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 assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

Question

Quizplus · Accepted Answer

Choice "A" is correct. The auditor decided to increase the level of the preliminary assessment of control risk because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate. Choice "B" is incorrect. The expected deviation rate was 2.5%, not 7%. Choice "C" is incorrect. The upper deviation rate is always more than the percentage of errors in the sample since the sum of the percentage of the errors and the allowance for sampling risk equals the upper deviation rate. Choice "D" is incorrect. The expected deviation rate is not used in evaluating the sample. It is the upper deviation rate that is compared to the tolerable rate in evaluating a sample.

An Auditor Desired to Test Credit Approval on 10,000 Sales