Question: Sample Size Determination. Grady Cambridge, CPA, is performing attributes sampling to determine whether all purchases on account are properly approved by the client. Because the client typically makes more than 2,000 purchases on account per year, Cambridge has decided to use sampling instead of examining the entire population of purchases. Based on past experience with this client, Cambridge anticipates a rate of deviation of 1 percent.
Required: a. What factors should Cambridge consider in determining the necessary sample size? How would the level of these factors be determined?
b. Once the appropriate factors have been determined, describe the process that Cambridge would use in determining the necessary sample size.
c. Assume that Cambridge established a risk of overreliance of 10 percent and a tolerable rate of deviation of 6 percent. Using AICPA sample size tables, determine the appropriate sample size to use in evaluating the controls over approval of purchases on account.
d. How would the following changes impact (a) the factors used to determine sample size and (b) the sample size examined by Cambridge? (Do not determine an exact sample size but indicate whether the sample size would be larger, smaller, or unchanged. Treat each of these changes in factors independently in providing your answers.)
1. Because of increased sales and new lines of business, the number of purchases made by the client on account increased markedly from more than 2,000 to nearly 5,000 during the current year.
2. The client remediated some control deficiencies related to the purchasing function noted in Cambridge's prior audits. One of these control deficiencies related specifically to the approval of purchases made by the client.
3. The client has had turnover in the purchasing function during the most recent year. This turnover resulted in a higher-than-normal number of deviations during the first few months of the new employees' tenure. The deviation rate since then has decreased to historical levels.
4. Cambridge has decided that it would be cost beneficial to seek a reduction in control risk from moderate to low.
5. Cambridge has decided that it is no longer efficient to test controls at current levels and accordingly increased control risk from moderate levels to high levels.
6. Because some of its previous suppliers are no longer in business or no longer competitive with respect to price, the client has added a number of new vendors to its approved vendor listing.
e. What are the trade-offs Cambridge must make between increasing the reliance on internal control and maintaining the current level of reliance on internal control?
f. What factors should Cambridge consider in deciding whether to increase the reliance on internal control?