AUE3702 Assignment 2 - Semester 1 OF 2022

AUE3702 Assignment 2 - Semester 1 OF 2022. 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. Downloaded by DESMOND CHIKASHA 8 () lOMoARcPSD| 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.