_{Subject Auditing 2}

_{Please keep the answer simple and a bit short.}

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Subject Auditing 2

Please keep the answer simple and a bit short.

Thank you for your time.

Statistical Sampling (9 marks-1.5 marks for each of 6 parts) Robert and Donna, two auditors you work with at the Internal Audit Department of ABC Company, have independently assessed the risks associated with the accounts receivable. The appropriate audit risk for both is determined to be .02. Both agree that inherent risk should be set at the maximum (1.0) and that no analytical procedures will be performed. Robert evaluates control risk as moderate (.40) while Donna assesses it as relatively low (.20). ABC Company processes an average of 400 vouchers payable every month. Each voucher package contains a copy of the cheque disbursed and supporting documents such as vendor invoices, receiving reports, and purchase orders. The Auditor plans to example a sample of vouchers listed in the voucher registry using attribute sampling to evaluate the effectiveness of several controls. The attributes include: I) Agreement of voucher amounts with invoice amounts; II) Voucher canceled after payment Based on past experience, the auditor expects a deviation rate of 2% for the first attribute and 1% for the second. The Auditor decides on a tolerable deviation rate of 7% for the first attribute and 6% for the second. The risk of assessing control risk too low is set at 5%. Assume that the auditor's tests uncovered 2 occurrences of voucher amounts not agreeing with invoice amounts and 2 occurrences of vouchers not being canceled after payment. Required: a) What is the risk of incorrect acceptance for Robert and for Donna and which auditor will have to collect the most evidence (explain your reasoning)? b) Using Donna's assessment, complete the following schedule (if necessary, round sample size per table up for sample size to use) Attribute 1 Attribute 2 Risk of assessing control risk too low Tolerable deviation rate Expected population deviation rate Sample size per table Sample size used Number of deviations identified Sample deviation rate (SDR) Achieved upper deviation rate c) Evaluate the sample results for the 2 attributes. What statistical conclusion do you make for each attribute? d) What is the audit decision you would make based on the quantitative sample results for each attribute? Include in your answer what recommendations might be made regarding the use of Risk Management Techniques. e) Compare the SDR results you calculated for Donna to that using Robert's assessments. Briefly discuss the difference in SDR results in terms of the costs and benefits of audit work. f) List the two types of computer-assisted audit techniques (CAATS) and three prerequisites to be met before the internal auditor can consider using (CAATS) ATTRIBUTE SAMPLING SAMPLE SIZE TABLES 5% Risk of Assessing Control Risk Too Low Tolerable Deviation Rate (Number of Expected Errors) 2% 3% 4% 5% 6% 7% 8% 9% Expected Population Deviation 10% Rate (%) 0.00 32 (0) 29 (0) 51 (1) 46 (1) 0.50 51 (1) 46 (1) 1.00 1.50 51 (1) 46 (1) 2.00 68 (2) 46 (1) 68 (2) 2.50 61 (2) 3.00 84 (3) 61 (2) 4.00 100 (4) 89 (4) 5.00 158 (8) 116 (6) 6.00 266 (16) 