Mason Rowe is testing the effectiveness of an important control for Hart Inc. Rowe is placing a high level of reliance on this control and has assessed a relatively low risk of assessing control risk too low (5 percent) and tolerable rate of deviation (6 percent). Based on the acceptable risk of overreliance, expected population deviation rate, and tolerable rate of deviation, Rowe determined a sample size of 60 items. The tests of controls revealed three deviations.
Required:
Calculate the sample rate of deviation.
Using AICPA sample evaluation tables, calculate the upper limit rate of deviation and allowance for sampling risk.
Why does the upper limit rate of deviation differ from the sample rate of deviation?
What would Rowe's conclusion be with respect to the operating effectiveness of the control? What options are available at this time?
Ignoring the effects on sample size, how would Rowe's decision to accept a higher risk of assessing control risk too low (10 percent) affect the conclusions made with respect to the operating effectiveness of the control?
2. You are auditing Martinez Inc.'s accounts receivable balance using classical variables sampling. Martinez's accounts receivable comprised 2,500 customer accounts and were recorded at $3,500,000.
Using a risk of incorrect acceptance and a risk of incorrect rejection of 5 percent, you selected a sample of 200 accounts for examination and confirmed the accounts with the customers. The total recorded balance of these 200 accounts was $1,000,000; based on your confirmations as well as an investigation of differences reported by customers, you determined an audited balance of $900,000. Tolerable misstatement was established at $175,000.
Required:
What is the sample estimate of Martinez's accounts receivable balance using mean-per-unit, difference and ratio estimation methods? Comment on why you get different estimates with the different methods. What changes would you recommend in this circumstance?
In what circumstances should each of the different methods of classical variables estimation be used?