For the audit of the financial statements of Mercury Fifo Company,Stella Mason, CPA, has decided to apply nonstatistical audit sampling in the testsof controls and substantive tests of transactions for sales transactions. Based on herknowledge of Mercury’s operations in the area of sales, she decides that the EPER is likelyto be 3% and that she is willing to accept a 5% risk that the true population exceptionrate is not greater than 6%. Given this information, Mason selects a random sampleof 150 sales invoices from the 5,000 generated during the year and examines them forexceptions. She notes the following exceptions in her audit schedules. There is no otherdocumentation.InvoiceNo. Comment5028 Sales invoice was originally footed incorrectly but was corrected by client before the billwas 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 indicationof 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 thecombined exceptions.c. Calculate SER for each attribute tested in the population. (You must decide whichattributes should be combined, which should be kept separate, and which exceptionsare actual exceptions before you can calculate SER.)d. Calculate TER – SER for each attribute and evaluate whether sampling error issufficiently 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.
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.
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