179 (11) Expected Population 10% Deviation Rate (%) 0.00 76 (0) 57 (0) 45 (0) 38 (0) 32 (0) 28 (0) 25 (0) 22 (0) 129 (1) 0.50 96 (1) 77 (1) 64 (1) 55 (1) 48 (1) 42 (1) 38 (1) 1.00 176 (2) 96 (1) 77 (1) 64 (1) 55 (1) 48 (1) 42 (1) 38 (1) 1.50 265 (4) 132 (2) 105 (2) 64 (1) 55 (1) 48 (1) 42 (1) 38 (1) 590 (12) 2.00 198 (4) 132 (3) 88 (2) 75 (2) 48 (1) 42 (1) 38(1) 353 (9) 2.50 158 (4) 110 (3) 75 (2) 65 (2) 58(2) 38 (1) 3.00 730 (22) 258 (8) 132 (4) 94 (3) 65 (2) 58 (2) 52 (2) 4.00 873 (35) 274 (11) 149 (6) 98 (4) 73 (3) 65 (3) 1,019 (51) 5.00 318 (16) 160 (8) 115 (6) 78 (4) 6.00 1,150 (69) 349 (21) 182 (11) 116 (7) Note: Sample sizes over 2,000 are not shown. This table assumes a large population. Copyright 2008. American Institute of Certified Public Accountants, Inc. All rights reserved. Used with permission. 99 (0) 74 (0) 59 (0) 49 (0) 42 (0) 36 (0) 157 (1) 117 (1) 93 (1) 78 (1) 66 (1) 58 (1) 257 (3) 156 (2) 93 (1) 78 (1) 66 (1) 58 (1) 392 (6) 192 (3) 124 (2) 103 (2) 66 (1) 58 (1) 846 (17) 294 (6) 181 (4) 127 (3) 88 (2) 77 (2) 513 (13) 234 (6) 150 (4) 109 (3) 77 (2) 1,098 (33) 361 (11) 195 (6) 129 (4) 95 (3) 1,348 (54) 421 (17) 221 (9) 146 (6) 478 (24) 240 (12) 1,580 (79) -- 1,832 (110) 532 (32) 10% Risk of Assessing Control Risk Too Low 2% 149 (0) 313 (2) 590 (6) 114 (0) 194 (1) 398 (4) 1,463 (22) Tolerable Deviation Rate (Number of Expected Errors) 3% 4% 5% 6% 7% 8% 9% ATTRIBUTE SAMPLING EVALUATION TABLES (UPPER DEVIATION LIMITS) 5% Risk of Assessing Control Risk Too Low Actual Number of Deviations Found Sample Size 0 1 2 3 4 5 6 7 8 20 14.0 21.7 28.3 34.4 40.2 45.6 50.8 55.9 60.7 25 11.3 17.7 23.2 28.2 33.0 37.6 42.0 46.3 50.4 30 9.6 14.9 19.6 23.9 28.0 31.9 35.8 39.4 43.0 35 8.3 12.9 17.0 20.7 24.3 27.8 31.1 34.4 37.5 40 7.3 11.4 15.0 18.3 21.5 24.6 27.5 30.4 33.3 45 6.5 10.2 13.4 16.4 19.2 22.0 24.7 27.3 29.8 50 5.9 9.2 12.1 14.8 17.4 19.9 22.4 24.7 27.1 55 5.4 8.4 11.1 13.5 15.9 18.2 20.5 22.6 24.8 60 4.9 7.7 10.2 12.5 14.7 16.8 18.8 20.8 22.8 65 4.6 7.1 9.4 11.5 13.6 15.5 17.5 19.3 21.2 70 4.2 6.6 8.8 10.8 12.7 14.5 16.3 18.0 19.7 75 4.0 6.2 8.2 10.1 11.8 13.6 15.2 16.9 18.5 80 3.7 5.8 7.7 9.5 11.1 12.7 14.3 15.9 17.4 90 3.3 5.2 6.9 8.4 9.9 11.4 12.8 14.2 15.5 100 3.0 4.7 6.2 7.6 9.0 10.3 11.5 12.8 14.0 125 2.4 3.8 5.0 6.1 7.2 8.3 9.3 10.3 11.3 150 2.0 3.2 4.2 5.1 6.0 6.9 7.8 8.6 9.5 200 1.5 2.4 3.2 3.9 4.6 5.2 5.9 6.5 7.2 10% Risk of Assessing Control Risk Too Low Actual Number of Deviations Found Sample Size 0 1 2 3 4 5 6 7 8 20 10.9 18.1 24.5 30.5 36.1 41.5 46.8 51.9 56.8 25 8.8 14.7 20.0 24.9 29.5 34.0 38.4 42.6 46.8 30 7.4 12.4 16.8 21.0 24.9 28.8 32.5 36.2 39.7 35 6.4 10.7 14.5 18.2 21.6 24.9 28.2 31.4 34.5 40 5.6 9.4 12.8 16.0 19.0 22.0 24.9 27.7 30.5 45 5.0 8.4 11.4 14.3 17.0 19.7 22.3 24.8 27.3 50 4.6 7.6 10.3 12.9 15.4 17.8 20.2 22.5 24.7 55 4.2 6.9 9.4 11.8 14.1 16.3 18.4 20.5 22.6 60 3.8 6.4 8.7 10.8 12.9 15.0 16.9 18.9 20.8 65 3.5 5.9 8.0 10.0 12.0 13.9 15.7 17.5 19.3 70 3.3 5.5 7.5 9.3 11.1 12.9 14.6 16.3 18.0 75 3.1 5.1 7.0 8.7 10.4 12.1 13.7 15.2 16.8 80 2.9 4.8 6.6 8.2 9.8 11.3 12.8 14.3 15.8 90 2.6 4.3 5.9 7.3 8.7 10.1 11.5 12.8 14.1 100 2.3 3.9 5.3 6.6 7.9 9.1 10.3 11.5 12.7 125 1.9 3.1 4.3 5.3 6.3 73 8.3 9.3 10.2 150 1.6 2.6 3.6 4.4 5.3 6.1 7.0 7.8 8.6 200 1.2 2.0 2.7 3.4 4.0 4.6 5.3 