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CMA Intermediate · Corporate Accounting and Auditing · Report on Internal Financial Control over Financial Reporting

During testing, the auditor of Narmada Foods Ltd finds that the control of matching purchase orders, goods receipt notes and supplier invoices before payment was not performed in 4 of 25 sampled payments. The company's tolerable deviation rate was set at 5%. What is the appropriate conclusion?

The sample deviation rate is 4 divided by 25, which is 16%, well above the 5% tolerable rate. The auditor therefore cannot rely on the control as operating effectively and must evaluate the deficiency's severity, including any compensating controls, before concluding.

  1. AThe control is effective because the sample is small
  2. BThe sample deviation rate is 16%, exceeding tolerable rate, so the control cannot be relied on as designedCorrect
  3. CThe deviation rate is 4%, which is within the tolerable rate
  4. DThe deviation rate is 25%, so a material weakness is automatic

Explanation

Deviation rate = 4/25 = 16%. This exceeds the 5% tolerable rate, so the auditor cannot conclude the control operated effectively and must evaluate the deficiency's severity and any compensating controls. The 4% option wrongly uses the count as a percentage, and 25% uses the wrong base. A material weakness is not automatic.

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