Question

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-percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 ½ percent 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 computed upper deviation rate to be 8 percent. The planned allowance for sampling risk was?

1) 5 ½ percent
2) 4 ½ percent
3) 3 ½ percent
4) 1 percent

Answer 1

The planned allowance for sampling risk is 5.5 percent, calculated by subtracting the estimated population deviation rate of 2.5 percent from the computed upper deviation rate of 8 percent.

Step-by-step explanation:

The auditor's planned allowance for sampling risk is the difference between the estimated population deviation rate and the computed upper deviation rate. In this case, the auditor estimated from past experience that about 2.5 percent of the sales invoices lacked approval (estimated population deviation rate), and the computed upper deviation rate from the sample was 8 percent.

Therefore, the planned allowance for sampling risk is the computed upper deviation rate minus the estimated population deviation rate, which equals 8 percent - 2.5 percent = 5.5 percent. The correct answer to the question is: 5 ½ percent.