General Attributes Sampling. Frazier Holyfield, a new staff accountant, is evaluatingimportant controls over the revenue cycle and, more specifically, assessing the operatingeffectiveness of the control that all shipments made to customers by Top Rank Inc. havebeen properly invoiced.Required:Comment on the following actions that Holyfield performed. You should evaluate eachaction independently of any other actions.a. Holyfield decided to inspect documentary evidence that all shipments made by Top Rankhave been invoiced by matching shipping documents with invoices. Accordingly, shehas identified the population from which she intends to sample as all sales invoices. TopRank has a computerized list of invoiced sales that she can use to select the appropriatesample.b. Because Holyfield plans to place a high degree of reliance on this particular control, sheassesses the risk of overreliance at 5 percent. In previous years, a 10 percent level wasused, but consultation with the engagement manager (Mike Evander) and partner (DonnaArum) indicate that a higher degree of reliance is planned in the current audit.c. Holyfield assessed the expected population deviation rate at 1 percent. Although the rateof deviation from prior audits has approximated 2 percent, Top Rank has made severalimprovements in its processing of sales invoices; as a result, she believes that a lowerexpected population deviation rate is appropriate.d. Based on the risk of overreliance (5 percent), the expected population deviation rate(1 percent), and the tolerable rate of deviation (4 percent), Holyfield uses sampling tablesto calculate a sample size of 156. She then increases the sample size to 175 because thepopulation of sales invoices is extremely large. (More than 30,000 sales invoices areprocessed per year.) e. Based on her tests of controls, Holyfield determined a sample rate of deviation of 2 percent.Using this rate of deviation, along with the appropriate risk of overreliance, she determined an allowance for sampling risk of 2.5 percent. Because the sum of these two(4.5 percent) is less than the risk of overreliance, Holyfield concluded that the control isoperating effectively and decided to rely on this control as planned to reduce the scope ofher substantive procedures.
General Attributes Sampling. Frazier Holyfield, a new staff accountant, is evaluating
important controls over the revenue cycle and, more specifically, assessing the operating
effectiveness of the control that all shipments made to customers by Top Rank Inc. have
been properly invoiced.
Required:
Comment on the following actions that Holyfield performed. You should evaluate each
action independently of any other actions.
a. Holyfield decided to inspect documentary evidence that all shipments made by Top Rank
have been invoiced by matching shipping documents with invoices. Accordingly, she
has identified the population from which she intends to sample as all sales invoices. Top
Rank has a computerized list of invoiced sales that she can use to select the appropriate
sample.
b. Because Holyfield plans to place a high degree of reliance on this particular control, she
assesses the risk of overreliance at 5 percent. In previous years, a 10 percent level was
used, but consultation with the engagement manager (Mike Evander) and partner (Donna
Arum) indicate that a higher degree of reliance is planned in the current audit.
c. Holyfield assessed the expected population deviation rate at 1 percent. Although the rate
of deviation from prior audits has approximated 2 percent, Top Rank has made several
improvements in its processing of sales invoices; as a result, she believes that a lower
expected population deviation rate is appropriate.
d. Based on the risk of overreliance (5 percent), the expected population deviation rate
(1 percent), and the tolerable rate of deviation (4 percent), Holyfield uses sampling tables
to calculate a sample size of 156. She then increases the sample size to 175 because the
population of sales invoices is extremely large. (More than 30,000 sales invoices are
processed per year.)
e. Based on her tests of controls, Holyfield determined a sample rate of deviation of 2 percent.
Using this rate of deviation, along with the appropriate risk of overreliance, she determined an allowance for sampling risk of 2.5 percent. Because the sum of these two
(4.5 percent) is less than the risk of overreliance, Holyfield concluded that the control is
operating effectively and decided to rely on this control as planned to reduce the scope of
her substantive procedures.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
