1. Problem 11-22, p. 357
For the examination of the financial statements of Scotia Inc., Rosa Schellenberg, a public accountant, has decided to apply non-statistical audit sampling in the tests of sales transactions. Based on her knowledge of Scotia’s operations in the area of sales, she decides that the estimated population deviation rate is likely to be 3 percent and that she is willing to accept a 5 percent risk the true population rate is not greater than 6 percent. Given this information, Rosa selects a random sample of 150 sales invoices from the 5,000 prepared during the year and examines them for exceptions. She notes the following exceptions in her working papers. There is no other documentation.
REQUIRED
Which of the invoices in the table should be defined as an exception?
Explain why it is inappropriate to set a single acceptable TER and EPER for the combined exceptions.
State the appropriate analysis of exceptions for each of the exceptions in the sample.
Invoice No:
Comment
5028
Sales invoice had incorrect price, but a subsequent credit not was sent out as a correction.
6791
Voided sales invoice examined by auditor.
6810
Shipping document for a sale of merchandise could not be located.
7364
Sales invoice for $2,875 has not been collected and is six months past due.
7625
Client unable to locate the printed duplicate copy of the sales invoice.
8431
Invoice was dated three days later than the date of the shipping document.
8528
Customer purchase order is not attached to the duplicate sales invoice.
8566
Billing is for $100 less than it should be due to a pricing error.
8780
9169
Credit is not authorized, but the sale was only for $7.65.

2. 11.22 Solution a.
Invoice Number
Exception?
Type of Exception
5028 No
Error was detected and corrected by client.
6791
Sales invoice was voided.
6810
Yes
Proof of shipment not presented.
7364
Credit collection problem; should be noted for review of allowance for doubtful accounts.
7625
Duplicate sales invoice not properly filed.
8431
Invoices not recorded by proper date; represents potential cutoff problem.
8528
Customer orders not included in invoice package to verify compliance with the order.
8566
Error in pricing. No internal verification.
8780
9169
Credit not authorized.
b. It is inappropriate to set a single acceptable tolerable exception rate and estimated population exception rate for the combined errors because each attribute has a different significance to the auditor and should be considered separately in analyzing the results of the test.

3. c. For each exception, the auditor should check with the controller to determine his explanation for the cause. In addition, the appropriate analysis for each type of exception is as follows:
Invoice No.
Deviation Analysis
6810
Confirm the account balances to the customer; examine the reduction in the perpetual inventory records.
7625
Trace the amount to the sales journal and subsidiary ledger; examine the shipping document and recompute the sale amount. Ask the client to reprint the invoice if the full document is available in the automated system.
8431
Determine who recorded the invoice and check several others prepared by him or her to determine if the error consistently occurs. Increase cut-off testing around year-end work.
8528
Examine subsidiary ledger for subsequent cash receipts; examine sales invoices for other sales invoices to the same customer to determine if customer orders were attached.
8566
Check the price on other invoices to the same customer. Check the price on other invoices that have the same product.
8780
See 7625
9169
Check credit history of customer and evaluate collectability of the customer’s account.

4. Problem 11-25, page 358
You have just completed the accounts receivable confirmation process in the audit of Danforth paper Company Ltd., a paper supplier to retail shops and commercial users.
Following are the data related to the process:
Accounts receivable recorded balance $2,760,000
Number of accounts ,320
A non-statistical sample was taken as follows:
All accounts over $10,000 (23 accounts) $465,000
77 accounts under $10, $81,500
Materiality $100,000
Inherent and control risk are both high
No relevant analytical procedures were performed.
The table below gives the results of the confirmation procedures
REQUIRED
Evaluate the results of the non-statistical sample. Consider both the direct implications of the misstatements found and the effect of using a sample.

