An auditor is applying statistical sampling for attributes to the testing of ext
ID: 3277478 • Letter: A
Question
An auditor is applying statistical sampling for attributes to the testing of extensions of 1000 line items on sales invoices. A deviation is defined as an extension mistake on a line (i.e. line #39 quantity of 10 and unit price of $100 is calculated as $900).
The auditor decides to use a 10% Risk of Overreliance, a Tolerable Deviation Rate of 6%, and an expected population deviation rate of 2%.
Assume the following deviation condition exists in the population (the auditor would not know this):
Required
a. Calculate the sample size.
b. Take ONE sample using random selection. Regardless of your answer to part “a”, use a sample size of
100 lines. If you select a line number listed in the preceding deviation table, assume that a deviation
is found.
c. Quantitatively evaluate your sample results. [Use the “sample decision rule”.]
d. Assume that your sample contains so many deviations that you as the auditor conclude that controls
are not acceptable. Develop a “population decision rule”, as suggested in class. Use the population
decision rule to conclude that controls would be acceptable in this case.
e. Would the dollar amount of the deviations you found change the evaluation of your results? Why or
why not?
Explanation / Answer
(a) Using table of statistical sample sizes for test of controls for 10% risk of overreliance (Ref. American Institute of Certified Public Accountants, 2001), for expected population rate of 2% and tolerable deviation rate of 6%, sample size = 88 (with 2 expected errors).
(b) Take one sample of the size 100 using random selection, this you can do using excel (using randbetween(1,1000) function), copy and paste the values, sort and then check for the lines of deviations (by matching with the list given in the problem) and count the number of such deviations . In my case I got one deviation in single sampling.
(c) I am not sure what is the "sample decision rule" concept discussed in the class referred to in the question. Intuitively, I would try several samples of size 88, using the sample size calculated in (a), and find out the number of time positive and negative deviations obtained. Compare that the no. of errors with the no. of expected error obtained from table in (a) (i.e., 2)
(d) Similar to previous question, I am also not sure of the "population decision rule" referred in class. However, assuming so many deviations observed in (c), compare the tolerable deviation rate (i.e., 6, in our case) with maximum population deviation, which is sum of sample deviation rate and allowance of sample risk, i.e., % of deviation observed in sampling + 10%. In my case the latter become higher than the former estimate and hence, controlled will be acceptable in this case.
(e) Since, we are concerned about the deviation, not the magnitude of deviation, the dollar amount of deviations will not change the evaluation of our results.
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