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2 years ago
You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms.

 In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate in the population of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms.

In your testing, you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33 %.

Required:

A) What actions are available to you regarding your planned reliance on the master file change controls?

B) What are the advantages and disadvantages of each action?

C) How would you decide which action to take?
Textbook 

Auditing: The Art and Science of Assurance Engagements, Canadian Edition

Edition: 12th
Authors:
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2 years ago
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The problem here is that the actual error rate in the population is higher than expected, too high to place reliance upon the control.
A), B)
Potential action   Advantages   Disadvantages
Revise the TER (tolerable error rate) from 1% to a higher number   This would allow the auditor to rely upon the population, but likely with a lower level of assurance.   Difficult to justify (particularly from a quality control perspective). The amount of reliance on the control will have to be less, resulting in the need to do additional substantive tests.
Expand the sample size   The estimated error in the population will decrease IF there are no errors in the additional items sampled.   There may also be errors in the additional items tested, resulting in an even larger estimated error for the population.
Revise assessed control risk    This action is most supportable and demonstrates good use of judgment.   This will require either looking for and relying upon a compensating control (if available) or conducting additional tests of details.


C) In order to decide on which action to take, the audit staff should:
• First consult with the engagement senior, supervisor or manager.
• Carefully investigate the errors to determine whether they are representative (for example, if they occurred while the senior accountant was on holiday; perhaps only that holiday period would require additional substantive tests).
• Carefully check to see that the sample was selected properly and is representative.
• Compare the costs of the alternative approaches.
• Consider how much time is left to complete the audit.
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