Audit Chapter 8 & 9
As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to a.Find smaller misstatements. b.Find larger misstatements. c.Increase the tolerable misstatement in the accounts. d.Decrease the risk of overreliance.
a
Fact Pattern:An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined, and seven of them were lacking approval. The auditor then determined the achieved upper deviation limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of the risk of material misstatement because the a. Tolerable deviation rate (7%) was less than the achieved upper deviation limit (8%). b. Expected deviation rate (7%) was more than the percentage of deviations in the sample (3.5%). c. Achieved upper deviation limit (8%) was more than the percentage of deviations in the sample (3.5%). d. Expected deviation rate (2.5%) was less than the tolerable deviation rate (7%).
a
In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the a.Population. b.Attribute of interest. c.Sample. d.Sampling unit.
a
In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also directly consider the I.Likely rate of deviations II. Allowable risk of underreliance a. I only. b. II only. c. Both I and II. d. Either I or II.
a
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of overreliance, and the a. Tolerable population deviation rate. b. Risk of incorrect acceptance. c. Nature and cause of deviations. d. Population size.
a
To determine the sample size for a test of controls, an auditor should consider the tolerable population deviation rate, the risk of overreliance, and the a.Expected population deviation rate. b.Upper precision limit. c.Risk of incorrect acceptance. d.Risk of incorrect rejection.
a
When an auditor uses monetary-unit sampling to examine the total value of invoices, each invoice a. Has an equal probability of being selected. b. Can be represented by no more than one monetary unit. c. Has an unknown probability of being selected. d. Has a probability proportional to its monetary value of being selected.
a
Which of the following factors is usually not considered in determining the sample size for a test of controls? a.Population size, when the population is large. b.Tolerable population deviation rate. c.Risk of overreliance. d.Expected population deviation rate.
a
Which of the following factors is(are) considered in determining the sample size for a test of controls? Expected Population Deviation Rate/ Tolerable Population Deviation Rate a. Yes,Yes b. No,No c. No,Yes d. Yes,No
a
Which of the following statements is true concerning statistical sampling in tests of controls? a.The population size has little or no effect on determining sample size except for very small populations. b.The expected population deviation rate has little or no effect on determining sample size except for very small populations. c.As the population size doubles, the sample size also should double. d.For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.
a
While performing a test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of a.Incorrect rejection. b.Incorrect acceptance. c.Overreliance. d.Underreliance.
a
The risk of incorrect acceptance and the risk of overreliance relate to the a.Effectiveness of the audit. b.Efficiency of the audit. c.Preliminary estimates of materiality levels. d.Tolerable misstatement.
a If a financial statement amount is erroneously accepted as fairly stated based upon a sample, additional audit work and the chances of exposing the mistake will probably be minimal. However, rejection of a fairly stated amount typically results in further audit investigation and ultimately the acceptance of the amount. Similarly, overreliance on a control leads to an unjustified reduction in substantive testing, thereby decreasing the effectiveness of the audit. However, underreliance on a control results in an unneeded increase in substantive testing but most likely does not decrease ultimate audit effectiveness.
In attribute sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? a.Population size. b.Tolerable population deviation rate. c.Risk of overreliance. d.Expected population deviation rate.
a A change in the size of the population has a very small effect on the required sample size when the population is large. As the population increases, the sample size also increases but at a decreasing rate.
Which of the following best describes what the auditor means by the rate of occurrence in an attribute sampling plan? a. The number of deviations that can be estimated to be contained in the sample. b. The estimated frequency with which a certain characteristic occurs within a population. c. The degree of confidence that the sample is representative of the population. d. The dollar range within which the true population total can be expected to fall.
b
Which of the following is the primary objective of monetary-unit sampling (MUS)? a.To identify overstatement errors. b.To increase the proportion of smaller-value items in the sample. c.To identify items to which controls were not properly applied. d.To identify zero and negative balances.
a MUS gives each monetary unit in the population an equal chance of selection. However, the auditor does not examine an individual monetary unit but uses it to identify an entire transaction or balance to audit (the logical sampling unit). MUS is useful only for tests of overstatements (e.g., of assets) because a systematic selection method is applied (every nth monetary unit is selected). Accordingly, the larger the transaction or balance, the more likely it will be selected. This method is inappropriate for testing a population (e.g., liabilities) when understatement is the primary audit consideration.
