As a new audit staff member of Namtip & Associates CPAs, you have been assigned

Question

As a new audit staff member of Namtip & Associates CPAs, you have been assigned to a long-time audit client, SFA. Because of your recent training in audit sampling you will be assigned to assist in the sampling applications.

One of your assignments on this client is to assist in the performance of tests of controls over cash disbursements from the Bank A account. For the year to date, SFA, has received 21,236 vendor invoices for items purchased and issued 18,972 checks in payment of most of those invoices. It has been decided to use statistical sampling in the performance of tests of controls, also known as, sampling for attributes, over cash disbursements.

1. Using the appropriate attached tables, what is the minimum sample size for each of the cases given the stated parameters below?

Case

Risk of Assessing Control Risk Too Low

Tolerable Deviation Rate

Expected Population Deviation Rate

A

5%

7%

2.00%

B

5%

9%

2.00%

C

5%

7%

3.00%

D

10%

7%

2.00%

E

10%

7%

1.50%

2.

a. What impact does a change in the Risk of Assessing Control Risk Too Low (overreliance) on the sample size? Indicate which cases above would illustrate your answer.

b. What impact does a change in the Tolerable Deviation Rate on the sample size? Indicate which cases above would illustrate your answer.

c. What impact does a change in the Expected Population Deviation Rate on the sample size? Indicate which cases above would illustrate your answer.

3. This part is independent of your answers in 1 and 2 above. Another staff associate completed the worksheet presented on the next page showing the checks from Bank Z which had been selected for testing and the results of the actual test of control. Unfortunately, before the other staff associate could complete the evaluation of the test, she was seriously, but not life-threatening, injured (compound broken femur) in the CPA firm’s annual softball game. You are required to complete the evaluation, showing the formulas used and supporting calculations where appropriate, by answering the following questions:

a. What is the sample deviation rate?

b. Using the appropriate tables, what is the upper deviation rate?

c. What would your conclusion be based on the results of your tests of controls and your evaluation in 3a. and 3b. above? Why? Be specific.

SFA

Cash Disbursement Tests of Control

For the Year Ended December 31, 2016

Objective: To determine whether the payee listed on the Bank Z’s checks was the same as the payee on the invoice.

Parameters: Risk of assessing control risk too low (overreliance) 10%, Tolerable Deviation Rate 8%, Expected Population Deviation Rate 5%

Check Number

Check Payee equal Invoice Payee

Check Number

Check Payee equal Invoice Payee

Check Number

Check Payee equal Invoice Payee

Check Number

Check Payee equal Invoice Payee

Check Number

Check Payee equal Invoice Payee

2052860

2056887

2061214

2063992

2067947

2052917

2056927

2061222

2064362

2068294

2052943

2056978

2061319

2064652

2068343

2053060

2057683

£

2061323

2064707

2068520

2053263

2057687

2061343

2065153

2068882

2053382

2058043

2061528

2065165

2069094

2053425

2058264

2061549

2065293

£

2069239

2053452

2058544

2061585

2065297

2069356

2053502

2058560

2061600

2065352

2069711

2053513

2058652

2061632

2065384

2069802

2053663

2058975

2061684

2065530

2070171

2053725

2058977

2061766

2065568

2070181

2053835

£

2059250

2061813

2065575

2070396

2053867

2059263

2061879

2065606

2070407

2054278

2059620

2061898

2065680

2070497

2054360

2059781

2061903

£

2065829

2070591

2054396

2059939

2062510

2065901

2070650

2054677

2060090

2062560

2066558

2070658

2054686

2060194

2062568

2066761

2070959

2055056

2060198

2062664

2066851

2070987

£

2055422

2060428

2062666

2067084

2071048

B

2055533

2060547

2062668

2067125

2071190

£

2055534

2060611

2062866

2067197

2071203

2055702

2060621

A

2062946

2067263

2071263

2055728

2060735

2063067

2067277

2071267

2055778

2060773

2063067

£

2067353

2071291

2055864

2060813

2063070

2067492

2071311

2056078

2060985

2063121

2067651

2071482

2056768

2060992

2063281

2067692

2071518

2056769

£

2060998

2063373

2067719

2071543

2056797

2061077

2063665

2067847

2071653

2056819

2061123

2063964

2067947

2071695

Case

Risk of Assessing Control Risk Too Low

Tolerable Deviation Rate

Expected Population Deviation Rate

A

5%

7%

2.00%

B

5%

9%

2.00%

C

5%

7%

3.00%

D

10%

7%

2.00%

E

10%

7%

1.50%

Explanation / Answer

Qualification. An important value-added service accountants should provide is to help the business owner qualify their needs – to articulate the purpose of the loan and to consider various options for financing, including whether a bank loan is even desired or necessary. Many borrowers that approach lenders are unable to articulate how much they need and why, and that can be a major turnoff to banks.

As a trusted business advisor, you can assess how to proceed by considering the lifecycle of this particular business. Will this loan serve as startup funding, or is the business in growth mode? Is there a major change on the horizon for this business, such as succession, or a potential sale or acquisition? The accountant’s knowledge of various industries and how or why they use various forms of credit can also be helpful in determining whether a bank loan is necessary or whether another form of credit, such as factoring, would be appropriate.

2. Quantification. Once client needs and options have been qualified, accountants can help in the next phase of winning a loan: quantifying the current financial condition and the credit need, as well as helping identify repayment sources. As an accountant, you’re in a unique position to offer both a narrow-focus and 50,000-foot view of a company and its operations from a financial perspective. Clients will see the real value-added in this service by translating what the numbers mean now, what they mean for the owner’s goals, and the implications for seeking a business loan.

For example, showing the client data on the company’s recent cash flow and projections for upcoming periods – with or without external financing – may help determine the size of any loan requested. You can also provide industry benchmarks to the client for credit metrics, such as debt-service coverage or liquidity ratios, to show how they stack up and how they may be viewed by lenders.

Helping a client test the business-loan waters by offering this data can bring some peace of mind to a potentially frazzled business owner. According to a small business survey conducted by Sageworks in 2014, nearly one-quarter of respondents said they did not apply for a business loan because they believed they would not be approved. If your review uncovers potential roadblocks to getting a loan, you can help the client address those before they approach a bank.

3. Presentation. Finally, you can help clients put together the information that will improve the chances a bank will approve a loan request. In the current banking environment, many financial institutions require reviewed or audited financial statements. Knowing this, you can help your client be proactive.

An important next step is to walk the client through the lending process from the financial institution’s perspective. The lender wants to know who’s borrowing the money, can they repay it, and whether the bank is protected. Helping clients pull together the collateral they need, along with providing background on the loan application process (such as explaining the 5 C’s of credit for banks), makes their life easier and helps them feel prepared for that walk to the bank. You can also answer questions related to evaluating and, perhaps, negotiating terms of the loan, such as those related to minimum capital requirements.

Accountants have the skills and perspective to help business clients as they consider and apply for a loan. Business clients need assistance qualifying their financial needs, quantifying current and projected performance, and presenting a winning loan package. Helping them through this type of endeavor is one

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