5. Individual misstatements for items under $10,000 Item 12 5,120 4,820
Recorded Value
Audited Value
Items over $10,000
$465,000
$432,000
Items under $10,000
81,500
77,150
Individual misstatements for items under $10,000
Item 12
5,120
4,820
Item 19
485
385
Item 33
1,250
250
Item 35
3,975
3,875
Item 51
1,850
1,825
Item 59
4,200
3,780
Item 74
2,405
19,285
14,935
Difference = $4,350
Overstatement

6. This nonstatistical (i. e. , judgmental) sample is a stratified sample
This nonstatistical (i.e., judgmental) sample is a stratified sample. All 23 items over $10,000 were examined 100%. The remaining 7,297 items were tested with a sample of 77 items. Although this was not a probabilistic sample, GAAS requires that, in the auditor’s judgment, it be a representative one. Accordingly the results must be projected to the population and a judgment made about sampling risk, although sampling risk and precision cannot be measured.
Projection of the total population misstatement would be as follows:
Items over $10,000:
Projected Misstatement = Recorded value  Audited value
= 465,000  432,000
= 33,000 overstatement.
Items under $10,000:
As this is a representative sample per GAAS, use a point estimate
Point estimate = (Client Misstatement / Recorded Value of Sample) x Recorded Book Value of Stratum
Book value of sample = $81,500
Recorded book value of stratum = $2,760,000 - $465,000 = $2,295,000
= (4,350/81,500) x 2,295,000
= $122,494 overstatement
Total overstatement = $33,000 + $122,494 = $155,494
As materiality is $100,000, the population is materially misstated.

7. As the population is materially misstated:
The client will have to make an adjustment to remove the material misstatement
An adjustment to correct the misstatements in the sample will not be sufficient as there is the probability that there are further misstatements in the remaining population
This stratum will have to be further examined to see if there are any misstatements
This will probably be performed by the auditor at an increased cost to the client.
It will be a judgment call as to how many more accounts need to be examined.
All misstatements found will have to be corrected.
If many more misstatements are found the auditor could request the client to examine the complete A/R and correct all errors.

8. Problem (p.357) note: good segregation of duties has the receptionist prepare a prelisting of cash receipts when they are received in the mail
You have been asked to do planning for statistical testing of the audit of cash receipts. Following is a partial audit program for the audit of cash receipts.
Review the cash receipts journal for large and unusual transactions.
Trace entries from the prelisting of cash receipts to the cash receipts journal to determine whether each is recorded.
Compare customer name, date, and amount on the prelisting with the cash receipts journal.
Examine the related remittance advice for entries selected from the prelisting to determine whether cash discounts were approved.
Trace entries from the prelisting to the deposit slip to determine whether each has been deposited.
REQUIRED
Identify which audit procedures can be tested using attribute sampling. Justify your response.
State the appropriate sampling unit for each of the tests in part (a).
Define the attributes that you would test for each of the tests in part (a). State the audit object associated with each of the attributes.
Define exception conditions for each of the attributes that you have described in part (c).
Which of the exceptions would be indicative of potential fraud? Justify your response.

9. Solution 11-23
It would be appropriate to use attributes sampling for all audit procedures except audit procedure 1. Procedure 1 is an analytical procedure for which the auditor is doing a 100% review of the entire cash receipts journal.
The appropriate sampling unit for audit procedures 2-5 is a line item, or the date the prelisting of cash receipts is prepared. The primary emphasis in the test is the completeness objective and audit procedure 2 indicates there is a prelisting of cash receipts. All other procedures can be performed efficiently and effectively by using the prelisting.
c. The attributes for testing are as follows
Audit Procedure
Attribute 2
Cash receipts in the prelisting are recorded in the cash receipts journal 3
Customer name, date, and amount are equal on the prelisting and cash receipts journal. 4
Cash discounts were approved on the related remittance advice. 5
Cash included in the prelisting has been included on the deposit slip.

10. d. & e. Exception conditions apply to items 2 through 5
(d) Exception condition
(e) Potential indicator of fraud? ALL ...
(2) Items on the prelisting are not recorded in the cash receipts journal OR
Items on the prelisting are recorded in the cash receipts journal in a different amount.
They could indicate theft of cash or lapping.
(3) Customer name, date, or amount do not agree to the amounts listed in the cash receipts journal.
Differences in customer name or date could indicate lapping.
Differences in amount could indicate theft.
(4) Cash discounts are not approved, but are taken by customers.
Unauthorized discounts could be given to related parties.
(5) Items on the prelisting are not recorded on the deposit slip OR
Items on the prelisting are recorded on deposit slip in a different amount.

