Part 2A: Short problems Section - Control Risk Assessment and Testing

Instructions: Answer all questions.

• As an intern for A.C Delgado CPAs, your supervisor handed you the following audit control assessment and possible test planning for Jasper PaceSetter, Inc. a nonpublic company. Your supervisor wants to complete the table and come to his office for a meeting where you are expected to defend how you came with your conclusions. Complete the following Table in expecting of your meeting with your supervisor. Use the items in italics in column one as options for completing the table.

	Case AControls Appear Strong; Auditor Decides to Test Controls to Extent Possible*	Case BControls Appear Strong, but Auditor Does Not Test*	Case CControls Appear Weak*
At what level is planned assessed level of control risk? (low; maximum)
Describe the scope of tests of control that will be performed. (none; tests performed)
Results of Tests of Controls	A(1) Controls strong (operated effectively)		A(2) Controls ineffective	N/A	N/A
At what level is the assessed level of control risk? (low; maximum)
(a) What is the acceptable level of detection risk? (low; high)
(b) Describe the scope (nature, timing, and extent) of substantive tests. (high; low) Explain reasoning

*Inherent risk is assessed at the maximum level; evaluation of controls is based on managements description.

Part 2B. Calculations (40 points)

Instruction: Use the information on the Table below to answer all Questions in this section. Please note that the size of the answer space provided below does not in any way indicate the amount or quality of your response. (Use textbook to locate appropriate statistics not provided on the table Figure provided as needed).

Ques. 1 Substantive Testing Problem This is a comprehensive PPS/MUS Sampling problem

The information below pertains to your current client ACC400-500, Inc..

Table A: General Information Zebulon Corp. Accounts Receivable audit. NOTE: all the information that you might need from figure 9.14 and figure 9.15 in the textbook have been provided in the table below. Round your answers to the next nearest whole number.
The A/R total book value (population) (P)	$5,250,000.00
Tolerable Misstatement (TM)	$750,000.00
Expected misstatement in the population (EM)	75,000.00
Error Expansion Factor (EEF) at 15% risk of Incorrect Acceptance (EEF)
Reliability Factor: (RF) is at the risk of incorrect acceptance at 15%
Formula Section:
Sample Interval (SI) or (I) = {TM - (EM x EEF)}/RF
Sample size (n) = Pop/I, or n = (Pop x RF)/(TM (EM x EEF))
Basic Precision = RF x SI
UML = Basic Precision + Projected Misstatements + Incremental allowance for sampling risk

Part2B

Ques. 1.

1a. Calculate the Sampling Interval (SI) and Insert your answer here: ________________________

You must show your calculations here to receive full credit )

1b. Calculate the sample size (n). Assume zero misstatements found and Insert your answer here: __

Show your calculations here to receive full credit:

1c. The auditor selected the following accounts to perform the confirmation of accounts receivable procedures. Complete Column C, D, E, and F in Table B

Table B

A Book Value	B Audited Value	C Misstatement or tainting amount A-B	D Tainting Factor % (C/A)	E Sampling Interval	F = E*D1 Projected Misstatement
$750,000 (top stratum)	$500,000		N/A
$340,000 Mid stratum	$150,000
$100,000 Lower Stratum	$90,000
Total	-

Answer the following using the Table B that you completed

What is the Misstatements or the tainting amount from Colum C ________________What is the correct tainting factor from Column D for the two bottom strata . _______Complete Colum E by putting the Sample Interval you calculated earlier.Determine the Basic Precision (RF x SI) insert your answer here _______________Using the information on the table you completed above to calculate and indicate your Projected Misstatement here: _________________

Show the calculation of Projected Misstatement here to receive full credit

Top stratum: _____________________________________________________:

+

Bottom stratum: __________________________________________________:

= Total Projected Misstatement ___________________________________________:

Par 2. 2. Use the information from Table A and your previous calculations to answer the questions below

1. What is the incremental allowance for sampling errors: Insert answer here: ________

(Use the worksheet below to determine your incremental allowance)

A Error Rank	B Reliability Factor	C Increment	D= (C-1) Increment-1	E Projected Misstatements	F Incremental Allowance F=(DxE)
0	4.61	-	-	-	-
1	6.64
2	8.41
Incremental Allowance for Sampling Risk

2. What is the UML (the upper misstatement limit)? Insert your answer here: _________

	Description of item	Insert Amount
	Basic Precision
2.	Projected Misstatements
3.	Incremental Allowance
4	UML

Note: UML is the total of items 1-3

3. What is your conclusion about the accuracy of the Accounts Receivable Balance (2.5pts)?

4. Why do you conclude the way you did

Part 2. C (20 points): Essays questions Instructions: Auditors are required to consider a client's internal control when conducting an audit

a. Describe three reasons why auditors consider a client's internal control when performing the audit 1. 1.

2.

3.

b. Even the best internal control has certain limitations. Identify and explain two of those limitations.

1.

2.

c. An audit clients population of accounts payable is $1,350,000. After testing a sample from this account, the auditor did not find any misstatements. As a result, the auditor concluded that the account payable is not materially misstated. Does this mean that Accounts payable does not contain any misstatement? Explain

1.

d. Who cares about sampling? Why dont we just select a bunch of invoices to test from the pile and test those?