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The audit manager has asked you to review the results of some statistical sampling testing. which resulted in 20% of the payables balance being tested.
The testing results indicate that there is a $45,000 error in the sample: $20,000 which is due to invoices not being recorded in the correct period as a result of weak controls and additionally there is a one-off error of $25,000 which was made by a temporary clerk.
What would be an appropriate course of action on the basis of these results?
The error is immaterial and therefore no further work is required
The effect of the control error should be projected across the whole population Poppy Co should be asked to adjust the payables figure by $45,000 0
A different sample should be selected as these results are not reflective of the population
Answer is b.
Although the control error is immaterial, the auditor must reach a conclusion on the population, based on the sample selected. In order to do so the effect of the error must be considered in relation to the whole population. It is not appropriate to project a one-off error across the population as by its nature it is not representative of the population.I am confused with D. Isn’t it better?
D would never be the correct answer – the whole point of audit sampling is that the results should be “reflective” of the population (because the sample should be representative). If there is an “outlier” – in this case the $25,000 one-off error – you would simply ignore that in the extrapolation of results to the remainder of the population.
See page 68 of our notes for an illustration (the “ratio method”).
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