(Objective 15-5) 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 Mercury’s operations in the area of sales, she decides that the EPER is likely to be 3% and that she is willing to accept a 5% risk that the true population exception rate is not greater than 6%. Given this information, Mason selects a random sample of 150 sales invoices from the 5,000 generated during the year and examines them for exceptions. She notes the following exceptions in her audit schedules. There is no other documentation.
Invoice No. | Comment |
5028 | Sales invoice was originally footed incorrectly but was corrected by client before the bill was sent out. |
6791 | Voided sales invoice examined by auditor. 6810 Shipping document for a sale of merchandise could not be located. |
7364 | Sales invoice for $2,875 has not been collected and is 6 months past due. |
7625 | Client unable to locate the duplicate sales invoice. |
8431 | Invoice was dated 3 days later than the date entered in the sales journal. |
8528 | Customer order is not attached to the duplicate sales invoice. |
8566 | Billing is for $100 less than it should be due to an unintentional pricing error. No indication of internal verification is included on the invoice. |
8780 | Client unable to locate the duplicate sales invoice. |
9169 | Credit not authorized, but the sale was for only $7.65. |
9974 | Lack of indication of internal verification of price extensions and postings of sales invoice. |
a. Which of the preceding should be defined as an exception?
b. Explain why it is inappropriate to set a single acceptable TER and EPER for the combined exceptions.
c. Calculate SER for each attribute tested in the population. (You must decide which attributes should be combined, which should be kept separate, and which exceptions are actual exceptions before you can calculate SER.)
d. Calculate TER – SER for each attribute and evaluate whether sampling error is sufficiently large given the 5% ARO. Assume TER is 6% for each attribute.
e. State the appropriate analysis of exceptions for each of the exceptions in the sample, including additional procedures to be performed.
Objective 15-5
Use nonstatistical sampling in tests of controls and substantive tests of transactions.
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