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You Are Working on the Testing of Internal Controls Over

question 35

Essay

You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms. In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms. In your testing you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33%.
Required:
Required:
A) What actions are available to you regarding your planned reliance on the master file change controls?
B) What are the advantages and disadvantages of each action?
C) How would you decide which action to take?

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Definitions:

Discounted Payback

The period of time it takes for an investment’s cash flows, discounted at a particular rate, to cover its initial cost.

Discounted Payback Rule

A capital budgeting technique that determines the amount of time required for discounted cash flows from a project to repay the initial investment.

Pre-Specified Period

A defined time frame agreed upon or determined before the start of a certain process or event.

Discounted Payback Period

The time it takes to break even from an investment based on the present value of its cash flows.