11. Problem 12-24, page 404
Lenter Supply Corp. is a medium sized distributor of wholesale hardware supplies in southern Manitoba. It has been a client of yours for several years and has instituted excellent internal control for the control of sales, at your recommendation.
In providing control over shipments, the client has prenumbered “warehouse removal slips” that are used for every sale. It is company policy never to remove goods from the warehouse without an authorized warehouse removal slip. After shipment, two copies of the warehouse removal slip are sent to billing for the computerized preparation of a sales invoice. One copy is stapled to the duplicate copy of the prenumbered sales invoice, and the other copy is filed numerically. In some cases more than one warehouse removal slip is used for billing one sales invoice. The smallest warehouse removal slip number for the year is and the largest is The smallest invoice number is and the largest is
In the audit of sales, one of the major concerns is the effectiveness of the control in making sure all shipments are billed. The auditor has decided to use attribute sampling in testing internal control.

12. State an effective audit procedure for testing whether shipments have been billed. What is the sampling unit for the audit procedure?
A random selection of warehouse removal slips should be made
Examined to see if they have the proper sales invoice attached
The sampling unit will be the warehouse removal slip
Assuming the auditor expects no deviations in the sample but is willing to accept a TDR of 3%, at a 10% ARACR, what is the appropriate sample size?
TDR = 3%
ARACR = 10%
EPDR (Expected Population Deviation Rate) = 0
As auditor expects no deviations

13. TOLERABLE DEVIATION RATE (IN PERCENTAGE) 2 3 4 5 6 7 8 9 10 15 20
EXPECTED POPULATION DEVIATION RATE (IN PERCENTAGE)
TOLERABLE DEVIATION RATE
(IN PERCENTAGE) 2 3 4 5 6 7 8 9 10 15 20
5 PERCENT RISK OF OVER RELIANCE (ARACR)
0.00
149 99 74 59 49 42 36 32 29 19 14
0.25
236
157
117 93 78 66 58 51 46 30 22
0.50 .
0.75
208
1.00
156
1.25
124
1.50
192
103
1.75
227
153 88 77
2.00
181
127 68
2.25 61
2.50
150
109
2.75
173 95
3.00
195
129 84
3.25
148
112
3.50
167 76 40
3.75
185
100
4.00
146 89
5.00
158
116
6.00
179 50
7.00 37

14. 10 PERCENT RISK OF OVER RELIANCE (ARACR)2 3 4 5 6 7 8 9 10 15 20
10 PERCENT RISK OF OVER RELIANCE (ARACR)
0.00
114 76 57 45 38 32 28 25 22 11
0.25
194
129 96 77 64 55 48 42 18
0.50
0.75
265
1.00 .
176
1.25
221
132
1.50
105
1.75
166 88
2.00
198 75
2.25 65
2.50
158
110 58
2.75
209 94 52
3.00
3.25
153
113 82
3.50 73
3.75
131 98
4.00
149
4.50
218
130 87 34
5.00
160
115 78
5.50
142
103
6.00
182
116
7.00
199
7.50
8.00 60
8.50 68
EPDR
Sample size

15. Effect of population size -Initial sample size only
-Possible to make adjustment to initial sample size based on overall population size
-Finite correction factor
n = revised sample size
n’ = initial sample size
N = population size
n = n’
1 + n’/N

16. From the problem 12-24
Population is – = 22840
n’ = 76/1+(76/22840) = 75.75
Thus revised sample size is still 76
the population has very little effect

17. Use of a random number table
A one-to-one correspondence between warehouse removal slip
How is this correspondence achieved?
Random stab in the random number table

18. Population of Warehouse Removal Slips
37039
97547
64673
31546
99314
66854
97855
25145
84834
23009
51584
66754
77785
52357
98433
54725
18864
65866
76918
78825
58210
97965
68548
81545
82933
93545
85959
63282
78049
67830
14624
17563
25697
07734
48243
50203
25658
91478
08509
23308
48130
65047
40059
67825
18934
64998
49807
71126
77818
84350
67241
54031
34535
04093
35062
58163
30954
51637
91500
48722
60988
60029
60873
86723
36464
98305
08009
00666
29255
18514
50188
22554
86160
92250
14021
65859
16237
50014
00463
13906
35936
71761
95755
87002
66023
21428
14742
94874
58533
26507
04458
61862
63119
09541
01715
87901
91260
57510
36314
30452
09712
37714
95482
30507
43373
58939
95848
28288
60341
52174
11879
61500
12763
64433
02268
57905
72347
49498
78938
71312
99705
71546
42274
23915
38405
64257
93218
35793
43671
64055
88729
11168
56864
21554
70445
24841
04779
56774
96129
35314
29631
06937
54545
04470
75463
77112
40704
48823
65963
39359
12717
56201
22811
07318
44623
02843
33299
59872
86774
06926
94550
23299
45557
07923
75126
00808
01312
34348
81191
21027
77087
10909
03676
97723
92277
57115
50789
68111
75305
53289
39751
56093
58302
52236
65756
50273
61566
61962
16623
17849
96701
94971
94758
08845
32260
50848
93982
66451
32143
05441
10399
17775
48006
58200
58367
66577
68583
21108
41361
56640
27890
28825
96509
21363
53657
60119
Population of Warehouse Removal Slips
14,682 – 37,521
Random Stab
Random Number Table

