Your audit team has established the following parameters for the examination of ELM’s control over the authorization of sales:
Population size ……………… 388 shipments
Risk of overreliance …………………… 10%
Expected population deviation rate …….. 1%
Tolerable rate of deviation ………………. 6%
a. Use IDEA to determine the necessary sample size, given the preceding parameters. Parts (b), (c), and (d) are independent scenarios that affect sample size.
b. Assume the audit team has decided to increase its reliance on this control and reduce control risk related to the authorization of sales on account. Accordingly, it has decided to reduce the risk of overreliance to 5 percent. What is the necessary sample size, holding all other factors constant?
c. Assume that in the past year the audit team noted a greater extent of deviations in the population and decided that an expected population deviation rate of 2 percent would be more appropriate. What is the necessary sample size, holding all other factors constant?
d. Assume that the audit team has decided to reduce its reliance on this control and is willing to increase the tolerable rate of deviation from 6 percent to 8 percent. What is the necessary sample size, holding all other factors constant?
e. How do the results in parts (b), (c), and (d) reflect the relationship between various parameters and sample size?