You have been asked to test the effectiveness of Ingo Corporation\'s control of
ID: 1224838 • Letter: Y
Question
You have been asked to test the effectiveness of Ingo Corporation's control of manually approving all purchases over $25,000. During the year, lngo Corporation has made 1,000,000 purchases, of which 3,000 were over $25,000. Jian Zhang, CPA, your supervisor, asked you to use a tolerable deviation rate of 4 percent (although she expects the rate to be only approximately 0.25 percent) and a 5 percent risk of assessing control risk too low. Use the following 10 determine the planned assessed level of control risk and the assessed level of control risk.
(Planned) Assessed Level of Control Risk Tolerable Deviation Rate
Low 2-7%
Moderate 6-12%
Slightly below the maximum 11-20%
Maximum Over 20%
For all parts of this question select the proper reply from below.
a. What is the planned assessed level of control risk?
b. Determine the appropriate sample size and allowable number of deviations using Figure 9.4.
For parts cl through, c6 assume that the sample size was 100 items. Use Figure 9.5 to determine the achieved upper deviation ratre and the above table to determine the assessed level of control risk under the following circumstances.
Circumstance Achieved Upper Deviation Rate Assessed Level of Control Risk
No deviations were included in the sample. c1 c4
One deviation is included in the sample. c2 c5
Eight deviations were included in the sample c3 c6
Replies
Planned and Assessed Level Sample Size Achieved Upper of Control Risk
of Control Risk (Questions a, c4, c5, c6} (Question b) (Questions c1, c2, c3}
1. Low
5. 74 items.
10.
0.00%
2. Moderate
6. 93 items.
11.
2.00%
3. Slightly below the maximum.
7. 117 items.
12.
2.52%
4. Maximum.
8. 119 items
13.
3.00%.
9. 236 items.
14.
3.99%
15
4.70%
16.
6.20%
17.
12.13%
18.
14.00%
19.
18.00%
1. Low
5. 74 items.
10.
0.00%
2. Moderate
6. 93 items.
11.
2.00%
3. Slightly below the maximum.
7. 117 items.
12.
2.52%
4. Maximum.
8. 119 items
13.
3.00%.
9. 236 items.
14.
3.99%
15
4.70%
16.
6.20%
17.
12.13%
18.
14.00%
19.
18.00%
Explanation / Answer
AU section of 350 of the AICPA professionals standards indicates that audit risk arises from sampling and non sampling data.Sampling risk results from performing an audit procedure on less than one hundred percent of the population.It represents the risk that the audit sample is not the representative of the population.Non sampling risk results from human error.It represents the risk that the selected audit procedures is not appropriate for the intended purpose.Nonsampling risk exist regardless of the number of items selected from a population for testing.
There are two aspects of sampling risk when performing tests of control:
The risk of assessing control risk too low represents the risk than an audit sample support s the conclusion that the design and operation of an internal control is effective when in fact it is not.
The risk of accessing control risk too high represent tsthe risk that an audit sample supports the conclusion that the design and operation of an internal control is not effective when in fact it I'd effective.
Attributes sampling: Relationship between the planned assessed level of control risk risk and the tolerable deviation rate.
Planned Assessed level of control risk. Tolerable deviation rate
Low. 2-7
Moderate. 6-12
Slightly below the maximum. 11-20%
Maximum. Omit test
Sampling --- Determining sample size
Risk of Assesing control risk too low- 5%
Tolerable deviation rate- 9%
Expected population dedeviation rate- 2%
Audit sampling steps for substantive tests
: Determine the objective of the test
: Define the population and sampling unit
: choose an audit sampling te hniwue
: Determine the sample size.
:Select the sample.
: Test the sample items
: Evaluate the sme results
:Document the sampling procedure.
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