5.9 6.5 Note: This table presents upper limits (body of table) as percentages. This table assumes a large population Statistical Sampling (9 marks-1.5 marks for each of 6 parts) Robert and Donna, two auditors you work with at the Internal Audit Department of ABC Company, have independently assessed the risks associated with the accounts receivable. The appropriate audit risk for both is determined to be .02. Both agree that inherent risk should be set at the maximum (1.0) and that no analytical procedures will be performed. Robert evaluates control risk as moderate (40) while Donna assesses it as relatively low (.20). ABC Company processes an average of 400 vouchers payable every month. Each voucher package contains a copy of the cheque disbursed and supporting documents such as vendor invoices, receiving reports, and purchase orders. The Auditor plans to example a sample of vouchers listed in the voucher registry using attribute sampling to evaluate the effectiveness of several controls. The attributes include: I) Agreement of voucher amounts with invoice amounts; II) Voucher canceled after payment Based on past experience, the auditor expects a deviation rate of 2% for the first attribute and 1% for the second. The Auditor decides on a tolerable deviation rate of 7% for the first attribute and 6% for the second. The risk of assessing control risk too low is set at 5%. Assume that the auditor's tests uncovered 2 occurrences of voucher amounts not agreeing with invoice amounts and 2 occurrences of vouchers not being canceled after payment. Required: a) What is the risk of incorrect acceptance for Robert and for Donna and which auditor will have to collect the most evidence (explain your reasoning)? b) Using Donna's assessment, complete the following schedule (if necessary, round sample size per table up for sample size to use) Attribute 1 Attribute 2 Risk of assessing control risk too low Tolerable deviation rate Expected population deviation rate Sample size per table Sample size used Number of deviations identified Sample deviation rate (SDR) Achieved upper deviation rate c) Evaluate the sample results for the 2 attributes. What statistical conclusion do you make for each attribute? d) What is the audit decision you would make based on the quantitative sample results for each attribute? Include in your answer what recommendations might be made regarding the use of Risk Management Techniques. e) Compare the SDR results you calculated for Donna to that using Robert's assessments. Briefly discuss the difference in SDR results in terms of the costs and benefits of audit work. f) List the two types of computer-assisted audit techniques (CAATS) and three prerequisites to be met before the internal auditor can consider using (CAATS) ATTRIBUTE SAMPLING SAMPLE SIZE TABLES 5% Risk of Assessing Control Risk Too Low Tolerable Deviation Rate (Number of Expected Errors) 3% 4% 5% 6% 7% 8% Expected Population Deviation 2% 9% 10% Rate (%) 0.00 149 (0) 99 (0) 74 (0) 59 (0) 49 (0) 42 (0) 36 (0) 29 (0) 32 (0) 313 (2) 0.50 157 (1) 117 (1) 93 (1) 78 (1) 66 (1) 58 (1) 51 (1) 46 (1) 590 (6) 1.00 257 (3) 156 (2) 93 (1) 78 (1) 66 (1) 58 (1) 46 (1) 51 (1) 1.50 392 (6) 192 (3) 124 (2) 103 (2) 66 (1) 58 (1) 51 (1) 46 (1) 2.00 846 (17) 294 (6) 181 (4) 127 (3) 88 (2) 68 (2) 77 (2) 46 (1) 2.50 513 (13) 234 (6) 150 (4) 109 (3) 77 (2) 68 (2) 61 (2) 1,098 (33) 361 (11) 3.00 195 (6) 129 (4) 95 (3) 84 (3) 61 (2) 4.00 1,348 (54) 421 (17) 221 (9) 146 (6) 100 (4) 89 (4) 5.00 1,580 (79) 478 (24) 240 (12) 158 (8) 116 (6) - 6.00 1,832 (110) 532 (32) 266 (16) 179 (11) 10% Risk of Assessing Control Risk Too Low Tolerable Deviation Rate (Number of Expected Errors) Expected Population Deviation 2% 3% 4% 5% 6% 7% 8% 9% 10% Rate (%) 0.00 114 (0) 76 (0) 57 (0) 15 (0) 38 (0) 32 (0) 28 (0) 25 (0) 22 (0) 0.50 194 (1) 129 (1) 96 (1) 38 (1) 77 (1) 64 (1) 55 (1) 48 (1) 42 (1) 398 (4) 1.00 176 (2) 96 (1) 77 (1) 64 (1) 55 (1) 48 (1) 38 (1) 42 (1) 1.50 1,463 (22) 265 (4) 132 (2) 105 (2) 64 (1) 55 (1) 38 (1) 48 (1) 42 (1) 590 (12) 198 (4) 2.00 132 (3) 88 (2) 75 (2) 48 (1) 42 (1) 38(1) 2.50 353 (9) 158 (4) 110 (3) 75 (2) 65 (2) - 58(2) 38 (1) 3.00 730 (22) 258 (8) 132 (4) 94 (3) 65 (2) 58 (2) 52 (2) 873 (35) 4.00 274 (11) 149 (6) 98 (4) 73 (3) 65 (3) 1,019 (51) 318 (16) 160 (8) 5.00 115 (6) 78 (4) - 6.00 1,150 (69) 349 (21) 116 (7) 182 (11) Note: Sample sizes over 2,000 are not shown. This table assumes a large population. Copyright 2008. American Institute of Certified Public Accountants, Inc. All rights reserved. Used with permission. ATTRIBUTE SAMPLING EVALUATION TABLES (UPPER DEVIATION LIMITS) 5% Risk of Assessing Control Risk Too Low Actual Number of Deviations Found Sample Size 0 1 2 3 4 5 6 7 8 20 14.0 21.7 28.3 34,4 40.2 45.6 50.8 55.9 60.7 25 11.3 17.7 23.2 28.2 33.0 37.6 42.0 46.3 50.4 30 9.6 14.9 19.6 23.9 28.0 31.9 35.8 39.4 43.0 35 8.3 12.9 17.0 20.7 24.3 27.8 31.1 34.4 37.5 40 7.3 11.4 15.0 18.3 21.5 24.6 27.5 30.4 33.3 45 6.5 10.2 13.4 16.4 19.2 22.0 24.7 27.3 29,8 50 5.9 9.2 12.1 14.8 174 19.9 22.4 24.7 27.1 55 5.4 8.4 11.1 135 15.9 18.2 20.5 22.6 24.8 60 4.9 7.7 10.2 12.5 14.7 16.8 18.8 20.8 22.8 65 4.6 7.1 9.4 11.5 13.6 15.5 17.5 19.3 21.2 70 4.2 6.6 8.8 10.8 12.7 145 16.3 18.0 19.7 75 4.0 6.2 8.2 10.1 11.8 136 15.2 16.9 18.5 80 3.7 5.8 7.7 9.5 11.1 12.7 14.3 15.9 174 90 3.3 5.2 6.9 8.4 9.9 114 12.8 14.2 15.5 100 3.0 4.7 6.2 7.6 9.0 10.3 11.5 128 14.0 125 2.4 3.8 5,0 6.1 7.2 8.3 9.3 10.3 11.3 150 2.0 3.2 4.2 5.1 6.0 6.9 7.8 8.6 9.5 200 1.5 24 3.2 3.9 4.6 52 5.9 6.5 72 10% Risk of Assessing Control Risk Too Low Sample Actual Number of Deviations Found Size 0 1 2 3 4 5 6 7 8 20 10.9 18.1 24.5 30.5 36.1 41.5 46.8 51.9 56.8 25 8.8 14.7 20.0 24.9 29.5 34.0 38.4 42.6 46.8 30 74 12.4 16.8 21.0 24.9 28.8 32.5 36.2 39.7 35 6.4 10.7 14.5 18.2 21.6 24.9 28.2 31.4 34.5 40 5.6 9.4 12.8 16.0 19.0 22.0 24.9 27.7 30.5 45 5.0 8.4 11.4 14.3 17.0 19.7 22.3 24.8 27.3 50 4.6 76 10.3 12.9 154 17.8 20.2 22.5 24.7 55 4.2 6.9 9,4 11.8 14.1 16.3 18.4 20.5 22.6 60 3.8 6.4 8.7 10,8 12.9 15.0 16.9 18.9 20.8 65 3.5 5.9 8.0 10.0 12.0 13.9 15.7 17.5 19.3 70 3.3 5.5 7.5 9.3 11.1 12.9 14.6 16.3 18.0 75 3.1 5.1 7.0 8.7 10.4 12.1 13.7 15.2 16.8 80 2.9 4.8 6.6 8.2 9.8 11.3 12.8 14.3 15.8 90 2.6 4.3 5.9 7.3 8.7 10.1 11.5 12.8 14.1 100 2.3 3.9 5.3 6.6 7.9 9.1 10.3 11.5 12.7 125 1.9 3.1 4,3 5.3 6.3 73 8.3 9.3 10.2 150 1.6 2.6 3.6 4.4 5.3 61 7.0 7.8 8.6 200 1.2 2.0 2.7 3.4 4.0 46 5.3 5.9 6.5 Note: This table presents upper limits (body of table) as percentages. This table assumes a large population