Question: General Sampling. The accounting firm of Mason & Jarr performed the work described in each of the following separate cases. The two partners are worried about properly applying auditing standards regarding sampling. They have asked your advice.
Required: Write a report addressed to Mason & Jarr stating whether they did or did not observe the essential elements of auditing standards in each case. When applicable, refer to the appropriate professional standards regarding audit sampling.
a. Mason selected three purchase orders for the purchase of raw materials from LIZ Corporation's files. He started at the beginning in the accounting process and traced each one through the accounting system. He saw the receiving reports, purchasing agent's approvals, receiving clerks' approvals, vendors' invoices (now stamped paid), entry in the cash disbursement records, and canceled checks. This work gave him a first-hand familiarity with the cash disbursement system, and he felt confident about understanding related questions in the internal control questionnaire completed later.
b. Jarr observed the physical inventory at SER Corporation. She had a list of the different inventory descriptions with the quantities taken from the perpetual inventory records. She selected the 200 items with the largest quantities and counted them after the client's shop foreperson had completed his count. She decided not to verify the count accuracy of the other 800 items. The shop foreperson miscounted in 16 cases. Jarr concluded the rate of miscount was 8 percent and that as many as 80 of the 1,000 items might be counted incorrectly. As a result, she asked him to recount everything.
c. CSR Corporation issued seven separate commercial paper notes near the fiscal year-end to finance seasonal operations. Jarr confirmed the obligations under each series with the independent trustee for the holders, studied all seven indenture agreements, and traced the proceeds of each issue to the cash receipts records.
d. At the completion of the EH&R Corporation audit, Mason obtained written representations as required by generally accepted auditing standards from the president, the chief financial officer, and the controller. He did not ask the chief accountant at headquarters or the plant controllers in the three divisions for written representations.
e. Jarr audited the Repairs and Maintenance account of Kerr Corporation by vouching all entries of more than $5,000 (totaling $278,000) to supporting documents. She compared the sum of all remaining entries ($75,000, a material amount) in relation to the prior-year total of $56,000 and decided the amounts were reasonable and did not perform any additional procedures with respect to these entries.