Calgari Clothing Company manufactures high-quality silk ties that are marketed under a number of trademarked names. Joe & Vandervelte LLP has been the company’s auditors for five years. Lisa Austen, the senior-in-charge of the audit, has reviewed Calgari’s controls over purchasing and inventory, and she determined that a number of controls can be relied upon to reduce control risk. Austen 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, prenumbered receiving report. Austen decided to use a nonstatistical sampling approach based on the following judgments for each control procedure and has judgmentally decided to use a sample size of 100 purchase orders for control 1 and 40 receiving reports for control 2.
Calgari Clothing Company manufactures high-quality silk ties that are marketed under a number of trademarked names. Joe & Vandervelte LLP has been the company’s auditors for five years. Lisa Austen, the senior-in-charge of the audit, has reviewed Calgari’s controls over purchasing and inventory, and she determined that a number of controls can be relied upon to reduce control risk. Austen 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, prenumbered receiving report.
Austen decided to use a nonstatistical sampling approach based on the following judgments for each control procedure and has judgmentally decided to use a
|
Control Procedure |
||
|
Parameters |
1 |
2 |
|
Desired confidence |
90% |
95% |
|
Tolerable deviation rate |
6.75% |
8.5% |
|
Expected population deviation rate |
2.5% |
2.1% |
After completing the examination of the sample items, Austen noted three deviations for each control procedure.
Required:
What conclusion should Austen reach about each Control Procedure #2? Justify your answer.
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