Accounting Case 5: Sampling Case Analysis of Hooplah, Inc. Data

This case study analyzes the sampling procedures of Hooplah, Inc., focusing on internal controls and account receivables. The analysis includes evaluating the sample sizes for different controls based on tolerable and expected deviation rates, as well as assessing the efficiency of these controls. The case examines credit memo approvals, quantity and description matching, and the impact of deviations found. Additionally, the study addresses the determination of sample sizes for account receivables, direct testing considerations, and the identification of risky areas for this account. The student provides detailed responses to all parts of the questions, demonstrating a thorough understanding of the case and its implications for auditing and accounting practices. The student follows the honor pledge and provides a comprehensive analysis of the case.

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Case 5 (25 points): Sampling Case – Hooplah, Inc. (case book)
Read the case and provide a thorough response to the following:
Part A:
Question 1, parts a. and b.
Part A
Based on Appendix A and the data provided in the case study it may be inferred that for Control
1, the following parameter has been set Moderately important i.e.8% tolerable deviation limit
with 1% estimated population deviation rate. Thus, the same size shall be 58. While for Control
2, the following parameter has been set Moderately important i.e.8% tolerable deviation limit
with 2% estimated population deviation rate. Thus, the sample size shall be 77. Thus, by using
the same sample size Darrell has not been congruent to Appendix A. As the same size to be
selected for Control 1 is 58 while the sample size to be selected for control 2 is 77,
Further, using the same set of transaction has no issues and there is no such norm for selecting
different data set for every control. However, it is generally advisable to select different data and
not a 100% replica.
Part B
Further, the deviation computed is at 7.7. under both the case which is within the set parameter
of 8%. Thus, it may be concluded that systems are operating efficiently.
Question 2, parts a. and b.
Part A
Based on Appendix A and the data provided in the case study it may be inferred that for Control
3, the following parameter has been set Highly important i.e.4% tolerable deviation limit with
0% estimated population deviation rate. Thus, the same size shall be 74.
Part B
The last five credit memos have been checked and following details have been found for the five
credit memos:
Credit Memo 1: Clear no issues as memo was approved.
Credit Memo 2: Clear no issues as memo was approved.
Credit Memo 3: Clear no issues as memo was approved.
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Credit Memo 4: Clear no issues as memo was approved.
Credit Memo 5: Clear no issues as memo was approved.
Accordingly, there is no exception to the approvals of credit memos for sales return and they are
properly authorized by Brian Thompson.
Thus, the computed upper deviation rate as there is zero deviation and 75 sample size is 4.
Accordingly, the control is operating efficiently and within the limits set.
Hint: Just focus on the initials from the accounting supervisor (Brian) on the credit memo for
part b.
Question 3, parts a. and b.
Part A
On re performing the control procedures on balance five credit memos in regard to quantity and
description is presented as under:
Credit Memo 1: Credit Memo : Quantity 15 Description: Micro Processor
Inventory Receipt: Quantity 15 Description: Micro Processor
Customer Return Report: Quantity 15 Description: Micro Processor
Everything Matches OK.
Credit Memo 2: Credit Memo : Quantity 150 Description: Connector (50) and semi-conductor
(100)
Inventory Receipt: Quantity 150 Description: Connector (50) and semi-conductor (100)
Customer Return Report: Quantity 150 Description: Connector (50) and semi-conductor (100)
Everything Matches OK.
Credit Memo 3: Credit Memo: Quantity: 40 Description: Micro Processor (15) and power supply
(25)
Inventory Receipt: Quantity: 40 Description: Micro Processor (15) and power supply (25)
Customer Return Report: Quantity: 40 Description: Micro Processor (15) and power supply (25)
Everything Matches OK.
Credit Memo 4: Credit Memo: Quantity: 45 Description: Accelerometer (15), Heat Sensor (20)
and power supply (10)
Inventory Receipt: Quantity: 35 Description: Accelerometer (15), Heat Sensor (20)
Customer Return Report: Quantity: 35 Description: Accelerometer (15), Heat Sensor (20)
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Not OK
Credit Memo 5: Quantity: 20 Description: Motion Sensor
Inventory Receipt: Quantity: 20 Description: Motion Sensor
Customer Return Report: Quantity: 20 Description: Motion Sensor
Everything Matches OK.
