Question

After completing the tests of controls for inventories and purchases for DTB Inc. for the year ended You have been assigned to work on the accounts receivable section of the 2019 audit of XYZ. You have completed your study of the internal controls (attribute sampling) over sales and receivables and have decided that the key control over the completeness of sales is that shipping orders must be matched to sales invoices.

Your first step is to determine the correct sample size.

The next step is to test to see if the control is operating as described.

The following is given.

Acceptable risk of incorrect acceptance (beta risk) = 5%.

Expected population deviation rate = 1%

Tolerable deviation rate = 3%

Based on the work completed, you discovered that three shipping orders were not attached to sales invoices.

Required:

Prepared in good form a working paper and conclude whether the auditor can rely on the control of completeness of sales and receivables. Your working paper should include the sampling steps identified in the textbook for tests of controls. Each step should clearly specify how it relates to the facts in the question above.

Answer 1

Ans. We have completed your study of the internal controls over sales and receivables and have decided that the key control over the completeness of sales is that shipping orders must be matched to sales invoices.

Our first step is to determine the correct sample size.

The next step is to test to see if the control is operating as described.

Acceptable risk of incorrect acceptance (beta risk) = 5%.

Expected population deviation rate = 1%

Tolerable deviation rate = 3%

Based on the work completed, we discovered that three shipping orders were not attached to sales invoices.

Therefore, we should look to inform the management about the shortfalls in internal control and conduct a detailed analysis of the shortfalls found. An efficient and effective internal control is management's responsibility. However, the auditor needs to verify the operational efficiency of internal controls governing preparation and presentation of financial statements.