14-25 (OBJECTIVES 14-3, 14-4) The following is a list of possible errors or

fraud involving sales and controls that may prevent or detect the errors or
fraud:
Possible Errors or Fraud
1. Goods are removed from inventory for unauthorized orders.
2. Credit sales are made to customers with unsatisfactory credit ratings.
3. Invoices are sent to co-participants in fraudulent scheme, and sales are
recorded for fictitious transactions.
4. Goods shipped to customers do not agree with goods ordered by cutomers
5. Invoices are sent for shipped goods, but are not recorded in the sales journal
6. Invioces are sent for shipped goods, and are recorded in the sales journal, but
are not posted to any customer account.
7. Invoices for goods sold are posted to incorrect customer account
8. Invalid transactions granting credit for sales returns are recorded

POSSIBLE ERROR OR FRAUD CONTROL

1. Invoices for goods sold are posted to c. Monthly statements are mailed to all
incorrect customer accounts customers with outstanding balances.
2. Goods ordered by customers are shipped, but g. Shipping documents are compared with sales
not billed to anyone. invoices when goods are shipped.
3. Invoices are sent for shipped goods, but are f. Daily sales summaries are compared with
not recorded in the sales journal sales invoices when goods are shipped.
4. Invoices are sent for shipped goods and are k. Control amounts posted to the accounts
recorded in the sales journal, but are not posted receivable ledger are compared with the control
to any customer account totals of invoices
5. Credit sales are made to customers with i. Customer orders are compared to an
unsatisfactory credit ratings approved customer list.
6. Goods are removed from inventory for b. Approved sales orders are required for goods
unauthorized orders to be removed from the warehouse.
7. Goods shipped to customers do not agree d. Shipping clerks compare goods received
with goods ordered by customers from the warehouse with approved sales orders
8. Invoices are sent to colluding parties in a i. Customer orders are compared with an
fraudulent scheme and sales are recorded for approved customer list
fictitious transactions
 CASE: 14-33 (PAGE 519)

ANSWER
a)
b. Misstatement or Error c. General Control Needed d. Audit Test
Prevented
a. Occurrence  Sales may be recorded for Access Controls; only Review password access
Accuracy invalid or non-existent authorized individuals may tables to ensure that only
products. access master files. (for authorized individuals
 Sales may be processed on example is using can access master files.
inaccurate price passwords).
information.
b. Occurrence  Sales may be recorded for Program Change Controls; Use computer-assisted
 Accuracy invalid or non-existent only authorized changes audit techniques to scan
products. should be made to inventory files for
 Sales may be processed for programs that perform inventory quantities that
existing products using calculations (for example are less than zero.
quantities ordered, even is reducing inventory for
when ordered quantities are shipped orders).
not on hand.
c. Occurrence  Sales may be processed for Access Controls; only Computer-assisted audit
customers who are unable secure information should techniques should be
to pay. be sent/received to or from used to list any accounts
credit card companies. receivables amounts for
internet sales that have
been outstanding for
more that 30 days.
d. Occurrence  Shipments may be made to Segregation of Duties; Use computer-assisted
persons making an only authorized personnel audit techniques to list
unauthorized credit card should have access to any customers where the
purchase (for example; physical media on which credit car billing address
using a stolen credit card) data is stored. is different from the
shipping address.
e. Accuracy  Sales may be processes Program Change Controls; Complete a test order on
inaccurately (wrong only authorized changes the internet to ensure that
product, price, and qty.) should be made to the accept and reject
programs that perform buttons are functioning
calculations, for example correctly.
is calculation invoice
totals.
f. Occurrence  Sales may be recorded even Access Controls; only Use computer-assisted
Timing though shipment has not authorized individuals audit techniques to list
occurred. should be allowed to enter the pending file as of the
 Sales may be recorded in shipping information. year-end date. Trace to
the wrong time period. subsequent sales
documents.

