Reference no: EM13335699

[1] Evaluate the appropriateness of Darrell's conclusions relating to the first two controls:

NI Is it acceptable to use the same set of transactions and the same sample size to test two different controls?

Do you agree with Darrell's conclusions with respect to these first two controls? If not, why not? In evaluating Darrell% conclusions, you may wish to refer to the attribute sampling evaluation table available in Appendix A.

What additional work, if any, is necessary to support his assessment that both controls are operating effectively?

[2] Evaluate each of the following questions independently:

Referring to Garrett and Schulzke's sample size table (AppendixA), determine an appropriate sample size for the test of the control relating to authorization of credit memos.

PA Regardless of your answer to question [a], assume that Darrell randomly selected a sample of 75 credit memo packages, each of which contains a credit memo with a matching receiving report and inventory warehouse receipt, and has reviewed all but the last five credit memo packages and found no exceptions.

Each credit memo authorizing a customer refund or reduction in the amount owed due to the return of goods should be authorized by Brian Thompson, the accounting supervisor over accounts receivable. When a customer wants to return unwanted or defective product, they go to Hooplah's website and download a "Customer Return Report" and fill in their information as well as a description and quantity of goods being returned. Chris Jacobs in the receiving department at Hooplah uses the Customer Return Report as the receiving report when the shipment comes in, and Felix Katt counts and inspects the goods to make sure they're all in good condition. The goods are then transferred back to Jed Baxter in the warehouse, who issues an "Inventory Receipt." Once the Inventory Receipt is attached to the Customer Return Report, the documents are forwarded to Brian so that he can approve a credit memo. Brian examines the Customer

Return Report and the Inventory Receipt to ensure that credit is only authorized when goods have been received and for the quantity actually received. He then documents his authorization by marking his initials on the credit memo. You have agreed to help Darrell by examining the remaining five credit memo packages.

You will find the last five credit memo packages at www.pearsonhighered.com/beasley5e. Examine these documents for Brian Thompson's initials indicating the memos were approved (for this question, just focus on his initials for audit evidence that the control is operating effectively) and then evaluate the test results for the full sample. Provide support for your assessment on the effectiveness of the control based on testing performed.

[b] you gathered evidence on the operation of the control by examining the five credit memos for Brian's initials. While this provides some evidence of control, higher quality evidence that the control is actually operating effectively can be obtained by reperforming Brian's control procedure. This would be done by verifying that each credit memo is supported by a Customer Return Report and Inventory Receipt and that the quantity and description of goods on the credit memo is supported by the quantity and description on the supporting documents. If Brian's initials are on the credit memo, but the quantity or description of goods on the memo is not consistent with the quantity and description on the supporting documents, this would be considered a control deviation. Assume Darrell reperformed the control for the first 70 credit memo packages and found no exceptions.

Cal Reperform the control for the remaining five credit memo packages and evaluate the test results for the full sample. Provide support for your assessment on the effectiveness of the control based on testing performed.

IN If you came to a different conclusion in 2[b] and 3[a], which conclusion is more supportable and why?

(41 Assuming the controls testing is not expanded to provide additional support regarding the effectiveness of the controls tested, what are the implications of the controls testing in question 3[a] with respect to the nature, timing, and extent of substantive evidence that must be gathered to support the fairness of the accounts receivable balance?