You are in the process of evaluating the internal control system of our client, Kris Company, and you desire to perform a compliance test of controls that the client has indicated are in effect in the accounts payable area. The specific control in which you are interested relates to the matching of the purchase order, receiving report, and vendor invoice, prior to approving the invoice for payment. You are told that the 3 documents are compared, cancelled and approved for payment by the accounts payable supervisor. After performing this operation, the supervisor indicates that the invoice is approved for payment, initials the invoice, staples the 3 documents together and forwards them for processing.

After processing the documents are filled together in voucher number order. Each year, the voucher number begins at 0001. The last voucher number assigned during the current year is 8178. You define an error as being either (1) any approved invoice that does not agree in amount with the other 2 documents, (2) cases in which any of the 3 documents is missing, or (3) any paid invoice that does not bear the initials of the supervisor. In the past you have found an error rate in this population of approximately 3% and you expect this condition in the current year. If you found evidence that the error rate exceeded 6%, however, you would conclude that this control feature was ineffective. Because of the importance you place on this control, you decide to use a 90% reliability level.

a) Determine the sample size appropriate in this case if the auditor uses estimation sampling for attributes.

b) Discuss the procedures you would use in selecting the sample

c) What would you conclude if, in examining the items in the sample, 3 errors were found?

d) If 5 errors were found in the sample, what would your conclusions be? What would be the effect on your audit?

e) Discuss and explain the risk that are associated with compliance and substantive tests