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Question: Lenter Supply Company is a medium-sized

Lenter Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted excellent internal controls for sales at your recommendation. In providing control over shipments, the client has prenumbered "warehouse removal slips" that are used for every sale. It is company policy never to remove goods from the warehouse without an authorized warehouse removal slip. After shipment, two copies of the warehouse removal slip are sent to billing for the computerized preparation of a sales invoice. One copy is stapled to the duplicate copy of a prenumbered sales invoice, and the other copy is filed numerically. In some cases, more than one warehouse removal slip is used for billing one sales invoice. The smallest warehouse removal slip number for the year is 11741 and the largest is 34687. The smallest sales invoice number is 45302 and the largest is 65747.
In the audit of sales, one of the major concerns is the effectiveness of the controls in ensuring that all shipments are billed. You have decided to use audit sampling in testing internal controls.

a. State an effective audit procedure for testing whether shipments have been billed.
What is the sampling unit for the audit procedure?
b. Assuming that you expect no exceptions in the sample but are willing to accept a TER of 4%. At a 5% ARACR, what is the appropriate sample size for the audit test? You may complete this requirement using attributes sampling.
c. Design a random selection plan for selecting the sample from the population, using either systematic sampling or computer generation of random numbers. Use the sample size determined in part b. If you use systematic sampling, use a random starting point of 11878.
d. Your supervisor suggests the possibility of performing other sales tests with the same sample as a means of efficiently using your audit time. List two other audit procedures that can conveniently be performed using the same sample and state the purpose of each of the procedures.
e. Is it desirable to test the occurrence of sales with the random sample you have designed in part c? Why?

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> Explain the relationship between application controls and transaction-related audit objectives.

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> Define what is meant by an audit trail and explain how it can be affected by the client's integration of IT.

> Compare the risks associated with network systems to those associated with centralized IT functions.

> The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle. a. Use Table 15-8and Table 15-9 to complete the missing information for each attribute. Table 15-8 Table

> For the audit of the financial statements of Mercury Fifo Company, Stella Mason, CPA, has decided to apply nonstatistical audit sampling in the tests of controls and substantive tests of transactions for sales transactions. Based on her knowledge of Merc

> Describe systematic sample selection and explain how an auditor will select 40 numbers from a population of 2,800 items using this approach. What are the advantages and disadvantages of systematic sample selection?

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> The following are auditor judgments and attributes sampling results for six populations. Assume large population sizes. Required a. For each population, did the auditor select a smaller sample size than is indicated by using the attributes sampling table

> The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table: Required a. Using nonstatistical sampling, calculate TER – SER for each of columns 1 through 8 and evaluate whether

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> The following questions concern sampling for attributes. Choose the best response. a. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor (1) Minimize the failure to detect errors and fraud. (2

> The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. From a random sample of items listed from a client's inventory count, an auditor estimates with a

> The following items apply to determining sample sizes using random sampling from large populations for attributes sampling. Select the most appropriate response for each question. a. If all other factors specified in a sampling plan remain constant, chan

> What are the two types of simple random sample selection methods? Which of the two methods is used most often by auditors and why?

> List the major decisions that the auditor must make in using attributes sampling. State the most important considerations involved in making each decision.

> Distinguish between probabilistic selection and statistical measurement. State the circumstances under which one can be used without the other.

> When the CUER exceeds the TER, what courses of action are available to the auditor? Under what circumstances should each of these be followed?

> Explain what is meant by analysis of exceptions and discuss its importance.

> Assume that the auditor has selected 100 sales invoices from a population of 100,000 to test for an indication of internal verification of pricing and extensions. Determine the CUER at a 10% ARACR if four exceptions are found in the sample using attribut

> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material, e

> You have just completed the accounts receivable confirmation process in the audit of Danforth Paper Company, a paper supplier to retail shops and commercial users. Following are the data related to this process: Accounts receivable recorded balance $

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> An audit partner is developing an office training program to familiarize her professional staff with audit sampling decision models applicable to the audit of dollar-value balances. She wishes to demonstrate the relationship of sample sizes to population

> You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry of any kind. Your audit tests of all tests of controls

> In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10%. A PPS sample of 100 was selected from an accounts receivable population that had a recorded balance of $1,975,000.

