[Anonymous]

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 a 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 2.5% 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 precision limit 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:

A. tolerable rate (7%) was less than the achieved upper precision limit (8%).

B. expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).

C. achieved upper precision limit (8%) was more than the percentage of errors in the sample (3.5%).

D. expected deviation rate (2.5%) was less than the tolerable rate (7%).”

The auditor made a preliminary judgment that up to 7% of the sales invoices lacking approval would be acceptable. Thus, the tolerable deviation rate was 7%. Since the achieved upper precision limit or achieved deviation rate of sample was 8%, the auditor would either have to conclude the control procedure of credit approval was unacceptable or increase the preliminary assessment of control risk to allow for a decrease in the achieved upper precision limit to a level below the tolerable deviation rate.

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Why does a deviation rate of 8% mean that the controls are unacceptable? How is that related?

[Anonymous]

The auditor seems to have made a decision that he/she could only accept that 7% of the total file of invoices could be missing the approval. Greater than 7% and he assumes that the control is crap. This number was probably chosen because it's the highest number that he/she could accept without having to do more of the labor-intensive detail testing of sales. The auditor apparently can't leave much to chance — he/she wants to be very confident (99%) that no more than 7% are wrong, hence the large sample size.

The deviation rate achieved means that from the auditor's sample, projected to the population, he/she is 99% confident that no more than 8% of the invoices lack approval. There probably weren't that many deviations (only 7/200 were, 3.5%, in the sample), but he/she is just not certain enough about it. It COULD be above the crap threshold of 7%, so it's just too much risk for the auditor to take.

There's a lot of number noise in this question. My guess is that it was really part of a several question chain that was probably more statistical at one point.

[maxheadroom88]

If your having trouble with audit sampling i wouldn't go crazy… I didn't get any audit sampling questions when i took the exam

Far: 82 Aug 2014
Bec: 79 Aug 2014
Aud:78 Oct 2014
Reg: 81 Nov 2014 done!!!!

[Author]

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