STEP 1: DETERMINE THE OBJECTIVE OF THE TEST

To determine whether control procedures for SALES RETURNS can be relied on during substantive test of details

Although CW has long been respected for high-quality products, discussions with CW personnel reveal that quality
may have deterioated recently, a contention supported by an excessively large number of returns. Discussion with
predecessor auditor revealed that tests of sales returns in prior years had indicated relatively high deviations rates

TOC of Sales Returns:

A credit memo or credit memorandum is a document issued by the seller of goods or services to the buye
reducing the amount that the buyer owes to the seller under the terms of an earlier invoice.

AR -Cook
Sales

CM: General Journal

Sales Return
AR -Cook
STEP 2: DEFINE THE ATTRIBUTE AND DEVIATION
1. Unit pricing and extensions on the CM are accurate.
2. Quantity and other data on the CM agree with the receiving report.
3. Quantity and other data on the CM agree with the perpetual inventory records.
4. Journal entry is properly recorded as debit to Inventory and credit to COGS.
5. Journal entry is properly recorded as debit to Sales Returns and a credit to AR.

DEVIATION - the absence of attribute.

STEP 3: DEFINE THE POPULATION

ALL CREDIT MEMO issued from January 1 until the date of testing. Example, CM 4329 (issued on January 1) until C

Sampling Unit : Individual Credit Memo

STEP 4: DETERMINE THE SAMPLING APPROACH

Use STATISTICAL approach

STEP 5: DETERMINE THE SAMPLE SELECTION METHOD

Random-number sampling because the sequential four-digit CM numbers corresponds readily to random number t

STEP 6: DETERMINE THE SAMPLE SIZE

STEP 7: PERFORM THE TEST AND EVALUATE RESULTS
STEP 8 : COMPLY WITH DOCUMENTATION REQUIREMENTS
ng substantive test of details

W personnel reveal that quality control

ber of returns. Discussion with the
relatively high deviations rates.

goods or services to the buyer,

earlier invoice.

450
450

CM: General Journal

Sales Return 450
AR -Cook 450
29 (issued on January 1) until CM 5948 (issued on October 20)

nds readily to random number tables.

0.008

0.016
 Tolerable Expected
Error Pop. Dev.
4% 0.75%

INTERSECTION is 117

Actual Deviation is 1
Sample Rate/size is 125

Maximum Pop. Deviation Rate is 3.8

 Tolerable Expected
Error Pop. Dev.

8% 2%

INTERSECTION IS 48
Comprehensive Example on Projection of Errors - Variable Sampling
An external auditor send out positive confirmation requests to 2,000 customers. Population size is 4,800 accounts, with
P380,000. Presented below are the summary results of the examination of confirmation replies received from customers

Book value of selected samples 159,960.00

Audited value of selected samples 151,360.00
Difference 8,600.00

Average/mean book value (159,960 / 2,000) 80 rounded

Average/mean audited value ( 151,360/ 2,000) 76 rounded

RATIO ESTIMATION
1. Compute the ratio of the sample audited value to sample book value
Sample Audited Value(SAV) = 151,360.00
Sample Book Value (SBV) 159,960.00

Answer: 94.62% or 95% rounded

2. Compute for the Estimated Population Audited Value ( EPAV)
= ratio x Population Book Value (pbv)
= 0.9462 x 380,000
Answer: P359,556

3. Compute for the sample misstatement

= SAV - SBV
= 151,360 - 159,960
Answer: P8,600 overstated

4. Compute for the projected misstatement

= EPAV - PBV
= 359,556 - 380,000
Answer: P20,444 overstated

DIFFERENCE ESTIMATION:
1. Compute for the average difference between SAB and SBV
= Average or mean audited value - Average or mean book value
= 76 -80
Answer: P 4 overstated

2. Compute for the projected misstatement

= Average difference (Number 1) x number of items in the population
= P4 x 4,800 accounts
Answer: P19,200 overstated

3. Compute for the EPAV

= PBV + OR - Projected misstatement
= P380,000 - P19,200 overstatement
Answer: P360,800

MEAN-PER-UNIT ESTIMATION

Compute for the EPAV

= Average or mean audited value x number of items in the population
= P76 x 4,800 accounts
Answer: P364,800
on size is 4,800 accounts, with a total recorded value of
eplies received from customers.
Correction on 1st Column - Number of Accounts (remove auditor)
Correction on 3rd Column - Balance determined by the auditor