19. Computed Upper Exception Rate
Sample size = 100
TER = 3%
ARACR = 10%
Number of deviations = 1
Using the following tables:
CUER = 3.8%
Are the controls working? No, CUER > TER

20. ACTUAL NUMBER OF DEVIATIONS FOUND 1 2 3 4 5 6 7 8 9 10
Table 14-10
SAMPLE SIZE
ACTUAL NUMBER OF DEVIATIONS FOUND 1 2 3 4 5 6 7 8 9 10
5 PERCENT RISK OF OVER RELIANCE 25
11.3
17.6 . 30
9.5
14.9
19.5 35
8.2
12.9
16.9 40
7.2
18.3 45
6.4
10.1
13.3
16.3
19.2 50
5.8
9.1
12.1
14.8
17.4
19.9 55
5.3
8.3
11.0
13.5
15.9
18.1 60
4.9
7.7
12.4
14.6
16.7
18.8 65
4.5
7.1
9.4
11.5
15.5
19.3 70
4.2
6.6
8.7
10.7
12.6
14.4
16.2
18.0
19.7 75
3.9
6.2
10.0
11.8
15.2
18.4
20.0 80
3.7
11.1
12.7
14.3
15.8
17.3 90
3.3
5.2
6.8
8.4
9.9
14.1
16.8
100
3.0
4.7
7.6
8.9
10.2
14.0
16.4
125
2.4
6.1
9.3
10.3
12.2
13.2
150
2.0
3.1
4.1
5.1
6.0
6.9
8.6
200
1.5
2.3
3.8
6.5

21. 1 2 3 4 5 6 7 8 9 10 Sample size ACTUAL NUMBER OF DEVIATIONS FOUND .1 2 3 4 5 6 7 8 9 10
10 PERCENT RISK OF OVER RELIANCE 20
10.9
18.1 . 25
8.8
14.7
19.9 30
7.4
12.4
16.8 35
6.4
10.7
14.5 40
5.6
9.4
12.8
15.9
19.0 45
5.0
8.4
11.4
14.2
17.0
19.6 50
4.5
7.6
10.3
12.9
15.4
17.8 55
4.1
6.9
11.7
14.0
16.2
18.4 60
3.8
6.3
8.6
10.8
14.9
16.9
18.8 70
3.2
5.4
9.3
11.1
14.6
17.9
19.5 80
2.8
4.8
6.5
8.3
9.7
11.3
14.3
15.7
17.2
18.6 90
2.5
4.3
5.8
7.3
8.7
10.1
12.7
15.3
16.6
100
2.3
5.2
6.6
7.8
9.1
11.5
13.8
15.0
120
1.9
4.4
5.5
9.6
10.6
11.6
12.5
160
1.4
2.4
3.3
4.9
5.7
7.2
8.0
9.5
200
1.1
2.6
4.0
4.6
7.0

22. Problem 13-21, Page 439, Canadian 11th. Edition
For each of the following independent problems, design an unbiased random sampling plan using an electronic spreadsheet or a random number generator. The plan should include defining the sampling unit and establishing a numbering system for the population. After the plan has been designed, select the sample using the computer. Assume that the sample size is 50 for each od (1) thorough (4).
Prenumbered sales invoices in a sales journal where the lowest number is 1 and the highest is 6,211.
Prenumbered bills of lading where the lowest document number is 21,926 and the highest is 28,511
Accounts receivable on 10 pages with 60 lines per page except the last page, which has only 36 full lines. Each line has a customer name and an amount receivable.
Prenumbered invoices in a sales journal where each month starts over with number 1. (Invoices for each month are designated by the month and the document number. There is a maximum of 20 pages per month with a total of 185 pages for the year. All pages have 75 invoices except for the last page for each month.
Using systematic sampling, select the first five sample items for population (1).

