Compute the expected errors

Reference no: EM13552009

Attribute Sampling Exercise

You have been engaged to audit the financial statements of ABC Company, for the year ended 12/31/x1.

You have decided to conduct a test of controls using attributes sampling methods to determine the extent to which sales invoices are supported by a shipping document. There should be a shipping document for each sales invoice. During the year 20x1, ABC Company issued 468 sales invoices, numbered 20099 to 20566.

You have decided that for purposes of this test that the tolerable deviation rate should be 10% with an expected deviation rate of 0%, and an acceptable risk of assessing control risk too low of .05.

The objective of the test of controls is to determine if sales invoices are supported by a shipping document.

The attribute = yes, a shipping document exists to support the sales invoice.
The exception condition = no, a shipping document does not exists to support the sales invoice

The population is defined as all sales invoices generated during the year.
The sampling unit is defined as sales invoices.

After consulting the tables, you have determined an appropriate sample size of 64.

Required:

Question 1: Select the invoices to be included in your sample by generating random numbers of invoices to include in your sample. Use the instructions listed in the table below.

1. You need 64 random invoice numbers. Always run a few extra to allow for duplicates and voids. You may want to run between 70 and 75. Number the spaces in column A

2. Generate your random numbers in column B. In excel, select "insert" "function" "RAND". Copy down to fill all 64 spaces. The cell you copy from may change while you do this. To maintain your original random numbers, "value" the cells. Highlight the 64 numbers, press "CTL" and hold while pressing "c". Select "edit" "paste special" and "value". The 64 random numbers will no longer be formulas and will not change.

3. Apply your random numbers, which are between 0 and 1, to your population. In column C, put the value of your population (468) in all 64 cells. Calculate which invoice your random number indicates by multiplying the random number by the population size in column C (ie: B5*C5), in column D.

4. Input you "start" invoice for your population, in this case 20099, in column E.

5. Indicate your invoice selections. In column F, apply the invoice position to the start invoice (ie:D5+E5). You will need to round the invoice number or format the cell for no decimal places. Select the cells, right click, select format, choose number, and set decimals to zero.

6. Now that you have randomly selected which sales invoices you will sample, you need to eliminate duplicates and voids. If after doing this you still have more than 64 invoices selected, use the first 64 only.

Question 2. The following table contains a list of invoices not supported by shipping documents. In reality, the auditor would not have this information. Use the list to determine how many of your randomly selected invoices are not supported (exception condition).

20100	20209	20329	20497
20112	20232	20333	20510
20143	20261	20364	20539
20149	20298	20381
20155	20310	20399
20178	20324	20418

Question 3. Compute the "expected errors". EE = no# deviations observed/sample size x population size.

Question 4. Compute "expected error rate". EER = No# deviations observed/sample size.

Question 5. For a sample size of 65, the following is an excerpt from the tables on the upper limits at 5 % risk of assessing control risk too low. Determine the upper limit based on your observations.

	actual number of deviations observed
sample size	0	1	2	3	4	5	6	7	8
65	4.6%	7.1%	9.4%	11.5%	13.6%	15.5%	17.4%	19.3%	*

Question 6. What is your conclusion based on your sample, in terms of the effectiveness of this control?

Question 7. If you determine that the control is not working well, state the compensating substantive test(s) that you would perform.

Reference no: EM13552009

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