Final answer:
In analytical procedures, the precision of the expectation refers to how closely an auditor's expected outcome aligns with repeated measurements. A tolerable difference is an auditor-imposed threshold indicating the maximum allowable deviation without significantly affecting a user's decision, which can be stricter for unexpected results.
Step-by-step explanation:
The precision of the expectation in analytical procedures refers to the level of certainty or exactness that an auditor has regarding the expected outcome of an accounting estimate or other financial statement assertion before testing it against actual results. Precision is about how close the agreement is between repeated measurements under the same conditions and is often measured by the range or standard deviation of those observations.
An auditor might calculate a tolerable difference by determining the maximum error in the financial statements that could exist without affecting the decision of a reasonable person relying on those statements. This involves setting a threshold, which could be a percentage of the related account balance, transaction class, or estimate. When an expected result is in line with predictions based on historical data, less strict criteria may be applied because there's inherent confidence in the predictability of the outcome. However, for an unexpected result, stricter criteria may be needed due to the higher risk of material misstatement.
Therefore, in applying analytical procedures, auditors ensure the precision of their expectations is sufficient to identify potential material misstatements. When actual results deviate significantly from expectations, auditors investigate these discrepancies to determine if additional auditing action is required.