Question

An internal auditor is planning to use attribute sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements. In attribute sampling, decreasing the estimated occurrence rate from 5% to 4% while keeping all other sample size planning factors exactly the same would result in a revised sample size that would be

A. Unchanged.
B. Larger.
C. Smaller.
D. Indeterminate.

Answer 1

The correct answer is option C. Smaller.

Step-by-step explanation:

In attribute sampling used by internal auditors, the sample size is affected by factors including the desired level of confidence, the estimated population error rate, and the allowable risk of assessing control risk too low. When an auditor decreases the estimated population occurrence rate, while keeping all other factors constant, the formula used to calculate sample size will produce a smaller sample size. This is because the lower occurrence rate assumes a more effective control, reducing the number of samples needed to be confident that the auditor's assessment of control risk is not too low. This explains why the answer to the student's question is 'C. Smaller.'

Furthermore, to draw on the provided reference information: To reduce sampling error, a common method is to increase the sample size. A ±3 percent sampling error means that there is a 95% chance that the actual population parameter lies within 3 percent above or below the estimated parameter based on the sample.

Finally, if you decrease the allowable error bound while keeping the same level of confidence, it generally requires a larger sample size to ensure the same confidence in your results.