Question

1. Gurjot Gill Clothing Company manufactures high-quality silk ties that are marketed under a number of trademarked names. Capone & Celestin have been the company's auditors for five years. Chrisel Gladson, the senior-in-charge of the audit, has reviewed Gurjot Gill Clothing Company's controls over purchasing and inventory, and has determined that a number of controls can be relied upon to reduce control risk. Chrisel Gladson 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.

Chrisel Gladson 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                                                                             1                                  2               

Desired confidence                                                                 95%                             90%

Tolerable deviation rate                                                         4%                               4%

Expected population deviation rate                                       1.5%                            1.5%

After completing the examination of the sample items, Chrisel Gladson noted three deviations for control procedure 1 and two deviations for procedure 2.

Control Procedure:

1. What conclusion should Chrisel Gladson reach about control procedure 1? Justify your answer:

Sample Size:

CUDR:                   

TDR:                     

Decision:              

2. What conclusion should Chrisel Gladson reach about control procedure 2? Justify your answer.

Sample Size:         

CUDR:                   

TDR:                     

Decision:              

 

Answer 1

	Control Procedure 1	Control Procedure 2
Confidence Level Rate	95%	90%
Tolerable Deviation Rate	4%	4%
Expected Population Rate	1.5%	1.5%
Sampling Risk (100-confidence level Risk)	5%	10%
No. of Deviation Observed	3	2

Lets Suppose the Sample Size is	100 Purchase orders	100 Receiving Reports
Hence Population Deviation Rate	3/100	2/100
Hence Population Deviation Rate and Sampling Risk	3%+5%= 8%	2%+10%=12%
Comparison with Tolerable Deviation Rate	4%	4%
	Greater than TDR	Greater than TDR
Decision	Cannot rely on internal control	Cannot rely on Internal control

As in Both Cases Deviation rate is higher than TDR, It means control is not appropriate and cannot rely over the same with such controls.