Ira Icandoit is a staff auditor in the internal audit function of a small manufa

Question

Ira Icandoit is a staff auditor in the internal audit function of a small manufacturing
company located in western Kansas. Ira recently completed a professional
development course on a statistical sampling and is very excited about the new
knowledge he has gained. He decided to apply his newly gained knowledge during the
audit to which he had just been assigned. He used attribute sampling when he
performed his tests of controls over the company’s procurement transactions.
Ira figured that a tolerable deviation rate of 10 percent and a 5 percent risk of
assessing control risk too low were appropriate for the tests he planned to perform. He
had no idea how many deviations actually might exist in the population, so he set the
expected deviation rate at 2 percent to be conservative. Ira selected a sample of 100
items.
Because Ira believed larger items deserved more attention than smaller items, he
selected 75 items with values greater than or equal to $2,500 and 25 items with
values less than$2,500. He thought it would be the most appropriate to select
transactions near the end of the fiscal year, so he randomly selected items for testing
from the last two months.
Ira was relieved when he found only six deviations from prescribed controls. One
deviation was a missing vendor’s invoice, so Ira called the vendor to make sure the
transaction was in fact valid. Three deviations were missing signatures by an
authorized manager. The manager explained that he had not approved the invoices
because he had been out of the office on the date the invoices were prepared. H
reviewed the invoices and told Ira there were no problems with them. The other two
deviations involved dollar errors. One was an error in the extension of an invoice, and
the other was a misclassification error between expenses, which did not affect net
income. Ira considered these two dollar errors to be the only two actual control
deviations. He determined that the achieved upper deviation limit was 7 percent at a 5
percent risk of assessing control risk too low.
Based on these results, Ira concluded that procurement transactions for the year were
unlikely to contain more deviations than the allowable rate. Accordingly, he
concluded that controls over procurement transactions were effective and could be
relied on management.
Identify and explain any deficiencies you note in Ira’s attribute sampling application.

P/s: I know the solution of this, but I need more detail explanation why and what is it?? THANK YOU (will bonus a good credit for good answers :))

Explanation / Answer

As per International Standard on Auditing (ISA) 530 "Audit Sampling" Defines:-

The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.there must be sampling risk as well i.e The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

In Case of Ira, it is based on his presumptions & Decision Making ablities to analyse the tolerable deviation in the smaple list that she has made. In addtion to this, She can modify his decisions as per the deviations she has found while performing their audit. She should make a plan before the audit being ready to perform.she should make sure that the sampling she has choosen is within tolerable limits. In analyzing the deviations and misstatements identified, Ira may observe that many have a common feature, for example, type of transaction, location, product line or period of time. In such circumstances,Ira may decide to identify all items in the population that possess the common feature, and extend audit procedures to those items. In addition, such deviations or misstatements may be intentional, and may indicate the possibility of fraud.

For tests of controls, no explicit projection of deviations is necessary since the sample deviation rate is also the projected deviation rate for the population as a whole. ISA 330 provides guidance when deviations from controls upon which the auditor intends to rely are detected.

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