Question

Determining sample size for control testing LO 5 Alice Pang is planning the control testing of the accounts payable function in the hardware retailer Bunns and Major. Alice is attempting to determine the appropriate sample size for her tests and is writing a report to the engagement partner of the audit justifying her choices. She has had the opportunity to talk to management at Bunns and Major and tour the facilities. She has also reviewed the working papers from the previous audits and identified factors that have changed from previous years. She notes that the number of accounts payable has increased by 50 percent since last year because Bunns and Major has changed some of its suppliers from large corporate wholesalers to dealing directly with manufacturers. Overall, Alice believes that the controls in accounts payable are likely to be operating more effectively than in previous years, and she expects a reduction in control deviations. This situation is likely because of the appointment of an additional staff member in the accounts payable department three months after the start of the fiscal year. However, she is recommending that a lower rate of deviation would be acceptable this year because of the increased importance of accounts payable to Bunns and Major's solvency situation in the current economic climate. In addition, she is recommending that substantive testing of accounts payable be less extensive than in past years. Required Explain how the factors mentioned above would impact the sample size for control testing of accounts payable.

Answer 1

As per ISA 530" Audit Sampling",-

(i) When designing an audit sample, the auditor shall consider the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn.

(ii) The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.

(iii) The auditor shall select items for the sample in such a way that each sampling unit in the population has a chance of selection.

Tolerable Rate of Deviation:

Rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population.

-Different factors affect the sample size. The sample size should be sufficient to decrease the Sampling Risk to an acceptable lower level.

-• Sampling risk can lead to two types of erroneous conclusions:

1. In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.

2. In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Factors	Effect on sample size for Control Testing or Test of Cotrol of Accounts Payable
1.Change in material factors & Circumstances from previou year	Increase the sample size
2.Increase in Number of Samplig Units or Number of Accounts Payable	Negligible effect.(Because sampling is a statistical method. Increase or decrease in the number of samplingf units in the population will not have any effect on the sample size)
3.Change in characetristics of the suppliers	Increase the sample size.
4.Increase in Auditors Assessment on the Operating effectiveness of the control or If auditor assess that the control is effective	Decrease the sample size
5. Expectation of Less control deviation	Decrease the sample size
6.Appointment of additional staffs	Increase the sample size.
7.Increase in imporatnce of Assertion (Accouts Payable) Or Increase in desired level of assurance	Increase Sample size
8.Decrease in tolerable rate of Deviation	Increase the sample size
9. Decrease in use of Other Substantive procedure	Increase the sample size.