Thus, on the basis of above it may be inferred that there is one control deviation out of 75
samples tested. Based on above, the upper deviation rate for 1 deviation under 75 sample data is
6.2 which makes the deviation percentage greater than 4%. Accordingly, the control is not
operating efficiently.
Part B
Conclusion of Answer 3(a) is more supportable as there is error in the control and deviation has
been found. Thus, one must test more samples to verify whether there is any such further errors.
Hint: Now, for part a., analyze all of the information presented with the credit memo.
Part B:
Question 1, part a. and b.
Part A
Total Number of Customer: 357
Account Receivable Balance: $12,881,551
Tolerable Misstatement of Account Receivable: $400,000
Aggregate Misstatement of last year: Less than 0.5%
Customer
Number
<30 30 - 60 61 - 90 >90 Total
05-2034 0 4,07,474 91 0 4,07,565
05-3038 4,50,332 9,774 0 0 4,60,106
03-5308 2,13,095 0 3,83,513 47,719 6,44,329
01-5661 1,60,520 3,42,124 1,839 1,776 5,06,261
01-6827 0 0 1,05,154 3,77,502 4,82,657
02-7398 2,53,345 1,97,852 0 26,972 4,78,170
03-7802 3,09,350 1,66,151 2,017 36,586 5,14,105
03-8275 2,68,334 3,21,660 2,431 25,469 6,17,895
04-9069 0 0 0 4,68,557 4,68,557
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02-0149 2,36,129 2,30,282 117 590 4,67,119
Part B
Computation of Sample Size
Total Number of Customer: 357
Account Receivable Balance: $12,881,551
Tolerable Misstatement of Account Receivable: $400,000
Aggregate Misstatement of last year: Less than 0.5%
Sampling Population Book Value: $12,881,551-5,046,764=$78,34,787
Tolerable: $400,000
Expected: 0.5% of $78,34,787=$39,174
Confidence Factor: Moderate : 95% or 1.96
Using the formula: ($78,34,787)*1.96/($400,000-$39,174)= 43
Confidence factor of 95% has been taken to be in alignment with the part A testing.
Hint: in part b., remember to subtract out the value of the items selected for direct testing in part
a. Also, use the prior year’s misstatement rate in this account as the expected misstatement rate
for this year.
Question 2, part a. and b.
Part A
The following factors may be considered for direct testing
(a) Aging of Receivables i.e. receivables greater than 90 days must be confirmed directly
having values above $ 50000
(b) Aging of Receivables i.e. receivables greater than 90 days must be confirmed directly
having values above $ 100000;
(c) Negative Balances
Part B
Based on above, the following additional samples have been identified:
Based on a and c
Customer
Number
<30 30 - 60 61 - 90 >90 Total
04-6706 6,577 17,286 16,476 -98 40,241
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01-6827 0 0 1,05,154 3,77,502 4,82,657
01-7710 1,22,758 67,921 7,077 1,15,216 3,12,974
02-8307 0 422 0 61,284 61,706
05-8755 7,157 0 0 81,154 88,311
04-9069 0 0 0 4,68,557 4,68,557
03-1630 28,489 10,630 19,016 2,93,391 3,51,528
Based on b
Customer
Number
<30 30 - 60 61 - 90 >90 Total
03-5308 2,13,095 0 3,83,513 47,719 6,44,329
01-6827 0 0 1,05,154 3,77,502 4,82,657
02-8998 94,286 5,495 1,08,513 0 2,08,295
Hint: Use your judgment here- what might be risky for this account?
To receive full credit, you must provide a response to all parts of each question with sufficient
detail to show that you put some thought into your response. This case asks for some responses
in a list format, while others in more of a descriptive, full-sentence format. Respond using the
appropriate format requested in the question.
Requirements:
[1]
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