Consider each of the following situations, which are independent of each other.I

Question

Consider each of the following situations, which are independent of each other.In each case: 1. Identify the possible effect in relation to inventory if tests of control indicate a low control risk in relation to inventory 2. Describe what additional procedures you would complete at year end

a) While observing your client’s stocktake in progress you notice that the ‘count team’ and the ‘checking team’ are working together, ie. the counting team counts the stock and the checking team records the details on the stock tag and then signs off as having checked the count. When asked to explain the reason for this approach the staff indicate that it makes the stocktake go twice as fast and they are hoping to finish early and go down to the pub to watch the cricket.

b) Your client proposes to conduct the stocktake one month before year end and wishes to discuss the impact this will have on your audit.

c) Your client is a manufacturing business who expects to receive a large order from a government department for items that they do not normally produce. As such, they have purchased large amounts of raw materials on the assumption that they will receive the order. Manufacturing of the items for the expected order has already commenced and a significant amount of WIP exists.

Explanation / Answer

Distinguish between:

a) Attribute sampling and variable sampling

b) Sampling risk and non sampling risk

c) Alpha risk and beta risk.

Attribute sampling and variable sampling

Attribute refers to presence or absence of any character. For example, test of control, matching of delivery note with sales invoice is an attribute. The attribute sampling refers to statistics relating to test controls and measures presence of controls or deviations from prescribed procedures. The attribute sampling may be used for example to discover rate of deviations in payroll processing or cash disbursements.

Variable sampling is applied to account balance verification and measures the accuracy of amounts in account balances. For example, an auditor may use variable sampling for accounts receivable, inventories and fixed assets balances.

Sampling risk and non sampling risk

Sampling risk refers to the fact that sample selected by the auditor may not be representative of population. As a result the rate of deviation or monetary error may not be proportionate to these found in the population. The risk can be reduced by increasing sample size. There an inverse relationship between sample size and sampling risk. That is, the greater the sampling size the lower will be the sampling risk. Accordingly, if all items in a population are checked, the sampling risk ill be zero.

Non sampling risks refer to all aspects of audit risks not due to sampling. For example use of an inappropriate audit procedures, or misinterpreting the errors, or reliance on erroneous information received from another party.

Alpha risk and beta risk

The risk of incorrect rejection is called alpha risk. The consequence of the risk is that the auditor may assume on the basis of sample results that a population is materially misstated when, in fact, it is not.

The risk of incorrect acceptance is called beta risk. The consequence the risk is that the auditor may assume on the basis of sample results that the population is free of material misstatement when in fact material errors exist in the population.

List the matters that the auditor should document in relation to sampling?

Following matters should be documented when sampling is used.

a) Objective of test

b) Population

c) Sample units

d) What constitutes an error?

e) Sample size

f) Basis of selection

g) Errors found

h) Evaluation and conclusion

When is it appropriate to examine the entire population of items that make up an account balance or class of transactions during the course of substantive audit procedures?

It will be appropriate to examine the entire population of items that make up an account balance or class of transactions when the population constitutes a small number of large value items; when both inherent and control risks are high and other means do not provide sufficient appropriate audit evidences or when the repetitive nature of a calculation or other process performed by a computer information system makes a 100% examination effective.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.