Question

Calgari Clothing is a division of A&B Industries and manufactures high-quality silk ties that are marketed under a number of brand names. As an internal auditor for A&B, you have been assigned to review Calgari’s controls over purchasing and have determined that there are a number of controls in place. You have decided to test the operating effectiveness of the following control: Vendor invoices are agreed to receiving reports and purchase orders for product, quantity, and price. You also have decided to apply attribute sampling in your tests. Applicable sampling tables are presented on the following pages.

A. Clearly state how you would test the operating effectiveness of the control identified above.

B. Assume that you expect a 2% deviation rate in the sample and that you will tolerate a deviation rate of 7% at a 5% risk of assessing control risk too low. What is the appropriate sample size for your audit test?

C. Assume that the correct sample size is 100. Assume further that you properly tested the 100 sample items and found three items for which there was no purchase order. Evaluate your sample results and indicate what, if any, further action you should take.

Answer 1

Solution A.

Following points should be ensured for the operating effectiveness of the purchase process

Sr. No	Particulars
1	Purchase orders should be accurately and completely prepared and recorded on a timely basis.
2	All purchase orders are properly processed and sent to the vendors
3	Materials are purchased at an appropriate price after comparing it with different vendors
4	Orders are placed on a timely basis
5	Materials are received on a timely basis
6	Materials received meet required quality standards of the company
7	Materials received are processed on a timely and effective basis
8	Physical safe guards of the materials are adequate.
9	Vendor Invoice should be compared with the Purchase order raised, any deviation should be communicated
10	In case of return of material proper documentation should be maintained

Solution B.

Selection of Appropriate sample size would be based on the Following
Sr. No	Particulars	Remarks/Reasons	Sample Size
1	Deviation Rate	If the Auditor Expect there would be increase in the expected rate of deviation: Auditor need to select the larger sample size so that the auditor will be in a position to make a reasonable estimate of the actual rate of deviation	Rate is 2% which means rate is lower in such a case even smaller sample size will work
2	Tolerate rate	Similarly the Lower the Tolerate rate Larger will be the sample size	Rate is 7% which is a bit higher in such a case even a lower or a medium sample size would be better

Solution C.

Say Correct sample size is 100

Cases where no Purchase orders are found is 3, that is 3% of the sample size

In such a case if the sample properly indicate the full population then, it indicates that in 3% of the total population there would be no Purchase orders

Further auditor should test on a Larger sample size in order to obtain reasonable assurance that the audit sampling has provided a reasonable basis for conclusions about the population

Auditor may further request the management to investigate the misstatement identified and the potential for further mis-statment and may ask management for any necessary adjustments that are required

Auditor may even tailor the nature, timing and extent of his other audit procedure to achieve best required assurance