Problem
Sampling appropriateness
Your client, Chicken Supremacy Ltd, is a manufacturer of fancy dress costumes. At the planning stage, your preliminary assessment of internal controls in relation to purchases and payables suggested a low control risk. Your audit plan therefore included a combined audit approach in relation to purchases and payables with reliance being placed on internal control procedures followed by a reduction in the level of substantive testing.
You have just completed your tests of controls in relation to the purchases system and the result of the initial testing showed a projected error rate greater than the tolerable error. Your review of the results indicated that the errors were not isolated incidents, the samples were representative of the population as a whole and further testing confirmed the initial results.
Task
1. Discuss the impact of the results of the tests of controls on purchases and payables.
2. How would your approach differ if the errors were found to be isolated to a two-week period when the purchase ledger officer was on annual leave.