Annie Zhao is using attributes sampling in testing controls over sales transactions. She is testing five attributes related to sales invoices using an ARO of 5% (confidence level of 95%), and zero expected deviations for each attribute based on prior experience with the client. Annie has determined that the tolerable exception rate for each attribute is 5%. Using her firm's audit software, she entered the population size(number of invoices), desired confidence level, TER, and EPER, and determined a sample size of 60 invoices. She used the audit software to select a random sample of invoices and performed the control tests. She found zero deviations for four of the five attributes and concluded that the control can be relied upon for each of those attributes. For the remaining attribute, she found one control deviation. In projecting the sample results to the population for the attribute with one control deviation identified, Annie entered the confidence level, sample size, and one deviation into the audit software sampling module and determined that the computed upper exception rate for the attribute is 7.92%. Requirements:
1. Explain how Annie should interpret the cuer of 7.92% indicates the auditor is:.
a. 92.08%,
b. 95%,
c. 100%,
d. is not
2. What should Annie conclude about the effectiveness of the control attribute with one identified?Annie should conclude that the control is effective, ineffective because the CUER is:.
a. greater than the TER.
b. less than the TER.
3. What are the alternatives for Annie if she concludes the control cannot be relied upon?
A. Disclose the information to management and revise the TER or the ARO. She would choose this alternative only if she concludes that the original specifications were too? conservative, or if she is willing to accept the risk associated with the higher specifications.
B. Disclose the information to management and revise assessed control risk upward. This is likely to increase substantive procedures. Revising assessed control risk may be done if revising the TER or the ARO or expanding the sample size are not practical and additional substantive procedures are possible.
C. Expand the sample size and disclose the information to management. She would choose this alternative if she believes that the sample tested was not representative of the population and that exceptions are not expected in the expanded sample.
D. Revise assessed control risk downward. This is likely to decrease substantive procedures. Revising assessed control risk may be done if revising the TER or the ARO or expanding the sample size are not practical and additional substantive procedures are possible.
E. Reduce the sample size. She would choose this alternative if she believes that the sample tested was not representative of the population and that exceptions are not expected in the reduced sample.
4. Assume Annie discusses the deviation with the controller and learns this deviation occurred while a temporary employee was covering for the regular clerk, who was on vacation. Would this information be relevant in determining which of the alternatives in answer c would be the most appropriate response? What testing and documentation would be needed to conclude this control can be relied upon?
If the exception is isolated to a brief time period, Annie may choose to:.
a. expand
b. reduce the sample and
c. confirm the employees vacation
d. perform analytical procedures