Which of the following is a sampling risk that is associated with the efficiency of an audit? a.Risk of assessing control risk too high. b.Risk of incorrect acceptance. c.Inherent risk. d.Detection risk.
a Sampling risk is the risk that the auditor's conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population. An audit efficiency error represents an erroneous conclusion that controls are less effective than they actually are (underreliance), or a material misstatement exists when, in fact, it does not exist (incorrect rejection). Thus, assessing control risk too high is a type of error affecting audit efficiency and results in more work.
The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk? a. The auditor selecting inappropriate auditing procedures. b. The internal control being more effective than the auditor believes. c.The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated. d.The internal control not being as effective as the auditor believes.
a Sampling risk is the risk that the auditor's conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population. Two types of erroneous conclusions may be drawn: (1) controls are more effective than they actually are (overreliance), or a material misstatement does not exist when in fact it does exist (incorrect acceptance), or (2) controls are less effective than they actually are (underreliance), or a material misstatement exists when in fact it does not exist (incorrect rejection). Nonsampling risk is the risk of an erroneous conclusion caused by a factor not related to sampling risk. For example, the auditor may apply inappropriate procedures or misinterpret audit evidence and not recognize misstatements or control deviations.
When using statistical sampling for testing the effectiveness of internal controls, an auditor's evaluation would include a statistical conclusion concerning whether a. Procedural deviations in the population were within an acceptable range. b. Monetary precision is in excess of a certain predetermined amount. c. The population total is not misstated by more than a fixed amount. d. Population characteristics occur at least once in the population.
a The auditor uses attribute sampling to test the effectiveness of controls. The auditor considers the occurrence rate of deviations in the population. Attribute sampling enables the auditor to estimate the occurrence rates of deviations and to determine whether the estimated rates are within acceptable ranges.
AU-C 530, Audit Sampling, identifies two general approaches to audit sampling. They are a.Random and nonrandom. b.Statistical and nonstatistical. c.Precision and reliability. d.Risk and nonrisk.
b
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a.Incorrect rejection. b.Incorrect acceptance. c.Overreliance. d.Underreliance.
b
An auditor suspects that the invoices from a small number of vendors contain serious misstatements and therefore limits the sample to those vendors only. A major disadvantage of selecting such a directed sample of items to examine is the a. Difficulty in obtaining sample items. b. Inability to quantify the sampling error related to the total population of vendor invoices. c. Absence of a normal distribution. d. Tendency to sample a greater number of units.
b
Fact Pattern:An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined, and seven of them were lacking approval. The auditor then determined the achieved upper deviation limit to be 8%. The allowance for sampling risk was a. 5.5% b. 4.5% c. 3.5% d. 1%
b
In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample? a.Tolerable population rate of deviation. b.Number of items in the population. c.Degree of assurance desired. d.Risk of overreliance.
b
The risk of underreliance is that the sample selected to test controls a. Does not support the tolerable misstatement for some or all of management's assertions. b. Does not support the auditor's planned reliance on controls when the true operating effectiveness of controls justifies such an assessment. c. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes. d. Contains proportionately fewer errors or deviations from prescribed controls than exist in the balance or class as a whole.
b
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Amount of Misstatements, Measure of Tolerable Misstatement a.No,No b.Yes,Yes c.No,Yes d.Yes,No
b
Which of the following statements about audit sampling risks is correct for a nonissuer? a.Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. b.Nonsampling risk can arise because an auditor failed to recognize misstatements. c.Sampling risk is derived from the uncertainty in applying audit procedures to specific risks. d.Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
b
Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? a. The auditor should consider the tolerable population rate of deviation from the controls being tested in determining sample size. b. As the likely rate of deviation decreases, the auditor should increase the planned sample size. c. The allowable risk of overreliance has no effect on the planned sample size. d. Of all the factors to be considered, the population size has the greatest effect on the sample size.
b
he diagram below depicts the auditor's estimated maximum deviation rate compared with the tolerable deviation rate and also depicts the true population deviation rate compared with the tolerable deviation rate. a.I b.II c.III d.IV
b
Which of the following statements is true concerning statistical sampling in tests of controls? a.As the population size increases, the sample size should increase proportionately. b.Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements. c.There is an inverse relationship between the expected population deviation rate and the sample size. d.In determining the tolerable deviation rate, an auditor considers detection risk and the sample size.
b Deviations from a specific control increase the risk of misstatements in the accounting records but do not always result in misstatements. Thus, deviations from a specific control at a given rate ordinarily result in misstatements at the financial statement level at a lower rate.
