Evaluating a Sampling Application. Tom Barton, an assistant accountant with a local CPAfirm, recently graduated from Other University. He studied statistical sampling for auditing in college and wants to impress his employers with his knowledge of modern auditingmethods.Barton decided to select a random sample of payroll checks for the test of controls usinga tolerable rate of deviation of 5 percent and an acceptable risk of overreliance of 5 percent. The senior accountant told Barton that 2 percent of the checks audited last year hadone or more errors in the calculation of net pay. He decided to audit 100 random checks.Because supervisory personnel had paychecks with higher amounts than production workers, he selected 60 of the supervisor checks and 40 checks of the others. He was very carefulto see that the selections of 60 from the April payroll register and 40 from the August payrollregister were random.The audit of this sample yielded two deviations, exactly the 2 percent rate experiencedlast year. The first was the deduction of federal income taxes based on two exemptions for asupervisory employee whose W-4 form showed four exemptions. The other was payment toa production employee at a rate for a job classification one grade lower than it should havebeen. The worker had been promoted the week before, and Barton found that in the nextpayroll he was paid at the correct (higher) rate.When he evaluated this evidence, Barton decided that these two findings were reallynot control deviations at all. The withholding of too much tax did not affect the expenseaccounts, and the proper rate was paid the production worker as soon as the clerk caughtup with the change orders. Barton decided that having found zero deviations in a sample of100, the ULRD at 5 percent risk of overreliance was 3 percent, which easily satisfied hispredetermined criterion.The senior accountant was impressed. Last year he had audited 15 checks from eachmonth, and Barton’s work represented a significant time savings. The reviewing partner onthe audit also was impressed because she had never thought that statistical sampling couldbe so efficient, and that was the reason she had never studied the method.Required:Identify and explain the mistakes made by Barton
Evaluating a Sampling Application. Tom Barton, an assistant accountant with a local CPA
firm, recently graduated from Other University. He studied statistical sampling for auditing in college and wants to impress his employers with his knowledge of modern auditing
methods.
Barton decided to select a random sample of payroll checks for the test of controls using
a tolerable rate of deviation of 5 percent and an acceptable risk of overreliance of 5 percent. The senior accountant told Barton that 2 percent of the checks audited last year had
one or more errors in the calculation of net pay. He decided to audit 100 random checks.
Because supervisory personnel had paychecks with higher amounts than production workers, he selected 60 of the supervisor checks and 40 checks of the others. He was very careful
to see that the selections of 60 from the April payroll register and 40 from the August payroll
register were random.
The audit of this sample yielded two deviations, exactly the 2 percent rate experienced
last year. The first was the deduction of federal income taxes based on two exemptions for a
supervisory employee whose W-4 form showed four exemptions. The other was payment to
a production employee at a rate for a job classification one grade lower than it should have
been. The worker had been promoted the week before, and Barton found that in the next
payroll he was paid at the correct (higher) rate.
When he evaluated this evidence, Barton decided that these two findings were really
not control deviations at all. The withholding of too much tax did not affect the expense
accounts, and the proper rate was paid the production worker as soon as the clerk caught
up with the change orders. Barton decided that having found zero deviations in a sample of
100, the ULRD at 5 percent risk of overreliance was 3 percent, which easily satisfied his
predetermined criterion.
The senior accountant was impressed. Last year he had audited 15 checks from each
month, and Barton’s work represented a significant time savings. The reviewing partner on
the audit also was impressed because she had never thought that statistical sampling could
be so efficient, and that was the reason she had never studied the method.
Required:
Identify and explain the mistakes made by Barton
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