Final answer:
The auditor is most likely to choose a larger sample size or set the control risk at the maximum when the expected deviation rate exceeds the tolerable deviation rate to adequately handle the increased level of risk.
Step-by-step explanation:
If the expected deviation rate exceeds the tolerable deviation rate, the most likely action an auditor will take is to either have a larger sample size to reduce the risk of concluding that the controls are more effective than they actually are, or set the control risk at maximum to reflect the higher level of risk associated with the controls. However, setting the control risk at the minimum without sampling or choosing a lower risk of assessing control risk too low would not be appropriate responses, as these actions do not address the increased level of risk indicated by the expected deviation rate exceeding the tolerable deviation rate.
When an auditor encounters this situation, they might decide to pick a larger sample size because using larger sample sizes can provide a more reliable understanding of the population and the reliability of control procedures. Nonetheless, they may also consider setting the control risk at the maximum without sampling if they conclude the control environment is too risky and ineffective to rely on. Importantly, a higher sample size allows for a better estimate of the population parameters and minimizes the risk of incorrect conclusions.
The following are foundational concepts in auditing and statistical sampling: Larger sample sizes typically lead to lower sampling error and smaller confidence intervals, increasing the accuracy of the results. A ±3 percent sampling error means that there is a 95% confidence that the true value lies within 3 percent above or below the measured sample statistic. And, as the sample size increases, the better the sampling distribution will approximate a normal distribution, which is beneficial for hypothesis testing and generalizations.