23. SAMPLING UNIT
NUMBERING SYSTEM
FOR THE POPULATION
EXCEL SELECTION
FORMULA
Sales invoice
All invoices numbered 0001 to 6211
=RANDBETWEEN(1,6211)
Bill of lading
All bills of lading numbered through (if a random number table is used, the left-most digit “2” can be dropped)
=RANDBETWEEN(21926,
28511)
Customer
A pair of random numbers, where the first random number is the page number (1-10), and the second random number is the line number on the page (1-60)
=RANDBETWEEN(1,10)
and
=RANDBETWEEN(1,60)
Line numbers on the sales journal that have a sales invoice recorded on them
A pair of random numbers, where the first random number is the page number (1-185), and the second random number is the invoice as counted down from the top of the page (1-75)
=RANDBETWEEN(1,185)
=RANDBETWEEN(1,75)

24. SAMPLING UNIT
NUMBERING SYSTEM
FOR THE POPULATION
EXCEL SELECTION
FORMULA
Sales invoice
All invoices numbered 0001 to 6211
=RANDBETWEEN(1,6211)
Bill of lading
All bills of lading numbered through (if a random number table is used, the left-most digit “2” can be dropped)
=RANDBETWEEN(21926,
28511)
Customer
A pair of random numbers, where the first random number is the page number (1-10), and the second random number is the line number on the page (1- 60)
=RANDBETWEEN(1,10)
and
=RANDBETWEEN(1,60)
Line numbers on the sales journal that have a sales invoice recorded on them
A pair of random numbers, where the first random number is the page number (1-185), and the second random number is the invoice as counted down from the top of the page (1-75)
=RANDBETWEEN(1,185)
=RANDBETWEEN(1,75)

25. Problem 11-21, Page 356, Canadian 12th. Edition
Lam, PA, is auditing the financial statements of his client, Harvesters Ltd., a company that sells and distributes agricultural equipment across Canada. Lam has performed a preliminary evaluation of the company’s internal control over sales transactions, and has concluded that the quality of system design is very good. The system was developed for the client and installed by a well-respected consulting firm, and the system relies heavily on automated information systems. Lam decides that performing tests of control using computer-assisted audit techniques would likely be cost-effective. In addition, after completing his assessment of control risk over revenue transactions, Lam plans to use monetary-unit sampling to verify the client’s recorded accounts receivable at year end. In planning the engagement, Lam has assessed materiality to be $175,000.
Required:
Explain the basic principles of sample selection for monetary unit (dollar unit) sampling.
Also discuss how computer-assisted audit techniques could be used to assist in sample selection, assuming that the population of year-end accounts receivable is available to Lam as a data file compatible with his software.
Assume that the client’s recorded accounts receivable total $2,000,000 at year end and that Lam examines a valid random sample of 50 dollar units, and finds two errors as follows:
Account Number 26751
Account Number 87523
Recorded Amount
$20,000
$10,000
Amount conformed by customer
Nil
Both errors were caused by the client’s failure to record equipment returned by customers, where the equipment was deemed to be defective. The client agrees with the customer’s decision in both cases.
What further action is required on the part of the auditor with respect to these errors?
(Extract from CGA Canada Examinations.)

26. a. In order to obtain a valid dollar-unit sample, each dollar in the population must have an equal probability of being selected. Once a particular dollar is identified, it is then traced to the appropriate physical unit (here the customer account receivable) which is then audited using appropriate procedures.
b. There are several ways that computer-assisted audit techniques could be used to assist in sample selection. If the sample is selected randomly, the recorded amounts in the year-end accounts receivable can be arrayed as a list, with cumulative subtotals. A particular random number would then identify a dollar in the cumulative total, and a corresponding customer account in the list. Note that computer software (such as ACL, or spreadsheet software) can be used to generate the random numbers used in sample selection. Alternatively, the sample could be selected systematically. In that case, Lam could choose a random start and then choose each successive kth dollar in the cumulative total. Details concerning the corresponding customer account receivable could then be printed for audit examination.
c. Since the errors are both of the same type, Lam needs to determine whether control risk with respect to cut-off and occurrence need to be increased. If this is the case, then Lam should conduct additional year-end substantive testing of returns to determine that they have been recorded correctly. Lam also needs to extrapolate the error to the population to determine whether this would result in a potential material error.