15-25 (Objectives 15-1, 15-2, 15-5) Auditing standards provide general guidance to
auditors regarding audit sampling but do not require statistical versus non-statistical
sampling or specify which sampling method auditors should use. Search the Internet
for “PCAOB Audit Sampling: or go to pcaobus.org to locate the PCAOB’s auditing
standard related to sampling (AU Section 350) and refer to the standard to answer the
following questions.
a. What are the costs and benefit of using statistical sampling versus non-
statistical sampling?
b. What is the relationship among audit risk, sampling risk, and non-sampling
risk?
c. When is sampling not an appropriate method of performing tests of controls
(refer to paragraph 32 of AU Section 350)?
 d. Define the risk of assessing control risk too low and the risk of assessing
control risk too high. How do these risks impact the efficiency and
effectiveness of the audit?

Answers
a)
o Minimize the failure to detect errors and fraud.
o Eliminate the risk of nonsampling errors.
o Design more effective audit procedures.
o Measure the sufficiency of the audit evidence by quantifying sampling risk.

A statistical sampling will give the auditor the advantage of being able to monetize
the audit evidence sufficiently enough. This is done through quantifying a sample
risk. A sample risk is simply a small sampling of the risks the person being audited
has taken to make their money. Auditing often shows discrepancies that other
methods haven’t caught, so statistical sampling will give a good idea of what is going
on.
This method of sampling will also give the largest sample size possible for an audit,
which is incredibly helpful for the auditor. This allows the audit to be done on a
sample of the books, and the results there more often than not do apply to the rest of
the books.

b) Audit risks are the risks that auditor make the incorrect conclusion and express
the incorrect audit opinion on the financial statements. For example, auditor
express the unqualified opinion to the financial statements that contain
material misstatements. Audit risks are the combination of three difference
risks including inherent risks, control risks and detection.

Sampling risks are the risks that make by auditors and it is part of detection
risks. If auditor does not get fully understand about the nature of transactions
or event of the population, auditor might design incorrect audit sampling or
fail to apply the right sampling method. This will result increase sampling
risks and subsequently audit risks.

Sampling risks refer to the risks that arises from the possibility that the
auditor’s conclusion, based on a sample, may be different from the conclusion
if the entire population were subjected to the same audit procedure. For
example, the sample that auditors decided to select are not large enough to be
the population representative and the result of testing from those sampling will
lead auditor to make wrong conclusion.

Non-sampling risk arises from factors that cause the auditor to reach an
erroneous conclusion for any reason not related to the sampling risk. For
example, most audit evidence is persuasive rather than conclusive, the auditor
might use inappropriate procedures, or the auditor might misinterpret evidence
and fail to recognize an error.

c) Sampling generally is not applicable to tests of controls that depend primarily

on appropriate segregation of duties or that otherwise provide no documentary
 evidence of performance. In addition, sampling may not apply to tests of
certain documented controls. Sampling may not apply to tests directed toward
obtaining evidence about the design or operation of the control environment or
the accounting system. For example, inquiry or observation of explanation of
variances from budgets when the auditor does not desire to estimate the rate of
deviation from the prescribed control.

d)

 The risk of assessing control risk too low is the risk that the assessed level
of control risk based on the sample is less than the true operating
effectiveness of the control.
 The risk of assessing control risk too high is the risk that the assessed level
of control risk based on the sample is greater than the true operating
effectiveness of the control.

For example, if the auditor's evaluation of an audit sample leads him to the
initial erroneous conclusion that a balance is materially misstated when it
is not, the application of additional audit procedures and consideration of
other audit evidence would ordinarily lead the auditor to the correct
conclusion. Similarly, if the auditor's evaluation of a sample leads him to
unnecessarily assess control risk too high for an assertion, he would
ordinarily increase the scope of substantive tests to compensate for the
perceived ineffectiveness of the controls. Although the audit may be less
efficient in these circumstances, the audit is, nevertheless, effective.
CASE 15-35 (PAGE 560)

Answer:
a) Audit sampling could be conveniently used for procedures 3 and 4 since each
is to be performed on a sample of the population
b) The most appropriate sampling unit for conducting most of the audit
sampling tests is the shipping document because most of the tests are related
to procedure 4. Following the instructions of the audit program, however, the
auditor would use sales journal entries as the sampling unit for step 3 and
shipping document numbers for step 4. Using shipping document numbers,
rather than the documents themselves, allows the auditor to test the numerical
control over shipping documents, as well as to test for unrecorded sales. The
selection of numbers will lead to a sample of actual shipping documents upon
which tests will be performed.
c)