4. Colip the payroll journal t8 p department records. 5. Agree purchase order pr
ID: 2564467 • Letter: 4
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4. Colip the payroll journal t8 p department records. 5. Agree purchase order price to 5. Review overtime charges for approval of a supervisor. Case 3-8 Becker&Warren; Estimated time to complete: 20 minutes) Tammy Smith, a new senior auditor, is planning tests of controls for B ren, a law firm. She has come to you to get help in using audit sampling to test com tm trols over the firm's billing process and has developed the followingg a. What are the factors that affect the determination of (1) Acceptable level of risk of assessing control risk too low. (2) Tolerable deviation rate. (3) Expected population deviation rate. b. State the effect on sample size of an increase in each of the following factors assuming all other factors are held constant: (1) Acceptable level of risk of assessing control risk too low. (2) Tolerable deviation rate. (3) Expected population deviation rate.Explanation / Answer
a. 1.Risk of assessing control risk too low represents the risk that the auditor concludes that the design and operation of IC is effective when infact it is not. The level used for the risk is based on the auditor's desired control risk assessment.The lower the needed risk of assessing control risk too low.The risk is inversely related to sample size.
2.Tolerable deviation rate represents the highest deviation rate the auditor could accept and still conclude that the design and operation of an IC is effective.This rate is based on the tolerable misstatement relative to the number and dollar size of the transactions included in the population. Tolerable misstatement represents the maximum misstatement that could occur before the population would be considered materially misstated. The lower the required tolerable misstatement relative to the number and dollar size of transaction the lower the needed tolerable deviation rate.The rate is inversely related to the sample size.
3.Expected Population deviation rate represents the auditor's best estimate of the population deviation rate. this rate is normally based on prior experience with the client.the rate is directly related to sample size.
b. 1.The higher the auditors assessment of the risk of material misstatement, the largerthe sample size needs to be. The auditors assessment of the risk of material misstatement is affected by inherent risk and the control risk. ex if the auditor does not perform tests of control the auditors risk assessment cannot be reduced for the effective operations of IC wrt the particular assertion .therefore in order to reduce audit risk to an acceptably low level,the auditors needs a low detection risk and rely more on substantive procedure. The more the audit evidence ie abtained from test of details the larger the sample size needed
2 The greater the level of assurance that the auditor requires that the result of the sample are infact indicative of the actual amount of misstatement in the population the larger sample size is needed
3.In a test of sales order for appropriate credit approval, suppose the auditor estimate a 1.5% expected deviation of missing credit approval relative of total sales order establishes a tolerable of 6% and accepts a 95% confidence level that the larger sample size is needed.
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