[Anonymous]

If the auditor assesss the control risk is too low, then the the true population deviation rate exceeds auditor’s tolerable rate while the auditor’s estimate of the maximum deviation rate ( based on sample results) was less than tolerable rate.

Can anyone please explain this to me, I just cant get my head around this??????

[goodluck2everyone2]

its been a while since I took audit, but let me try and help

he assessed control risk too low right? He messed up. When he was doing his calculation based on the sample rate, he calculated control risk being lower than what it actually is. So this means that control risk is actually higher than what he assessed. Why did this happen though?

Based on his sample, the deviation rate was less than his tolerable rate. Meaning, he has a threshold for what he wants control risk to be and this is what his tolerable rate is (this is how much he is willing to tolerate). The deviation rate his LESS than this, so he's satisfied.

HOWEVER, he only came to this conclusion because the sample size did not accurately reflect what the control risk is for the entire population. “the true population deviation rate exceeds auditor's tolerable rate”. The true deviation rate exceeds what the auditor is willing to tolerate

cool story bro

[Anonymous]

In other words, you make a big pot of chili, and you do a taste of it. It just happens the part you tasted was good, but the rest of the chili had rotten meat. The part you tasted doesn't reflect how the whole pot of chili truly is.

It's a weird analogy, but it helps you learn it.

[NetsForce]

Not to thread-jack but I had a question concerning this same topic…

If the risk of assessing control risk too low INCREASES does that increase or decrease sample size?

*This is related to multiple choice 24 Wiley Book, Module 7 according to the answer in the book:

All of the following would lead to a reduction in sample size:

(1) Risk of assessing control risk too low INCREASES

(2) Tolerable rate INCREASES

(3) Expected population deviation rate DECREASES

I'm fine with 2 & 3 but am confused with 1. Any help is appreciated…

Also is it necessary to be familiar (know how to calculate) standard deviation, etc. for AUD?

—

[Anonymous]

I had a tough time with this until I went to the library and got “Auditing for Dummies” lol

Basically if you asses the control risk to low, you won't do enough testing. That's the risk; that you won't do enough testing (number 1).

Think of this formula: Audit Risk = Control Risk x Inherit Risk x Detection Risk

(AR = CR x IR x DR)

AR stays the same (use any number). So if CR is too low then DR has to go up. The risk that you won't “Detect” material misstatements. Treat it as a math formula that has to balance out. If one goes up, then another goes down and vice versa in order for the AR to stay the same.

[forever4]

When you assess the control risk too low and decide to increase it which means you think the risk that you will mess up increase, therefore you want to increase the sameple size.

Does that help?

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[NetsForce]

Thanks guys.

@forever4 – I'm either reading the question wrong or the answer in the Wiley book is wrong, but you pretty much reconfirmed my line of thinking,

If “the risk of assessing control risk too low” increases you are saying the risk that you might say control is good when it is not good increases (so you're saying you are more likely to screw up) – which in turn means that sample size should increase.

[forever4]

Yes. Assess control risk = effective = very important => It means you will rely on internal control when it is actually bad. So when you increase that risk (= likelihood that you will make that wrong decision to rely on a bad internal control), you want to increase the sample size so your result of sampling will be more accurate.

Makes sense? 🙂

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[NetsForce]

Yep. Thanks again.

[Anonymous]

I was having this same exact question. No, it's not a typo in the Wiley book… I found other sources explicitly saying that RACRTL (risk of assessing control risk too low) is inversely related to sample size.

I think what we are doing is reading it/interpreting it wrong. Read the question as “We're OKAY with RACRTL going up, therefore we're cool with a smaller sample size”.

If you were to reword this to mean “Uh oh, RACRTL just went way up, crap!” then intuitively, yes you'd then want to increase the sample size.

So read it as “we're okay with RACRTL going up” which would lead to you not needing as big of a sample size.

Conversely, “we need to work to make RACRTL go down” which would mean you now need a larger sample size.

One way of interpreting the statement is kind of reactionary response (the one which will lead you to confusion) whereas the book/exams expect you to interpret the statement in a proactive way (e.g. “we're okay with increased risk” OR “we want to work to lower this particular risk”)

[Author]

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