Consideration of Internal Control nan tnformation Technology Emsironment 365 the numerical sequence of shipping notices from each warehouse. Mathematical extensions are made bythe computer. Output consists of invoices (in six copies) and a daly sas register. ‘The daly sales register shows the aggregate totals of units shipped and unit prices, which the ‘computer operator compates to the contol tapes. AAll.copies of the invoice are returned to the billing clerk. The clerk mails three copies to the customer, forwards one copy to the warehouse, maintains one copy ina numerical file, and retains one copy in an open invoice file that serves asa detailed accounts receivable recor, Describe weaknesses in internal contol over information and data flows and the proce- dures for processing shipping notices and customer invoices, and recommend improvements in these controls and processing procedures, Organize your answer sheets a follows ro Recommended Improvement (AICPA, adapted) In-Class $38, The accompanying flowehant summarizes Trendel Corporation's processing of sales. Some of Team(Gase the llowchart symbols are labeled to indicate conlos and records, For each symbol numbered 1 through 13, select one response from either thelist of operations and controls (A through O) or the lst of documents, journals, ledgers, and fils (P through 7). ‘Operations and Controls Documents, Journals, Ledgers, and Files A Enter shipping data P. Shipping document 8. Verity agreement of sales order and shipping @. General ledger master fle document R. General journal C. Witte-off of accounts receivable S. Master price file . To warehouse and shiping department Sales journal E Authorize accounts receivable wite-of U. Sales invoice F Prepare aged vial balance V. Cash receipts journal G To sales department W. Uncollectisle accounts fle H. Release goods for shipment X. Shipping fle | To accounts receivable department Y. Aged tal balance J. Enter price data Z. Open order fle K Determine that customer exists |L Match customer purchase order with sales order IM. Perform customer erect check N. Prepare sales journal (©. Prepare sales invoice (AICPA. adapted)366 Chapter Eight ‘Trendel Corporation Sates Department ’ Compute: Processing Department ‘Shipping Department Fon ‘conpyreauen once [EouPvTenzED snow] customer Presa Basra 1 putamen ect and Caen Ea Sree ‘Sales Order eae - 1 Fon cone Baatigbae & ees) ‘ ome, ; Taare 7 aod Se _— : . COMPUTERIZED BILLING SER! Caen PO, Sales Ore r Transmit ales reer t i Shopng information ! comyrenao voare 2 &# tecomputer el 4 acre 7 Shipping Dec, 1 customer Shipong Document 1 General tegen fore Tansion Poca ‘Summary edAudit Sampling In Chapter 5, we discussed the auditors’ need for sufficient appropriate evidence as the basis for audit reports. This evidence is often obtained through selecting samples of transactions (or balances) and performing auditing procedures only on those transac- tions, rather than on the entire underlying population of transactions. As we discuss in ‘Chapters 5 and 7, data analytic approaches are reducing the need for audit sampling as auditors are able to economically audit certain entize populations. For example, if audi- tors wish to test approval of purchases transactions, when that approval is electronically indicated it may be very possible to perform an electronic seatch of all transactions luring the year for indication of approval. Nonetheless, sampling of certain populations remains commonly used approach for certain tests in virtually all audits. Audit sampling, whether statistical or nonstatistical, is the process of selecting and evaluating a sample of items Domne teweensinpicrme OM an audit population such that the auditors expect onli est the sample to be representative of some characteristic of the population, In this context, representative means that the sample will result in conclusions that are similar to those that would be drawn if the same procedures were applied to the entire population, Basic to audit sampling is ‘sampling risk—the risk that the auditors’ conclusion based on a sample might be dif- {erent from the conclusion they would reach if they examined every item in the entire population. That is, for example, sampling results may lead the auditors to conclude that a population is not materially misstated when, in fact, itis materially misstated, ‘Sampling risk is reduced by increasing the size of the sample. Atthe extreme, when ‘an entire population is examined, there is no sampling risk. When auditors audit only a sample from a population, they in essence balance acceptance of a degree of sam- pling risk against the audit efficiency of auditing a fewer number of items. Also, this reliance upon sampling procedures is one of the basic reasons that audit reports are regarded as expressions of opinion with auditors having obtained reasonable assut- ‘ance, rather than absolute assurance of the fairness of financial statements. ‘Auditors also may draw erroneous conclusions because of nonsampling errors— those due to factors not directly caused by sampling. For example, the auditors may fail to apply appropriate audit procedures, or they may fail to recognize errors in the documents or transactions that are examined. The risk pertaining to nonsampling errors is referred to as nonsampling risk. Nonsampling risk can generally be reduced to low levels through effective planning and supervision of audit engagements and implementation of appropriately designed quality control procedures by the CPA firm. ‘The procedures discussed throughout this text help control