Ira Icandoit is a staff auditor in the internal audit functionof a small manufacturing company located in western Kansas. Irarecently completed a professional development course on astatistical sampling and is very excited about the new knowledge hehas gained. He decided to apply his newly gained knowledge duringthe audit to which he had just been assigned. He used attributesampling when he performed his tests of controls over the company’sprocurement transactions.
Ira figured that a tolerable deviation rate of 10 percent and a5 percent risk of assessing control risk too low were appropriatefor the tests he planned to perform. He had no idea how manydeviations actually might exist in the population, so he set theexpected deviation rate at 2 percent to be conservative. Iraselected a sample of 100 items.
Because Ira believed larger items deserved more attention thansmaller items, he selected 75 items with values greater than orequal to $2,500 and 25 items with values less than$2,500. Hethought it would be the most appropriate to select transactionsnear the end of the fiscal year, so he randomly selected items fortesting from the last two months.
Ira was relieved when he found only six deviations fromprescribed controls. One deviation was a missing vendor’s invoice,so Ira called the vendor to make sure the transaction was in factvalid. Three deviations were missing signatures by an authorizedmanager. The manager explained that he had not approved theinvoices because he had been out of the office on the date theinvoices were prepared. H reviewed the invoices and told Ira therewere no problems with them. The other two deviations involveddollar errors. One was an error in the extension of an invoice, andthe other was a misclassification error between expenses, which didnot affect net income. Ira considered these two dollar errors to bethe only two actual control deviations. He determined that theachieved upper deviation limit was 7 percent at a 5 percent risk ofassessing control risk too low.
Based on these results, Ira concluded that procurementtransactions for the year were unlikely to contain more deviationsthan the allowable rate. Accordingly, he concluded that controlsover procurement transactions were effective and could be relied onmanagement.
Identify and explain any deficiencies you note in Ira’sattribute sampling application.
