Oakland Hardware Company is a hardware retailer that has been operational for over a decade. The company has grown and expanded its operations to different regions. As the company grows, it is essential to ensure that its operations remain strong and efficient. This is where tests of controls and substantive tests of transactions come in handy. By performing these tests, the company can identify areas that may need improvement, mitigate risks, and enhance its operations’ overall efficiency.
Testing the Strength of Oakland Hardware’s Operations
Oakland Hardware’s operations are subject to different risks, including fraud, errors, and inefficiencies. To ensure that the company’s operations are strong, the auditors perform tests of controls. These tests involve evaluating the company’s internal control procedures to ensure that they are operating effectively. The auditors review the company’s policies and procedures to identify areas that may need improvement. By doing so, they can provide recommendations to the company on how to make its operations more efficient.
Apart from tests of controls, the auditors also perform substantive tests of transactions. These tests are aimed at verifying the accuracy and completeness of the company’s transactions. Substantive tests of transactions involve testing a sample of transactions to ensure that they are valid, complete, and accurate. By performing these tests, the auditors can identify any errors or irregularities in the company’s accounting records. They can also provide recommendations on how to improve the company’s accounting practices.
Finding Success in Controls and Transaction Tests
By performing tests of controls and substantive tests of transactions, Oakland Hardware Company can identify areas that need improvement and enhance its operations’ overall efficiency. The company can also mitigate risks and ensure that its operations are compliant with relevant regulations. The auditors can provide recommendations to the company on how to improve its internal control procedures and accounting practices.
In conclusion, tests of controls and substantive tests of transactions are essential in evaluating the strength of Oakland Hardware Company’s operations. By performing these tests, the company can identify areas that may need improvement, mitigate risks, and enhance its overall efficiency. The auditors can provide recommendations to the company on how to improve its internal control procedures and accounting practices. With the right measures in place, Oakland Hardware Company can continue to thrive and grow its operations.
In performing tests of controls and substantive tests of transactions for the Oakland Hardware Company, Ben Frentz, a public accountant, is concerned with the internal verification of pricing, extensions, and footings of sales invoices, and the accuracy of the calculations. In testing sales using audit sampling, a separate attribute is used for the test of control (the presence of matching shipping documents) and the substantive test of transactions (the accuracy of calculation). Because internal controls are considered good, Frentz uses a 10-percent ARACR, a zero EPER, and a 5-percent TER for both attributes. Therefore, the initial sample size is 45 items, which Ben rounds up to 50.
In conducting the tests, the auditor finds three sample items for which there were no matching shipping documents, but in all cases the invoices are for services (such as product repairs or installation). No sales invoice tested in the sample has a financial misstatement. Complete the following requirements using either a non-statistical sampling or an attributes sampling approach.
a. Estimate or determine the CUER for both attributes, assuming a population of 5,000 sales invoices.
b. Decide whether each control is acceptable.
c. Discuss the most desirable course of action that the auditor should follow in deciding the effect of the CUER exceeding the TER.
d. Explain how it is possible that the sample had three control deviations but no transactions involved monetary misstatements.
e. How would you analyze exceptions in this case?
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