CLO4 Maximum Marks 10 Q3A: In using difference estimation, an auditor took a random sample of 100 inventory items from a large population to test for proper pricing. Several of the inventory items were misstated, but the combined net amount of the sample misstatement was not material. In addition, a review of the individual misstatements indicated that no misstatement was by itself material. As a result, the auditor did not investigate the misstatements or make a statistical evaluation. Explain why this practice is improper (5 Marks). Answer: Q3B: The following is a partial audit program for the audit of sales transactions (5 Marks). 1. Foot the sales journal for one month and trace the postings to the general ledger. 2. Review the sales journal for any large or unusual transactions. 3. Examine sales order for evidence of credit approval prior to shipment. 4. Vouch entries in sales journal to sales invoice and shipping document. 5. Examine evidence on sales invoice that the prices were agreed to the approved price list. 6. Recompute extensions of price and quantities on the sales invoice. 7. Trace entries in sales journal to entry in accounts receivable master file. Required a. Identify which audit procedures can be tested by using attributes sampling (1 Mark). b. What is the appropriate sampling unit for the tests in part a. (1 Mark)? c. List the attributes for testing in part a (1 Mark). d. Assume an ARO of 5% and a TER of 6% for tests of controls and 5% for substantive tests of transactions. The EPER for tests of controls is 1.0%, and for substantive tests of transactions it is 0.5%. What is the initial sample size for each attribute (2 Marks)