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Hello Kim,
Regarding Q3(ii),
1. Why the petty cash fraud needs to be reported to management? not TCWG? (The Course Note Page 42 says all instances of fraud should be reported to TCWG.)2. Can I bring in an additional point, “the potential familiarity threat to independence caused by the family relationship between the audit assistant and petty cashier should be reported to TCWG”?
Regarding Q3(i),
1.The 3 unauthorized purchase order is misstatement arised from sample, but why we don’t mention to extrapolate the error over the whole population to assess the potential for material misstatement?2.While this point has been mentioned in Q3(iii), I don’t understand why sometimes the answer mentions the projected error, but sometimes it doesn’t.
As you mentioned to me in one of the previous post that “See in Chapter 8 re the evaluation of misstatements – a projected error is the auditor’s best estimate of error in a population based on the extrapolation of errors in a sample. it applies to any transaction type/balance that is subject to sampling.”
Thank you.
Regards,
Marthew1) The notes are incorrect on this point (apologies – this is being corrected in AA – I hadn’t realised that it was also incorrect in AAA – thank you for pointing it out). It should say: “All instances of fraud should be communicated on a timely basis to the appropriate level of management. Fraud must be communicated to those charged with governance if it results in material misstatement or management is implicated.”
2) As the brother is merely the petty cashier he is hardly in a position to exert SIGNIFICANT INFLUENCE over the subject matter of the engagement (i.e. the financial statements), so I suggest it would be too trivial a matter to communicate to TCWG.
3) 🙂 For a substantive procedure, a monetary error in a sample can be extrapolated and for the evaluation of the potential misstatement. In i) there is no monetary error, as it is a test of control – what the audit team should have done is calculate the error rate (e.g. if sample size was 60 that would have been 5%) and decide if it was “tolerable”. Let’s say that 3% was considered the maximum considered tolerable. If the sample had been doubled and no more instances were found that would be ok (3/120 = 2.5%) but if one more error had been found that would not be ok (3/120 = 3.33%). The point is that the conclusion “no additional procedures were required” is incorrect – substantive tests should not have been kept to a minimum (as planned) but extended, unless the sample had been sufficiently extended to show that the error rate was acceptable.
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