MSmith Is Studying the Internal Control of Pooh Company

question 74

Essay

M.Smith is studying the internal control of Pooh Company.Smith has identified client verification of sales invoices as an important control and,based on the acceptable level of control risk and experience from prior audits,has made the following assessments: a.What is the appropriate sample size?
b.Ignore your answer from A.Assume that Smith examined a sample of 80 items and found two deviations.Calculate the following measures:
(1)Sample rate of deviation.
(2)Upper limit rate of deviation.
(3)Allowance for sampling risk.
c.What is Smith's initial conclusion regarding Pooh Company's internal control?
d.What possible actions are available to Smith with respect to Pooh Company's internal control?

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Definitions:

Direct Labor-Hours

Complete work hours of employees directly incorporated in production tasks.

Variable Overhead

Indirect production costs that vary with the level of production, such as electricity costs or materials used in the maintenance of machinery.

Manufacturing Overhead

All indirect costs associated with manufacturing, such as indirect materials, indirect labor, and other overhead costs.

Labor Efficiency Variance

The difference between the actual labor hours used and the standard labor hours expected, multiplied by the standard labor rate.