Question 1

Your manager, Amnah, believes that non-statistical sampling is the best method to use on the audit of ABC Corporation. You, however, believe that statistical sampling is by far the better method. In addition, you have a great deal of training in the proper use of sampling techniques.

Required:

Discuss with Amnah why statistical sampling should be used.

Question 2

Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $2,400,000 and 2nd quarter = $3,000,000. You are in the process of establishing overall materiality for the client. Based on prior years, the client has a 5% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 35% over the 3rd quarter. The overall materiality is 3 % of annual IBT.

Required:

Determine the amount of overall materiality for the audit based on these preliminary amounts.

Question 3

Explain three purposes of an engagement letter? Discuss two important information that the engagement letter should contain.

Question 4

The Following independent cases are a set of situations that may or may not involve sampling.

1. An auditor is examining loan receivables at a local bank. The population of loans contains two strata. One stratum is composed of 25 loans that are each greater than $1 million. The second stratum contains 450 loans that are less than $1 million. The auditor has decided to test all loans greater than $1 million and 15 loans less than $1 million.

2. An auditor has haphazardly selected 30 sales invoices to be examined for proper pricing of the goods purchased by the customer.

3. The prepaid insurance account is made up of four policies that total $45,000. The auditor has decided that this account is immaterial and decides that no policies will be examined.

Required:

Discuss which situations involve audit sampling (statistical or non-statistical) and why.

Question 5

For a particular audit, the sample size for testing controls over the revenue cycle is relatively large.

Required:

What can you infer (conclude) about the desired confidence level, the tolerable deviation rate, and the expected population deviation rate?

Question 6

Before performing sampling procedures in an audit of ABC client's controls, external auditor set the tolerable deviation rate at 5.4%. After the procedures. The external auditor computes a computed upper deviation rate of 4%.

Required:

a. Discuss the internal control if it is effective or not.

b. Discuss the relationship between test of control and substantive test.

Question 7

Answer the following questions:

a. Give three examples of types of audit evidence that are tested using audit sampling techniques.

b. Give three examples of types of audit evidence that are not tested using audit sampling techniques ( you have to audit all population).