Question

An auditor is using statistical sampling in testing internal controls for a pubLiCly held company. The auditor's computed upper deviation rate is 4.2. What should the auditor do?

1) Enlarge the sample to obtain a better estimate of the true error rate in the population.
2) Revise the tolerable deviation rate to 4.3.
3) Rely on the internal controls.
4) Stop testing this internal control and issue an adverse opinion on the adequacy of the client's internal controls.

Answer 1

The auditor should compare the computed deviation rate with the tolerable rate, consider a larger sample to achieve a better estimate, and refrain from adjusting the tolerable deviation rate or issuing an adverse opinion without a valid basis.

Step-by-step explanation:

Upon encountering a computed upper deviation rate of 4.2, the auditor's actions will depend on how this rate compares to the tolerable deviation rate set for the audit. The auditor should consider the following:

• If the computed upper deviation rate is within an acceptable range and does not significantly exceed the tolerable deviation rate, the auditor may decide to rely on the internal controls.
• If the rate is marginally higher than tolerable, a larger sample might be tested to obtain a more precise estimate of the true deviation rate.
• It is inappropriate to arbitrarily revise the tolerable deviation rate to match the sample results without a valid rationale.
• If the deviation rate is significantly higher than acceptable, the auditor may consider issuing an adverse opinion on the internal controls.

The correct course of action is not specified as it depends on the predetermined tolerable deviation rate and the auditor's judgment.