As a result of sampling procedures applied as tests of controls, an auditor incorrectly underrelies on controls. The most likely explanation for this situation is that a. The deviation rate in the auditor's sample is less than the tolerable population rate, but the deviation rate in the population exceeds the tolerable population rate. b. The deviation rate in the auditor's sample exceeds the tolerable population deviation rate, but the deviation rate in the population is less than the tolerable population deviation rate. c. The deviation rates of both the auditor's sample and the population exceed the tolerable population rate. d. The deviation rates of both the auditor's sample and the population are less than the tolerable population rate.
b If the auditor underrelies on controls, the result is likely to be an unnecessary extension of substantive procedures, which affects audit efficiency. Underreliance is the erroneous conclusion that controls are less effective than they actually are. The most likely explanation is that (1) the auditor expected the sample to be representative of the population, (2) the sample deviation rate exceeded the tolerable population deviation rate, and (3) the actual population deviation rate is less than the tolerable population deviation rate.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if a.Monetary-unit sampling (MUS) is used. b.The population has highly variable recorded amounts. c.The auditor's estimated tolerable misstatement is extremely small. d.The standard deviation of recorded amounts is relatively small.
b The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant.
An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods a.Afford greater assurance than a nonstatistical sample of equal size. b.Provide an objective basis for quantitatively evaluating sample risks. c.Can more easily convert the sample into a dual-purpose test useful for substantive testing. d.Eliminate the need to use judgment in determining appropriate sample sizes.
b The results of statistical (probability) sampling are objective and subject to the laws of probability. Hence, sampling risk can be quantified and controlled, and the degree of reliability desired (the confidence level) can be specified. Sampling risk is the risk that the sample selected does not represent the population.
An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client's internal control. One of the purchase orders in the chosen sample of 20 cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase order was properly approved. The auditor should a. Choose another purchase order to replace the missing purchase order in the sample. b. Consider this test of controls invalid and proceed with substantive procedures because internal control is ineffective. c. Treat the missing purchase order as a deviation for the purpose of evaluating the sample. d. Select a completely new set of 20 purchase orders.
c
An auditor randomly samples 50 out of 1,000 items and discovers an overstatement of $3,000. What is the projected misstatement for the entire population? a.$150,000 b.$120,000 c.$60,000 d.$48,000
c
Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, i.e., sampling risk, is introduced. An example of sampling risk is a.Projecting the results of sampling beyond the population tested. b.Properly applying an improper audit procedure to sample data. c.Improperly applying a proper audit procedure to sample data. d.Drawing an erroneous conclusion from sample data.
d
An auditor who uses statistical sampling for attributes in testing internal controls should alter the assessed risk of material misstatement when the a. Sample rate of deviation is less than the expected population rate of deviation used in planning the sample. b. Tolerable population deviation rate minus the allowance for sampling risk exceeds the sample rate of deviation. c. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate. d. Sample rate of deviation plus the allowance for sampling risk equals the tolerable population deviation rate.
c
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant? a.The sample size would be irrelevant. b.The sample size would be higher. c.The sample size would be lower. d.The sample size would be unaffected.
c
If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures, a.No inferences can be drawn from the sample. b.The auditor has caused nonsampling risk to increase. c.The auditor may or may not achieve desired precision at the desired level of confidence. d.The auditor will have to evaluate the results by reference to the principles of discovery sampling.
c
Which of the following combinations results in a decrease in sample size in an attribute sample? Allowable risk of overreliance/tolerable rate/expected pop deviation rate a.Increase,Decrease,Increase b.Decrease, Increase, Decrease c.Increase, Increase, Decrease d.Increase, Increase, Increase
c
Which of the following types of sampling allows an auditor to quantify sampling risk? a.Stratified nonstatistical. b.Haphazard. c.Attribute. d.Block.
c
To quantify the risk that sample evidence leads to erroneous conclusions about the sampled population, a.Each item in the sampled population must have an equal chance of being selected. b.Each item in the sampled population must have a chance of being selected that is proportional to its carrying amount. c.Each item in the sampled population must have an equal or known probability of being selected. d.The precise number of items in the population must be known.
c Probability (random) sampling is used in any sampling plan in which every item in the population has an equal (or known) and nonzero probability of being chosen. A probability sample permits the use of statistical methods based on the laws of probability to quantify an estimate of sampling risk.
