Reference no: EM132460263

Problem 1. Assume that you are using attributes sampling to test the controls over revenue recognition of the Packet Corporation, a public company. You are going to use the results as part of the evidence on which to base your opinion on internal controls and to determine what substantive auditing procedures you should performed on revenue and accounts receivable. You have decided to test the following controls and have set the risk of overreliance at 5%, the tolerable deviation rate at 5%, and the expected deviation rate at 1%. A sample size of 100 is used. The results of your testing are as indicated here.

Control Results

Control 1. All sales over $10,000 must be approved by the sales manager by initialing the customer's order.

1. There were only twenty-five sales over $10,000 in the sample. So, the auditor randomly collects an additional seventy-five sales transactions that were over $10,000. All were approved by the sales manager.

Control 2. Credit must be approved by the credit department prior to shipment and noted on the customer's order.

2. Three sales were recorded without evidence of credit approval. The sales manager said she had approved the sales. No customer order could be found for two of the other sampled items. Therefore, there were no credit approvals for these two items as well.

Control 3. Sales are recorded only when a shipping document is forwarded to the billing department.

3. No shipping document could be found for three of the sampled items.

Control 4. The date of recording the sale must correspond to the date on the shipping document.

4. Four sales were recorded prior to the date of shipment. Your follow-up indicates that a temporary employee worked for the last two months of the fiscal year and was unaware of this requirement.

Control 5. All prices are obtained from the current price list that is periodically updated by the sales manager.

5. All prices agreed with the appropriate price list.

Control 6. The shipping department is not to ship products without first receiving an approved customer's order.

6. No customer order could be found for two sample items as indicated in Control 2.

Control 7. The billing department compares the quantity billed with the customer's order.

7. Four billed quantities were for more than the customer order. Three of these took place near year-end. In addition, there was no customer order for the two items indicated in Control

Problem 2 Determine the upper limit of deviation for each of the controls (Control 1 through Control 7) - show the solutions. 2. Indicate the potential misstatements that could result from the control deviations (through Control 2 through Control 7)

Problem 3. Determine what substantive audit procedures should be performed in response to each of the identified control deviation identified in the question 2.

Problem 4. What impact do these results have on the type of opinion to be given on the effectiveness of the client's internal controls? What opinion would you issue on the client's internal controls over revenue recognition?