> State the relationship between the following: a. ARACR and sample size b. Population size and sample size c. TER and sample size d. EPER and sample size

> The accounts receivable population for Jake's Bookbinding Company follows. This table is the same as Table 17-1, except that cumulative amounts are included to assist you in completing the problem. The population is smaller than is ordinarily the case fo

> You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. An overstatement or understatement of more than $100,000 is considered

> You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are co

> The following relate to the use of statistical sampling for tests of details of balances. For each one, select the best response. a. When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice (1)

> The following apply to evaluating results of audit sampling for tests of details of balances. For each one, select the best response. a. While performing a substantive test of details during an audit, the auditor determined that the sample results suppor

> The following questions relate to determining sample size in tests of details of balances. For each one, select the best response. a. Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random

> Give an example of the use of attributes sampling, MUS, and variables sampling in the form of an audit conclusion.

> Explain why difference estimation is commonly used by auditors.

> An essential step in difference estimation is the comparison of each computed confidence limit with tolerable misstatement. Why this step so important, and what should the auditor do if one of the confidence limits is larger than the?

> Distinguish among difference estimation, ratio estimation, mean-per-unit estimation, and stratified mean-per-unit estimation. Give one example in which each can be used. When is MUS preferable to any of these?

> Identify the factors an auditor uses to decide the appropriate ARACR. Compare the sample size for an ARACR of 10% with that of 5%, all other factors being equal.

> In using difference estimation, an auditor took a random sample of 100 inventory items from a large population to test for proper pricing. Several of the inventory items were misstated, but the combined net amount of the sample misstatement was not mater

> Define what is meant by the population standard deviation and explain its importance in variables sampling. What is the relationship between the population standard deviation and the required sample size?

> What alternative courses of action are appropriate when a population is rejected using nonstatistical sampling for tests of details of balances? When should each option be followed?

> What is meant by a decision rule using difference estimation? State the decision rule.

> Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?

> Assume that a sample of 100 units was obtained in sampling the inventory in Question 17-4. An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 2,620 inventory items valued at $12,625,000. Th

> What is meant by the "percent of misstatement assumption" for MUS in those population items that are misstated? Why is it common to use a 100% misstatement assumption when it is almost certain to be highly conservative?

> What is the relationship between ARIA and ARACR?

> Evaluate the following statement made by an auditor: "I took a random sample and derived a 90 percent confidence interval of $800,000 to $900,000. That means that the true population value will be between $800,000 and $900,000, 90 percent of the time."

> Explain what is meant by acceptable risk of incorrect acceptance. What are the major audit factors affecting ARIA?

> Identify the factors an auditor uses to decide the appropriate TER. Compare the sample size for a TER of 7% with that of 4%, all other factors being equal.

> Explain how the auditor determines tolerable misstatement for MUS.

> The 2,620 inventory items described in Question 17-14 are listed on 44 inventory pages with 60 lines per page. There is a total for each page. The client's data are not in machine-readable form. Describe how a monetary unit sample can be selected in this

> What major difference between (a) Tests of controls and substantive tests of transactions (b) Tests of details of balances makes attributes sampling inappropriate for tests of details of balances? SOLUTION The most important difference between (a) te

> Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS, attributes sampling, and variables sampling? Explain.

> Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?

> Evaluate the following statement made by an auditor: "On every aspect of the audit where it is possible, I calculate the point estimate of the misstatements and evaluate whether the amount is material. If it is, I investigate the cause and continue to te

> Distinguish between the point estimate of the total misstatements and the true value of the misstatements in the population. How can each be determined?

> Define stratified sampling and explain its importance in auditing. How can an auditor obtain a stratified sample of 30 items from each of three strata in the confirmation of accounts receivable?

> Monetary unit sampling (MUS) is the most commonly used statistical method of sampling for tests of details because of its simplicity and its ability to provide statistical results in dollars. Read an article titled "Monetary-Unit Sampling Using Microsoft

> Explain the difference between replacement sampling and nonreplacement sampling. Which method do auditors usually follow? Why?


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