Question

Ira Icandoit is a staff auditor in the internal audit function of a small manufacturing company located in western Kansas. Ira recently completed a professional development course on a statistical sampling and is very excited about the new knowledge he has gained. He decided to apply his newly gained knowledge during the audit to which he had just been assigned. He used attribute sampling when he performed his tests of controls over the company’s procurement transactions. Ira figured that a tolerable deviation rate of 10 percent and a 5 percent risk of assessing control risk too low were appropriate for the tests he planned to perform. He had no idea how many deviations actually might exist in the population, so he set the expected deviation rate at 2 percent to be conservative. Ira selected a sample of 100 items. Because Ira believed larger items deserved more attention than smaller items, he selected 75 items with values greater than or equal to $2,500 and 25 items with values less than$2,500. He thought it would be the most appropriate to select transactions near the end of the fiscal year, so he randomly selected items for testing from the last two months. Ira was relieved when he found only six deviations from prescribed controls. One deviation was a missing vendor’s invoice, so Ira called the vendor to make sure the transaction was in fact valid. Three deviations were missing signatures by an authorized manager. The manager explained that he had not approved the invoices because he had been out of the office on the date the invoices were prepared. H reviewed the invoices and told Ira there were no problems with them. The other two deviations involved dollar errors. One was an error in the extension of an invoice, and the other was a misclassification error between expenses, which did not affect net income. Ira considered these two dollar errors to be the only two actual control deviations. He determined that the achieved upper deviation limit was 7 percent at a 5 percent risk of assessing control risk too low. Based on these results, Ira concluded that procurement transactions for the year were unlikely to contain more deviations than the allowable rate. Accordingly, he concluded that controls over procurement transactions were effective and could be relied on management. Identify and explain any deficiencies you note in Ira’s attribute sampling application.