Which of the following factors does an auditor usually need to consider in planning a particular audit sample for a test of controls? a. Number of items in the population. b. Total dollar amount of the items to be sampled. c. Acceptable risk of overreliance. d. Tolerable misstatement.
c A test of controls is an application of attribute sampling. The initial size for an attribute sample from a large population is based on the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate.
When using sampling for substantive tests of details, the auditor is required to do all but which of the following? a.Determine the tolerable misstatement. b.Project sample misstatement results to the population. c.Compute the sample standard deviation. d.Select a representative sample.
c AU-C 530 does not require that the sample standard deviation be calculated. The computation would be necessary if parametric statistical sampling were used, but statistical sampling is not required by AU-C 530.
Statistical sampling usually may be applied in tests of controls when the client's internal controls a. Depend primarily on appropriate segregation of duties. b. Are carefully reduced to writing and are included in client accounting manuals. c. Leave an audit trail in the form of documentary evidence of their effectiveness. d. Enable the detection of material fraud in the accounting records.
c Sampling is useful when a population can be identified from which to sample. When attribute sampling is applied in tests of controls, an audit trail of documents and notations on them (such as signatures) should exist to provide evidence of the effectiveness of the control.
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to a.Minimize the failure to detect errors and fraud. b.Eliminate the risk of nonsampling errors. c.Reduce the level of audit risk and materiality to a relatively low amount. d.Measure the sufficiency of the evidence obtained.
d
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the a. Sample rate of deviation plus the allowance for sampling risk equals the tolerable population deviation rate. b. Sample rate of deviation is less than the expected population deviation rate used in planning the sample. c. Tolerable population deviation rate minus the allowance for sampling risk exceeds the sample rate of deviation. d. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate.
d
As a result of tests of controls, an auditor underrelies on controls. This incorrect assessment most likely occurred because a.The assessed risk of material misstatement based on the auditor's sample is less than the actual risk. b.The auditor believes that the controls relate to management's assertions when, in fact, they do not. c.The auditor believes that the controls reduce the extent of substantive testing when, in fact, they do not. d.Operating effectiveness based on the auditor's sample is less than the true operating effectiveness of the controls.
d
In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year's rate because of the results of the prior year's tests of controls and the overall control environment. The auditor most likely would then increase the planned a.Tolerable deviation rate. b.Allowance for sampling risk. c.Risk of overreliance. d.Sample size.
d
Statistical sampling may be used to test the effectiveness of controls. The auditor's procedures should result in a statistical conclusion about a. Population characteristics occurring at least once in the population. b. The population value not being misstated by more than a fixed amount. c. Monetary precision exceeding a certain predetermined amount. d. The relation of the population deviation rate to the tolerable rate.
d
The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects a.Statistical risk. b.Sampling risk. c.Audit risk. d.Nonsampling risk.
d
The sample size of a test of controls varies inversely with Expected Population deviation rate/' Tolerable Population Deviation Rate a.Yes,Yes b.No,No c.Yes,No d.No,Yes
d
When performing tests of controls with respect to the effectiveness of internal controls related to cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population a. Must be systematically replaced in the population after sampling. b. May systematically occur more than once in the sample. c. Must be recorded in a systematic pattern before the sample can be drawn. d. May occur in a systematic pattern, thus destroying the sample randomness.
d
Which of the following is a true statement about statistical sampling in tests of controls? a. Deviations from controls at a given rate usually result in misstatements at a higher rate. b. As the population size doubles, the sample size also should double. c. The qualitative aspects of deviations are not considered by the auditor. d. The relationship between the sample size and the tolerable population deviation rate is inverse.
d
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? a. As the population size doubles, the sample size should increase by about 67%. b. The sample size is inversely proportional to the expected population deviation rate. c. There is no relationship between the tolerable population deviation rate and the sample size. d. The population size has little or no effect on the sample size.
d
Which of the following would be a consideration in planning an auditor's sample for a test of controls? a.Preliminary judgments about materiality levels. b.The auditor's allowable risk of underreliance. c.The level of detection for the account. d.The auditor's allowable risk of overreliance.
d A test of controls is an application of attribute sampling. The initial size for an attribute sample is based on (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, (3) the expected population deviation rate, and (4) the population size. However, a change in the size of the population has a very small effect on the required sample size when the population is large. Consequently, population size is often not considered unless it is small.
