Question

2. Fernanda Calle Clothing Company manufactures high-quality sikties that are marketed under a number of trademarked names. Capone & Celestin have been the company's auditors for five years. Chase Cetta, the senior-in-charge of the audit, has reviewed Fernanda Calle Clothing Company's control over purchasing and Inventory, and has determined that a number of controls can be relied upon to reduce control risk. Chase Cetta has decided to test two control procedures over purchases and inventory: (1) purchase orders are agreed to receiving reports and vendor's invoices for product, quantity, and price and (2) Inventory is transferred to raw material stores using an approved, pre-numbered receiving report. Chase Cetta decided to use an attribute sampling approach based on the following for each control procedure and has decided to use a sample size of purchase orders for control 1 and a Sample size of receiving reports for control 2. Control Procedure Parameters Desired confidence 95% 90% Tolerable deviation rate 7% Expected population deviation rate After completing the examination of the sample items, Chase Cetta noted two deviations for control procedure 1 and four deviations for procedure 2. Control Procedure: 1. What conclusion should Chase Cetta reach about control procedure 17 Justify your answer: Sample Size: CUDR: TOR: Decision: 2. What conclusion should Chase Cetta reach about control procedure 2? Justify your answer Sample Size: CUDR: TDR Decision

Answer 1

A B C D E F G Sample Size : It depends on the desired confidence level. Higher the 2 confidence level would mean less sample coverage. 4 CUDR (Computed Upper Deviation Rate): It is to be checked with 5 reference to the TDR or Tolerable Deviation Rate (TDR). If CUDR is 6 lower than the TDR, then no further action needs to be taken, otherwise more samples need to be extracted. TDR: It stands for Tolerable Deviation Rate. Higher the rate, higher would be the chances of misrepresentation. Sample Size : The sample size in control procedure 1 would be less as compared to control procedure 2 as the confidence level is higher in the former case. CUDR: Assuming that CUDR limit is below TDR and there are no other material deviations apart from the two, there are no further samples to be evaluated. TDR : TDR is lower than control procedure 2, which means more samples would come under the purivew of control procedure 1, resulting in lesser misrepresentations. Decision : No further samples to be evaluated. 13 14

А B. н Sample Size : More samples to be covered as the deviation is more. CUDR: Assuming the CUDR is above TDR, os more samples to be evaluated. TDR : TDR is higher in control procedure 2, which means there are higher chances of misrepresentation. Decision : Based on the above evidences, we can conclude that the further samples need to be obtained.