11-30 (Controls in an on-line real-time system) You have been engaged by Central Savings and LoanAssociation to audit its financial statements for the year ended December 31, 20X1. The CPA who audited the financial statements at December 31, 20X0, rendered an unqualified opinion.
In January 20X1, the Association installed an on-line real-time computer system. Each teller in the association’s main office and seven branch offices has an on-line input-output terminal. The customer’s mortgage payments and savings account deposits and withdrawals are recorded in the accounts by the computer from data input by the teller at the time of the transaction. The teller keys the proper account by account number and enters the information in the terminal keyboard to record the transaction. The accounting department at the main office also has direct access to the computer via on-line terminals. The computer is housed at the main office.
In addition to servicing its own mortgage loans, the association acts as a mortgage servicing agency for three life insurance companies. In this latter activity, the association maintains mortgage records and serves as the collection and escrow agent for the mortgagees ( the insurance companies), who pay a fee to the association for these services.

You would expect the associationto have certain internal controls in effect because an online real-time computer system is employed. List the internal controls that should be in effect solely because this EDP system is employed, classifying them as
a. Those controls pertaining to input information.
b. All other types of computer controls.
AICPA (adapted)

(Designing substantive tests) Final acceptable levels of detection risk have been determined for several assertions. The auditor is prepared to proceed with designing specific substantive tests.
a. What is the purpose of substantive tests?
b. What factors pertaining to substantive tests can be varied to accommodate different acceptable levels of detection risks? Explain how each factor is varied to accommodate a low versus a high acceptable level of detection risk.
c. Indicate the six types of substantive tests and the relative effectiveness and cost of each.

(Timing of substantive tests) Cook, CPA, has been engaged to audit the financial statements of General Department Stores, Inc., a continuing audit client, which is a chain of medium-sized retail stores. General’s fiscal year will end on June 30, 20X6, and General’s management has asked Cook to issue the auditor’s report by August 1, 20X6. Cook will not have sufficient time to perform all of the necessary fieldwork in July 20X6, but will have time to perform most of the fieldwork as of an interim date, April 30, 20X6.
For the accounts to be tested at the interim date, Cook will also perform substantive tests covering the transactions of the final two months of the year. This will be necessary to extend Cook’s conclusions to the balance sheet date.

a. Describe the factors Cook should consider before applying principal substantive tests to General’s balance sheet accounts at April 30, 20X6
b. For accounts tested at April 30, 20X6, describe how cook should design the substantive tests covering the balances as of June 30, 20X6, and the transactions of the final two months of the year.
(AICPA adapted)

(PPS sampling) Edwards has decided to use probability-proportional-to-size (PPS) sampling sometimes called dollar-unit sampling, in the audit of a client’s accounts receivable balance. Few, if any errors of overstatement are expected.
Edwards plans to use the following PPS sampling table:

5% Reliability Factors For Overstatements
Number of Risk of incorrect Acceptance
Overstatements 1% 5% 10% 15% 20%
0 4.61 3.00 2.31 1.90 1.61
1 6.64 4.75 3.89 3.38 3.00
2 8.41 6.30 5.33 4.72 4.28
3 10.05 7.76 6.69 6.02 5.52
4 11.61 9.61 8.00 7.27 6.73
a.) Identify the advantages of using PPS sampling over classical variables sampling.
Note : Requirements b) and c) are not related.
b.) Calculate the sampling interval and the sample size Ewards should use, given the following information:
Tolerable misstatement