nonsampling tisk. In the remainder of this chapter, we will emphasize the control of sampling tisk. Comparison of Statistical and Nonstatistical Sampling Statistical sampling involves the use of an appropriate statis- Te teceen sant teal technique to plan the sample (determine sample size and Iunmenitelmaping "sample items) and to evaluate sample results, Alternatively, a CHAPTER eee eaaed _ier Studying ts chapter, you should 3e ate toot toss oor Distinguish between sam dling ane nensamtng te Distinguish between st ‘teal and nonstate ‘sampling Deserise the metrods of selecting representative canale Uncerstand tne cterent ‘ypes of samatng plans sein ating, Exon the eects of changes in various popu- Iaton eharacterstce ane changes in sampling ak ‘onrequired sample size Pian, prom, and eva ‘se samples for test of convo using atvibutes sampling Plan, perform, nd eva 1s samples fo: substan te procecires using monetary unt sampling (Meaute 98) Plan, peor, nd eva le samples for substan- ‘ve procecures using pling. Mogule 95) Pan, perform, and eva ste samples for substan- te procecies using sampling (Vode 8¢)368 Chapter Nine Selecting a Random Sample sample is said to be nonstatistical (or judgmental) when the auditors use judgment rather ‘than statistical techniques to plan or evaluate sample results, This is not to say that nonsta- tistical samples are carelessly selected samples. Indeed, both nonstatistical and statistical audit samples should be selected in a way that they may be expected to allow the auditor to draw valid inferences about the population, In addition, the misstatements found in cither @ nonstatistical or a statistical sample should be used to estimate the total amount of misstatement in the population (called the projected misstatement). However, nonsta- tistical sampling provides no means of quantifying sampling risk. Thus, the auditors may find themselves taking larger and more costly samples than are necessary, or unknowingly accepting a higher-than-acceptable degree of sampling risk based on a small sample, ‘The use of statistical sampling does not eliminate professional judgment from the sampling process. It does, however, allow the auditors to measure and control sampling risk. Through statistical sampling techniques, the auditors may specify in advance the sampling risk that they want in their sample results and then compute a sample size that controls sampling risk at the desired level, Because statistical sampling techniques are based upon the laws of probability, the auditors are able to control the extent of the sam- pling risk in relying upon sample results. Thus, statistical sampling may assist auditors in (1) designing efficient samples, (2) measuring the sufficiency of the evidence obtained, and (3) objectively evaluating sample results. However, these advantages are not obtained. ‘without additional costs of training the audit staff, designing sampling plans, and select- ing items for examination, For these reasons, nonstatistical samples are widely used by auditors, especially for tests of relatively small populations. Both statistical and nonstat tical sampling can provide auditors with sufficient appropriate evidence.! ‘A common mistake is to equate random sampling and statistical sampling. Random sam. pling is simply a method of selecting items for inclusion in a sample; it can be used in conjunction with either statistical or nonstatistical sampling. To emphasize this distinc tion, we will use the term random selection rather than “random sampling” to refer to the procedure of selecting the items for inclusion ina sample. ‘The principle involved in unrestricted random selection is that every sampling unit (item) in the population has an equal chance of being selected for inclusion in the sample ‘The sampling unit may be defined in various ways. Consider a year-end account receivable from a customer that is composed of two ‘unpaid purchases ($20,000 and $30,000) for a total of $50,000. The sampling unit often ‘used is each customer's balance at a point in time—here there is one sampling unit with a book value of $50,000. A second approach is to consider the individual unpaid purchase transactions asthe sampling unit—here there ae two sampling units, one of $20,000 and ‘one of $30,000. A third approach isto consider each dollar the sampling unit—here there ae $0,000 sampling units. The approach used by the auditors depends upon a varity of factors, including the nature ofthe clients information system, industry practice, and the sampling technique being used Unrestricted random selection requires that every item in the population has an equal chance of being selected for inclusion ia the sample. Although random selection results in a statistically unbiased sample, itis not necessarily a sample that is representative of the overall population. Sampling risk still exists that purely by chance a sample will bbe selected that does not possess essentially the same characteristics as the population. However, because the risk of a nonrepresentative random sample stems from the laws of probability, this risk may be measured by statistical formulas. The sample also may not be representative ofthe actual population because the pop- ulation being sampled differs from the actual population. The auditors select an audit sample from a physieal representation of the population. For example, a sample of * professional standards (AICPA AU-C $20 and the Aut Guide: Aucit Sampling; PCAOB AS 2315} prove ‘ucts wth guidelines for planning, erorming, and evaluating bot statiscal and nonstatsteal samotes