Starr, CPA, is performing the financial statement audit of Brenda, Inc. In perfo

Question

Starr, CPA, is performing the financial statement audit of Brenda, Inc. In performing this audit, Starr has determined that she needs to perform tests of controls on the procedures used by Brenda to approve purchases made on account. Specifically, Brenda's internal control includes the following control procedures BRENDA, INC. SPECIFIC INTERNAL CONTROL PROCEDURES TO BE TESTED BY STARR, CPA (a)Departments requesting purchases should prepare a Purchase Requisition. (b) The requisitions should be approved by the Purchasing Agent through the preparation of a Purchase Order Once items purchased by Brenda are received, they are recorded in the Voucher Register. Starr feels that any cases where either of the controls are not functioning raise serious concerns about Brenda's internal controls REQUIRED: (1)What would Starr consider to be a deviation condition in this situation? (2) How should Starr define the population? For each item selected from the population, which procedure(s) should Starr perform? Assume that Starr decided upon a risk of overreliance of 5% and a tolerable deviation rate of 4%. In addition, based on her previous experience, Starr expected a deviation rate in the population of 1.25%. What sample size should be selected by Starr? Ignoring your answer to Question 3 above, assume that Starr examined 200 items and found 8 deviations (a) What is the sample deviation rate? (b)What is the upper precision limit? (c) What does the upper precision limit tell Starr? Based on your analysis in Question 4 above, what is the maximum number of deviations that Starr could find without reducing her reliance on internal control? (3) (4) (5)

Explanation / Answer

Answer 1: What would star consider a deviation condition in this situation

A deviation would be the purchaser creating a purchase order without a requisition from any person, dept (basically we are saying that someone bought something without the request coming from someone who needed the goods, service).

Another possible deviation is w have received and inwarded the goods (and entries made in voucher register) without a Purchase order in place (points towards the malpractice or possible fraud case of bypassing a purchaser/procurement team buying something unwanted or from a biased vendor or at biased purchase parameters)

Answer 2: How should starr define the population. For each item selected from the population, which procedures should Starr perform.

Starr should define the population as all the voucher entries in the voucher register (it could be the goods receipt register of the invoices register (preferred)).

For each item, Starr would check whether a Purchase requisition was in place or not and then whether the purchase was initiated and controlled by the purchasing agent through a PO or not.

Answer 3: Sample size to be selected by Starr

We would refer to the first table (5% risk), column of 4% tolerance deviation rate and row of 1.25% deviation rate which gives us the sample size 156

Answer 4:

a) sample deviation rate = 8/200 = 4%

b) Now from the sample evaluation table for 5% risk (we assume this), we get for a sample size of 200 (row), the number of deviations = 8 (column) we get the value 7.2% which is the error. Hence the upper precision limit = 100-7.2 = 92.8 % or .928

c) Upper precision limit is the maximum accuracy level that can be achieved for the audit of the complete population by extrapolating the errors found in the sample size. It tells Starr that if since there are 8 errors in a sample of 200, we are 92.8% accurate in our evaluation of the complete population

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