Baker, CPA, was engaged to audit Mill Company’s
financial statements for the year ended December 31, 200X. After obtaining an
understanding of Mill’s internal control, Baker decided to obtain audit
evidence about the effectiveness of both the design and operation of the
controls that may support a low assessed level of control risk concerning
Mill’s shipping and billing functions. During the prior years’ audits, Baker
had used nonstatistical sampling, but for the current year Baker decided to use
a statistical sample in the tests of controls to eliminate the need for
Baker wanted to assess control risk at a low level, so a tolerable rate of
deviation of 20 percent was established. To estimate the population deviation
rate and the achieved upper deviation rate, Baker decided to apply the
discovery sampling method with an expected population deviation rate of 3
percent for the 8,000 shipping documents, and he decided to defer consideration
of the risk of assessing control risk too low until the sample results had been
evaluated. Baker used the tolerable rate, the population size, and the expected
population deviation rate to determine that a sample size of 80 would be
sufficient. When it was subsequently determined that the actual population was
about 10,000 shipping documents, Baker increased the sample size to 100.
Baker’s objective was to ascertain whether Mill’s shipments had been properly
billed. Baker took a sample of 100 invoices by selecting the first 25 invoices
from the first month of each quarter. Baker then compared the invoices to the
corresponding prenumbered shipping documents.
When Baker tested the sample, eight deviations were discovered. Additionally,
one shipment that should have been billed at $10,443 was actually billed at
$10,434. Baker considered this $9 to be immaterial and did not count it as a
In evaluating the sample results, Baker made the initial determination that a
reliability level of 95 percent (risk of assessing control risk too low of 5
percent) was desired and, using the appropriate statistical sampling table,
determined that for eight observed deviations from a sample size of 100, the
achieved upper deviation rate was 14 percent. Baker then calculated the
allowance for sampling risk (5 percent), the difference between the actual
sample deviation rate (8 percent), and the expected deviation rate (3 percent).
Baker reasoned that the actual sample deviation rate (8 percent) plus the
allowance for sampling risk (5 percent) was less than the achieved upper deviation
rate (14 percent); therefore, the sample supported a low level of control risk.
Describe each incorrect assumption, statement, and inappropriate application of
attributes sampling in Baker’s procedures.
Your paper should be 3-4 pages in length. Follow APA format, according to Guide
to Writing and APA Requirements. Include reference page. Use two outside