Question

Old Rock Bakery

Joe Jones walked out of the Old Rock Bakery operation and chewed on a Cheese Danish. He had chosen random selection to test for proper authorization of purchasing transactions. He had just completed the initial audit testing of the purchasing transactions and had evaluated the results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions was relatively high.

In addition, Joe was preparing to start the audit of another client, Rohr Industries, an airplane component manufacturer. He had discussed sampling methodology with his audit team and it had been determined that the Rohr Industries systems did not lend themselves easily to statistical sampling techniques. The audit team would have to employ non-statistical sampling.

Required:

a) What is the procedure that Joe Jones would follow when his initial testing showed a relatively high deviation rate for the Old Rock Bakery transactions?

b) What is non-statistical sampling?

c) Describe the non-statistical sampling methods that were open to Joe and his team for the Rohr Industries audit.

d) Which of Joe’s two clients’ systems would lend themselves to stratification?

Answer 1

a) Since there's a high deviation rate for the Old Rock Bakery transactions, Joe Jones would perform the following procedures:

• Calculate the deviation rate and compare it with the tolerable rate of deviation
• In case the deviation rate exceeds the tolerable rate of deviation, Joe would then have to extend testing to a larger sample to gain further evidence and place his reliance on other controls that can be used to reduce the identified risk of material mismanagement.
• Once Joe extends his testing and more tests are conducted, if the result of these tests is still inconclusive or they still reflect the same deviation rate, Joe would have no option but to conclude that the client's internal control systems are not reliable and they can lead to a material internal lapse with severly different accounting results which can lead to material misstatement.
• As a last resort, Joe will now have to perform his tests on an even larger sample to base his results on.

b) Non-statistical sampling is the contrary method of statistical sampling. as the name suggests, it involves any method other than statistical sampling.

c) In case Joe doesn't proceed with statistical sampling, the following methods are open for his discretion:

Judgemental Selection - This involves Joe having a previous experience on a particular transaction or sample which he picks carefully after consideration. This is effective if Joe is aware of any previous lapses with respect to a particular client or transaction.

Hapazhard Selection - In this method, Joe can choose to pick any sample without any serial or arranged order. This type of selection is quite unpredicatble due to the nature of it's non-systematic process. However, this process might have a risk of missing out on some material transactions as well.

Block Selection - In this process, the auditor can choose to pick samples or transactions that are grouped together as a block without any further consideration. This process is non-statistical and not very reliable when dealing with large number of transactions with higher complexity.

d) Joe might split the client's systems based on stratification:

High risk items - This will the result of 12 samples that reported as exceptions

Low Risk items - This will be part of the remaining sample that were categorized as normal transactions.