Assignment Choice 1 Sampling Procedure

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Business Finance

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Assignment Choice #1: Sampling Procedure

Reference Case Study 9-51 in the textbook.

Baker, CPA, was engaged to audit Mill Company’s financial statements for the year ended December 31, 200X. After obtaining an understanding of Mill’s internal control, Baker decided to obtain audit evidence about the effectiveness of both the design and operation of the controls that may support a low assessed level of control risk concerning Mill’s shipping and billing functions. During the prior years’ audits, Baker had used nonstatistical sampling, but for the current year Baker decided to use 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 of 20 percent was established. To estimate the population deviation rate and the achieved upper deviation rate, Baker decided to apply the discovery sampling method with an expected population deviation rate of 3 percent for the 8,000 shipping documents, and he decided to defer consideration of the risk of assessing control risk too low until the sample results had been evaluated. Baker used the tolerable rate, the population size, and the expected population deviation 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 prenumbered shipping documents.

When Baker tested the sample, eight deviations were discovered. Additionally, 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 a deviation.

In evaluating the sample results, Baker made the initial determination that a reliability level of 95 percent (risk of assessing control risk too low of 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 upper deviation rate was 14 percent. Baker then calculated the allowance for sampling risk (5 percent), the difference between the actual sample deviation rate (8 percent), and the expected deviation 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 upper deviation rate (14 percent); therefore, the sample supported a low level of control risk.

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

Your paper should be 3-4 pages in length. Follow APA format, according to CSU-Global Guide to Writing and APA Requirements. Include a title page and reference page. Use two outside academic sources other than the textbook, course materials, or other information provided as part of the course materials.

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Explanation & Answer

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There are a lot of incorrect statements and assumptions as well as inappropriate use of
sampling techniques that Baker made in his auditing process. Some of these incorrect
assumptions that I was able to identify are;
1 – In this case, Baker wants to carry out an analysis of the control risks at a deviation
level which is lower than the current one. However, the rate of toleration for deviation is 20%
according to the information that has been given. According to the Audit Guide of AICPA, Audit
Sampling of 20% is at the control risk’s planned assessment upper bound. Besides, the 20% is
rightly placed at the upper bound in a level which is slightly less than the maximum for the
control risks. A tolerable level of deviation which is low is said to range between 2% and 20%
which is actually not acceptable especially from the audit perspective. 20% is considered to be a
wide range for one to obtain data which is accurate from a sampling exercise.
2 – Discovery is normally a sampling attribute which is very appropriate especially in
instances where the rate of deviation is very near to 0%. The technique is mostly used in
circumstances when one expect that the deviation rate will be lo...


Anonymous
Really useful study material!

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