Question 1:
A. Define inherent risk and residual risk.
Inherent risk -
Residual risk -
B. Which of the two types of risk would have a greater impact on the annual internal audit plan?
Question 2:
You are conducting an audit of the effectiveness of MittRyan Corporation's control of manually approving all purchases over $25,000. During the year MittRyan has made 1,300,000 purchases, of which 3,000 were over $25,000. You consider this a key control in terms of financial reporting so you assess tolerable deviation rate as low. You also consider the expect error rate to be very low, but given this is a manual process there is likely to be some errors so you set the rate at 1%. Payment for purchases requires a complete voucher packet consisting of the purchase order, receiving report, approved vendor number, and invoice. Voucher packets are stored electronically and filed by purchase order number. The file contains the purchase order number, electronic approval if under $25,000, receiving report number, invoice number and dollar amount of purchase. Manually approved purchases are included in the file with the purchase order number. Hardcopy of the manually approved purchase orders with the signature authorizing purchase are stored by purchase order number in a file cabinet in the purchasing department.
(a) To test this control, identify the population from which you should select a sample to test this control.
(b) For a given sample unit in this population, what would be an "error"?
(c) You set the confidence level at 95% and a tolerable deviation rate at 3%. What is the initial samplesize you would use for this test? (Tables on following pages).
(d) Assume your sample size was 60, briefly describe how you would select a random sample for testing this control.
(e) Assume you took a sample of 150 and found 3 errors. State your conclusion in proper form.
