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. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the

1) Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent).
2) Expected population deviation rate (7 percent) was more than the percentage of errors in the sample (3 ½ percent).
3) Computed upper deviation rate (8 percent) was more than the percentage of errors in the sample (3 ½ percent).
4) Expected population deviation rate (2 ½ percent) was less than the tolerable deviation rate (7 percent).

Answer 1

The auditor decided to increase the level of the preliminary assessment of control risk because the tolerable deviation rate was less than the computed upper deviation rate.

Step-by-step explanation:

The auditor decided to increase the level of the preliminary assessment of control risk because the tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent). The tolerable deviation rate is the maximum percentage of errors that the auditor is willing to accept. In this case, the auditor set it at 7 percent. The computed upper deviation rate is the maximum deviation rate based on the sample examined. If the computed upper deviation rate exceeds the tolerable deviation rate, it suggests a higher likelihood of control risk.