As a result of tests of controls, an auditor overrelied on controls and decreased substantive testing. This assessment occurred because the true deviation rate in the population was a. Less than the risk of overreliance, based on the auditor's sample. b. Less than the deviation rate in the auditor's sample. c. More than the risk of overreliance, based on the auditor's sample. d. More than the deviation rate in the auditor's sample.
d In the case of a test of controls, overreliance is the erroneous conclusion that controls are more effective than they actually are. Overreliance occurs if the sample has fewer observed deviations than the true deviation rate in the population.
In a monetary-unit sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample is $1,000 $2,000 $5,000 $10,000
d Monetary-unit sampling results in the selection of every nth monetary unit. Thus, a $1,000 item is 1,000 times more likely to be selected than a $1 item. The probability of selection of a sampled item is directly proportional to the size of the item.
The possibility of the auditor's failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from a.Statistical risk. b.Sampling risk. c.The standard error of the mean. d.Nonsampling risk.
d Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm's audit practice in accordance with the quality control standards (AU-C 530). Sampling risk results from the use of statistical sampling.
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the a.Risk of overreliance. b.Tolerable deviation rate. c.Expected population deviation rate. d.Sample size.
d Statistical theory permits the auditor to measure sampling risk and to restrict it to an acceptable level. Statistical methods determine the sample size that will accomplish the auditor's objectives.
In selecting a sample using monetary-unit sampling, the dollar is the sampling unit. For example, if the 300th dollar of invoices is selected, a. Only that dollar is audited. b. Only an invoice with exactly $300 is audited. c. An invoice of less than $300 cannot be selected. d. The invoice containing the 300th dollar is audited.
d The monetary unit selected is a basis for choosing the sales invoice to be audited. Thus, the 300th dollar identifies an invoice on which all dollars will be audited.
An auditor may decide to increase the risk of incorrect rejection when a.Increased reliability from the sample is desired. b.Many differences (audit amount minus recorded amount) are expected. c.Initial sample results do not support the assessed risk of material misstatement. d.The cost and effort of selecting additional sample items are low.
d The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not. This risk relates to the efficiency, not the effectiveness, of the audit. Incorrect rejection ordinarily results in the application of additional procedures that finally lead the auditor to the proper conclusion. If the cost and effort of selecting additional sample items are low, a higher risk of incorrect rejection may be acceptable.
What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%? a.Modify the planned assessed risk of material misstatement because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate. b.Accept the sample results as support for the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate. c.Accept the sample results as support for the assessed risk of material misstatement because the tolerable deviation rate minus the allowance for sampling risk equals the expected population deviation rate. d.Modify the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
d The sample has a 6% (3 ÷ 50) deviation rate. The auditor's achieved upper deviation limit is 8% (6% + the 2% allowance for sampling risk). The allowance for sampling risk may be calculated from a standard table as the difference between the upper deviation limit and the sample rate. However, the allowance is given. Thus, the true deviation rate could be as large as 8% and exceed the tolerable rate. Accordingly, the auditor should revise the assessed risk of material misstatement for the relevant assertions and possibly alter the nature, timing, and extent of substantive procedures.
If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, then the auditor would most appropriately a. Increase the tolerable rate of deviation. b. Extrapolate the impact of the exceptions on other key controls requiring management review. c. Propose an audit adjustment. d. Increase the assessed risks of material misstatement.
d The tolerable deviation rate for a control is the maximum that the auditor can accept without increasing the assessed risk of material misstatement. Deviations increase the probability of misstatements in the accounting records, but they do not always cause misstatements. If deviations from a control on which the auditor intends to rely occur, the auditor should investigate the deviations and their consequences. The auditor then should evaluate whether (1) the tests of controls justify reliance, (2) additional tests of controls are needed, or (3) the potential risks of misstatement should be addressed by performing substantive procedures.
