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AUE3702 ECP ASSIGNMENT 2 OF 2021
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AUE3702 ECP ASSIGNMENT 2 - SEMESTER 1 2021
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AUE3702 ECP ASSIGNMENT 2 – SEMESTER 1OF 2021
NOTE THAT THIS ASSIGNMENT SHOULD BE
PRESENTED IN OWN WAY AS THERE IS RISK
OF PLAGIARISM, HENCE TREAT IT AS A GUIDE
TO CREATING YOUR OWN SOLUTION
1. Audit Sampling – Inventory
1.1. Comments on the size of sample selected
Considering that in prior years, no instances of empty boxes had been found,
internal controls in the receiving and issuing of inventory and physical controls
over inventory are operating effectively for the year ended 30 April 2021 and
the company has a strong control environment with the risk of material
misstatement assessed as low, the sample size can be reduced.
However, 30 out of 15 000 (0.2%) only were sampled which will increase the
sampling risk as the sample seems too low. Out of the sample of 30, one of
the boxes representing 3.33% was found to be empty and resealed very
carefully, which then increases the risk that many more boxes can be empty.
One out of thirty might seem too low but when this applies to the whole
inventory batch there is a possibility that 500 (15 000 * 3.333%) are empty.
When escalated, there is a possibility that the risk maybe material after all.
The auditor should consider the confidence level required, the higher the
confidence level, the higher the sample size and the lower the confidence
level the lower the sample size.
The tolerable misstatement also has to be taken into account. If the tolerable
misstatement is above or equal to the 3.33% error discovered in the sample,
then the auditor can place confidence in the results but if the tolerable
misstatement is below 3.33%, the sample size should be increased.
After escalating the results of the one box, it is found that the expected
misstatement from the pilot sample results is that 500 boxes will be empty.
This figure seems too large, as a result it is reasonable under the
circumstances to increase the sample size.
, The population size also plays a role in determining the sample in some
instances. Considering that there are 15 000 inventory items, a sample of 30
seems too small as it only represents 0.2%.
The fact that the one anomaly box was found to be carefully resealed shows
a well - orchestrated intention to steal, which represents a materiality in
nature which might warranty increasing the sample size to verify the extent of
the theft if the suspicions are right.
The sample should also take into account the variety of the products offered.
1.2. Comment on the opinions of the audit team
Mpho suggested that considering that only one box in 15 000 hardly makes a
difference as this is not material. This is wrong considering that it was not one
empty box out of 15 000 (0.00667%) but it was rather one out of 30 (3.333%).
When escalated there is a possibility that more boxes may be empty.
It should also be noted that materiality is not only measured by size, it is also
measured by nature. The size of the misstatement may be immaterial but it
may be material in nature. Considering that there can be suspected theft, this
might result in materiality from the viewpoint of the nature of the act. If not
stopped this can increase to the extent of affecting the size in the long run
and also affecting the overall ethics in the entity.
Lethabo`s opinion to open another 30 boxes can be reasonable but ignoring
the one box can be detrimental if the cause is material in nature. Furthermore,
the auditor should exercise professional judgement in determining the
additional sample as it should be representative of the population. For
example, it might be more reasonable to pick our sample of PS4, Xbox1,
Nintendo Switch and Gaming PCs in the ratio of 5 000:5 000:2 500:2 500
respectively as this represents the proportions of these units in the
population.
A decision has to be made on whether statistical or non – statistical sampling
should be applied. The confidence level desired will also have a role in
determining whether more units should be sampled.
Bandile`s argument is that one out of 30 is a tolerable error rate. The tolerable
error rate can be skewed due to the sample selected, if a second sample of
30 is obtained, you might find that a greater quantity of boxes can be empty.
Consideration should also be given to the expected misstatement and by
escalating the results of the pilot sample to the population, we find that there
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