Test of Control

deviations.

What is your conclusion? You are auditing revenues and receivables for ABC Corporation. ABC requires that all credit sales go through a credit approval before goods are shipped. All credit sales go through an automated approval as long as they are for $10,000 and below. Anything above $10,000 requires a manual credit check which is done by the credit manager, who then puts his signature on the sale documents.

You wish to test to test the effectiveness of ABCs control of manually approving all credit requests over $10,000. During the year ABC has made 15,000 purchases, of which 3,000 were over $10,000. You have established a tolerable deviation rate of 5% and your expected deviation rate is 2%

1a. What is your sample size? (use the sampling table provided in chapter 8 slides - 2. 1 slide 9)

1b. What is the maximum number of deviations allowed?

1c. After selecting your sample and performing your audit test you find 5

1.d What impact does this have on your further testing?

Substantive Test

Assume that you are now performing substantive tests on receivables and you want to perform account receivable confirmations. The clients recorded book value is $2,300,000 made up of 2,650 customers. You have established a tolerable misstatement of $75,000 for accounts receivable. You have selected 200 accounts worth a total of $235,000 to confirm and after sending out the confirmations, four are returned showing the following overstatements.

	Book Value	Audit value
Sonic Trading	12,800	10,350
Bazaar Enterprises	8,300	6,500
Millers Co	18,800	14,150
Mendez Bros.	4,925	3,200

2a. What is your sample misstatement?

2b. What is your projected misstatement using the ratio estimation method?

2.c What do you conclude about the fairness of the accounts receivable account?

2d. Using the difference estimation method, calculate your projected misstatement

2e. What do you conclude about the fairness of the accounts receivable account?

Cxample Desired Level of assurance-5% Tolerable Deviation Rate7% Expected Population Deviation Rate- 1.5% 1 deviation found Expected Population Deviation Rate (As Percentages) 0.00% 0.25 0.50 0.75 1.00 1.25 2% 149(0) 236(1) 3% 99(0) 157(1) 157(1) 208(2) * 4% 74(0) 117(1) 117(1) 117(1) 156(2) 156(2) 192(3) 227(4) 5% 59(0) 93(1) 93(1) 93(1) 93(1) 124(2) 124(2) 153(3) 181(4) 208(5) * 99 320 510 510 510 510 510 510 510 * * * Tolerable Deviation Rate 6% 7% 8% 49(0) 42(0) 36(0 78(1) 66(1 58(1) 78(1 66(1) 58(1) 78(1) 66(1) 58(1) 78(1) 66(1) 58(1) 78(1) 66(1) 58(1) 103(2) 66(1) 58(1) 103(2) 88(2) 77(2) 127(3) 88(2) 77(2) 127(3) 88(2) 77(2) 150(4) 109(3) 77(2) 173(5) 109(3) 95(3) 195(6) 129(4) 95(3) 148(5) 112(4) * The factor in the table is 66(1) Auditor selects sample of 66 items, allowable number of deviations = 1. 1.50 * * 680 * * * 1.75 2.00 2.25 2.50 2.75 3.00 3.25 * * 68(: 681 680 846. 840 * Conclusion Deviation rate in the population