Frank is a technical manager of a CPA firm. Recently Frank was requested by his firm to conduct a review of the working papers on the audit of a new client, Alpha Electronics Limited ("Alpha"), a company engaging in the manufacturing and trading of computer accessories and devices, and to report his findings to the partner in charge of the audit. Upon review of the working papers prepared by the audit staff, Frank noted that a sample of 33 sales transactions was selected from the sales daybook at random for compliance test purposes. A total of 8 transactions were found to have discrepancies. The audit staff concluded in the working papers that since none of the errors found was above the materiality level set by the firm, the control system on sales would be considered as functioning properly and could be relied upon for other audit work.
Comment on the appropriateness of work done and conclusions drawn by the audit staff and recommend the right course of action, where applicable.
a) The conclusion drawn by the audit staff was inappropriate because a compliance test is mainly concerned with the effective operation of the control system. Hence the key issue should be the frequency of occurrence of errors and not the materiality of such errors.
b) The frequency of errors detected ...
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