Lam, a public accountant, is auditing the financial statements of his client, Harvesters Ltd., a company that sells and distributes agricultural equipment across Canada. Lam has performed a preliminary evaluation of the company's internal control over sales transactions and has concluded that the quality of system design is very good. The system was developed for the client and installed by a well-respected consulting firm, and the system relies heavily on automated information systems. Lam decides that performing tests of controls using Audit Data Analytics (ADAs) would likely be cost-effective. In addition, after completing his assessment of control risk over revenue transactions, Lam plans to use monetary unit sampling to verify the client's recorded accounts receivable at year-end. In planning the engagement, Lam has assessed materiality to be $175,000.

Requirement b. Assume that the client's recorded accounts receivable total $2,000,000 at year-end and that Lam examines a valid random sample of 50 dollar units and finds two errors. Both errors were caused by the client's failure to record equipment returned by customers, where the equipment was deemed to be defective. The client agrees with the customer's position in both cases. What further action is required on the part of the auditor with respect to these errors? Since the amount confirmed by the customer is the recorded amount for both errors, Lam needs to determine whether control risk with respect to cut-off and occurrence need to be If this is the case, then Lam should conduct additional year-end of returns to determine whether they have been recorded correctly. Lam also needs to extrapolate the error to the to determine whether this would result in a potential material error