Dev is working on the testing of internal controls over price changes in the inventory system. Dev has completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms.

In order to place reliance on this control, his audit supervisor has decided that the estimated population exception rate error rate should be less than 1 percent. When Dev calculated the sample size, he used an ARO of 10 percent and a TER of 4 percent. Based on these decisions, Dev examined 150 inventory price master file change forms. Based upon Dev’s firm sampling guidelines for ARO of 10 percent, the following computed upper exception rate (CUER) for actual number of deviations is:

0 (1.4%), 2 (1.4%), 2 (3.3%), 3 (3.3%), 4 (4.1%), 5 (4.9%)

In his testing, Dev uncovered five deviations. Answer the following questions to explain the impact on the audit.

a. Since the number of deviations represents an actual error rate of 3.3 percent, which is less than TER, Dev concluded that the control is effective. Explain whether or not his conclusion is correct.

b. Assume Dev’s quantitative assessment indicates that the control for inventory price changes is ineffective. List two further actions Dev should perform before making his final conclusion. Explain the purpose of each action.

c. What potential misstatement could occur if the controls over price file changes are ineffective? Be sure to identify the affected account(s) and the type of misstatement (over/understated), as well as the relevant assertion(s).