Audit Sampling

Topics: Accounts receivable, Sampling, Risk Pages: 7 (1973 words) Published: January 16, 2012
Auditing Sample Case Study Memo
Team D (Wayne Brown, Melissa Ginez, Matthew Gourlie, Juel Rypka) University of Phoenix
Alisa Dumond
December 19, 2011

interoffice memorandum
to:John Smith, CEO Key west company
from:Audit Team D
subject:Audit Findings for Key West Company

Dear Mr. Smith
The purpose of this memo is to communicate to you the results and findings from our team’s assessment of the Accounts Receivable balances for Key West Company as of 20X1. Our team has already completed a thorough evaluation of the company’s internal control and we believe they are excellent. Therefore, the team has decided to use the Probability-proportionate-to-size sampling theory, (PPS). We have used PPS to find the evidence required to prove there has been no materially misstatement in Key West Company’s accounts receivable accounts. The financial cycle is the cycles of business transactions, which involve the processing of financial activity including cash inflows, outflows, dividends, stocks, and long term debt agreements. Once an auditor can clearly identify what is involved in the financial cycle then the process may begin test the evidence found. According to FFIECIT, “This process is an essential part of the planning process, which involves designing and building automated control and security features into applications (2009). In order to illustrate team D’s findings during the audit we have created a six-teen slide presentation showing our calculations and findings. In this presentation we will calculate the sample size, sampling interval. Then we will assume a series of misstatements to calculate the projected misstatement, allowance for sampling risk, and the upper misstatement limit. The following are team D’s finding’s, which needs to brought to your attention. There are no internal control deficiencies, the controls over the accounts receivable were found to be working effectively and supported and assessment for a low risk of material misstatements. There may be several feasible courses of action regarding the identified misstatements. It is more important to be concerned with the process of problem definition and isolation, analysis, and evaluation of alternatives, and the choice of one or more recommendations, rather than trying to find a single answer. The steps taken to test the internal controls were read the state of affairs once for familiarity, noting issues that come to the forefront. Determine all the facts, making notes about symptoms of problems, root problems, unresolved issues, and roles of key players and watch for issues beneath the surface. By isolating the problem, we get a feel for the overall environment by putting ourselves in the position of one of the key players. Sample Size (Slide 3 and 4)

The information from the PPS samplings is as follows: the company has over 4000 customer accounts with a total book value of $3,000,000. Our team decided to use $150,000 as the maximum tolerable misstatement and anticipate there may be $30,000 of misstatement in the population. We intend to limit the incorrect acceptance risk to The company has 3,000 clients and we calculated that sixty six of those clients should be sampled and we in intend to gather conformation from all the clients that were sampled. It is anticipated that of the amount of clients in ten percent. Our intention is to find positive confirmation of accounts included in the sample and to apply alternative procedures to accounts for which no reply is received. Based on the information given our team determined the population size to be sixty-six. This information is presented on slide 4 of our presentation. Here are the calculations: Book Value of the Population BV = $3,000,000 Risk of Incorrect Acceptance 10%...

References: Boynton, W. and Johnson, R. (2006). Modern Auditing: Assurance Services and the Integrity of Financial Reporting (8th ed.). Hoboken, NJ: Wiley.
California Board of Accountancy. (2005). A Manual of Disciplinary Guidelines and
Model Disciplinary Orders 6th Edition 2005. Retrieved December 17, 2011, from
FFIEC IT Handbook InfoBase. (n.d.). Booklet: Development and Acquisition. Section:
Development Procedures. Subsection: Systems Development Life Cycle.
Retrieved December 17, 2011, from
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