Integrated Audit Assignment 5 - Discussion Questions

Integrated Audit Practice Case SEVENTH EDITION Assignment FIVE Discussion Questions David S. Kerr l Randal J. Elder l Alvin A. Arens Armond Dalton Publishers, Inc. Okemos, Michigan NAME: Group 11 Discussion questions 1. For this assignment, the expected population exception rate (EPER) was specified as 1% or 2%, the tolerable exception rate (TER) was specified as 7% or 8%, and the acceptable risk of overreliance (ARO) was specified as 10% for all attributes in the audit of acquisitions transactions. Indicate how each of these variables (EPER, TER, and ARO) should be determined. What is the effect on sample size of lowering each variable (EPER, TER, and ARO)? Tolerable Exception Rate (TER): It is determined by the deviation rate, which is the rate the auditor is willingly to accept and rely on internal controls without changing the assessment of control risk. The 7% - 8% rate represents a low importance on controls with a medium effectiveness. Expected Population Excepton Rate (EPER): The exception rate that auditor believe to find before perfoming tests. The rate is determined from past years audit which are subject to change based on effectiveness of internal control system. 1%-2% represents a medium effective internal control system. Acceptable Risk of Overreliance (ARO): A 10% ARO is a smaller smaple size set and there is more risk due to relying on controls. Effect on Sample Size on Lowering Each Variable: -TER: Lowering TER increases sample size. Inverse relationship between the two. -EPER: Lowering EPER decreases the sample size. Directly corelated with each other. -ARO: Lowering ARO increases sample size. Inverse relationship between the two. Page 1 l Assignment FIVE NAME: 2. Group 11 When the computed upper exception rate (CUER) exceeds the tolerable exception rate (TER), the auditor will likely increase the assessed level of control risk and increase one or more related substantive tests. What other courses of action are available to the auditor when CUER exceeds TER? The auditor should determine if the sample is representative of the total population. If so, the auditor may increase the control risk and perform more substantive procedures. The auditor may also increase TER or ARO. If the sample size is not representative, the auditor should increase the smaple size. This should only occure if CUER is slightly grater than TER. If CUER is significiantly greater than TER increasing the sample size will not provide better results. 3. The study and evaluation of internal controls in Assignment 4 identified deficiencies in internal controls over acquisitions. Did any of these deficiencies result in misstatements in the recording of transactions? Explain why deficiencies in internal controls might not always result in significant misstatements when transactions are recorded. [Does anyone know the answer to the first question?] Deficiencies in internal controls do not always result in significant misstatements when transactions are recorded. Internal controls are not always meant to prevent monetary losses but to identify accountability and responsibility. Nonmentary controls seek to enhance cooperation and mutual trust amongst the people of the organization. Page 2 l Assignment FIVE NAME: 4. You performed tests of controls and substantive tests of transactions for acquisitions using nonstatistical sampling. The tests of controls and substantive tests of transactions for sales transactions were performed using statistical sampling. Indicate the significant differences in these approaches in planning the sample, performing the audit procedures, and evaluating the results of the sample. The difference between nonstatistical sampling and statistical sampling is how the results are decided. Nonstatiscal sampling requires the auditor to use their professional judgement to determine what to sample from the total population. Statistical sampling allows the auditot to measure and control sampling risk resulting in a quantifiable evidence. There is a no difference in the planning the sample and performing the audit procedures. Page 3 l Assignment FIVE