Page 128 - DCOM509_ADVANCED_AUDITING

Unit 7: Audit Sampling

Notes
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Case Study Critique of Attribute Sample Application

aker, CPA, was engaged to audit Mill Company’s financial statements for the year
ended September 30, 20X1. After obtaining an understanding of Mill’s internal
Bcontrol structure, Baker decided to obtain evidential matter about the effectiveness
of both the design and operation of the policies and procedures that may support a low
assessed level of control risk concerning Mill’s shipping and billing functions. During the
prior years’ audits Baker used non-statistical sampling, but for the current year Baker used
a statistical sample in the tests of controls to eliminate the need for judgment.
Baker wanted to assess control risk at a low level, so a tolerable rate of deviation or
acceptable upper precision limit (UPL) of 20 percent was established. To estimate the
population deviation rate and the achieved UPL, Baker decided to apply a discovery
sampling technique of attribute sampling that would use a population expected error rate
of 3 percent for the 8,000 shipping documents, and decided to defer consideration of
allowable risk of assessing control risk too low (risk of over reliance) until evaluating the
sample results. Baker used the tolerable rate, the population size, and the expected
population error rate to determine that a sample size of 80 would be sufficient. When it
was subsequently determined that the actual population was about 10,000 shipping
documents, Baker increased the sample size to 100.

Baker’s objective was to ascertain whether Mill’s shipments had been properly billed.
Baker took a sample of 100 invoices by selecting the first 25 invoices from the first month
of each quarter. Baker then compared the invoices to the corresponding pre-numbered
shipping documents.
When Baker tested the sample, eight errors were discovered. In addition, one shipment
that should have been billed at $10,443 was actually billed at $10,434. Baker considered
this $9 to be immaterial and did not count it as an error.
In evaluating the sample results, Baker made the initial determination that a reliability
level of 95 percent (risk of assessing control risk too low 5 percent) was desired and, using
the appropriate statistical sampling table, determined that for eight observed deviations
from a sample size of 100, the achieved UPL was 14 percent. Baker then calculated the
allowance for sampling risk to be 5 percent, the difference between the actual sample
deviation rate (8 percent) and the expected error rate (3 percent). Baker reasoned that the
actual sample deviation rate (8 percent) plus the allowance for sampling risk (5 percent)
was less than the achieved UPL (14 percent); therefore, the sample supported a low level of
control risk.
Question:

Describe each incorrect assumption, statement, and inappropriate application of attribute
sampling in Baker’s procedures.

Source: http://www.chegg.com/homework-help/questions-and-answers/baker-cpa-engaged-audit-
company-s-financial-statements-year-ended-september-30-20x1-obtain-q2543454

7.6 Summary

 Sampling is the application of an audit procedure to less than 100% of the items within an
account balance or class of transactions for the purpose of evaluating some characteristic
of all the items within the balance or class of transactions.

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