Auditing & Assurance Services (Auditing and Assurance Services)
Auditing & Assurance Services (Auditing and Assurance Services)
7th Edition
ISBN: 9781259573286
Author: Timothy J Louwers, Allen Blay, David Sinason Associate Professor, Jerry R Strawser, Jay C. Thibodeau Associate Professor
Publisher: McGraw-Hill Education
Question
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Chapter F, Problem 67EP
To determine

Determine the sample rate of deviation, ULRD, and allowance for sampling risk for each condition.

Expert Solution
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Explanation of Solution

Attributes sampling: Attributes sampling helps the auditor to assess a specific rate of occurrence for a specific characteristic of the audit population. It is helpful in finding the estimate related to a particular transaction or activity in the system.

Sample rate of deviation: It is a rate of deviation that ascertains the percentage of occurrence and accuracy of control. Sample rate of deviation is calculated by using the following formula:

Sample deviation rate=Number of deviationSample size

Upper Limit Rate of Deviation (ULRD): It is an adjusted deviation rate that ascertains a conservative measure of the population rate of deviation and allows the auditor to control the disclosure of sampling risk to acceptable levels.

Allowance for sampling risk: It is the “adjustment” of the sample deviation rate for the acceptable risk of overreliance. Allowance for sampling risk is calculated by using the following formula:

Allowance for sampling risk = Upper limit rate of deviation  Sample rate of deviation

a.

Determine the sample rate of deviation.

Sample deviation rate=Number of deviationSample size×100=8100×100=8%

Determine ULRD by using AICPA sample evaluation tables.

According to the AICPA sample evaluation tables, the ULRD for 8 deviations of 100 sample size at 5% risk of overreliance is 14%.

Determine allowance for sampling risk.

Allowance for sampling risk = Upper limit rate of deviation  Sample rate of deviation=14% 8%=6%

Hence, the sample rate of deviation, upper limit rate of deviation and allowance for sampling risk is 8%, 14% and 6% respectively.

b.

Determine the sample rate of deviation.

Sample deviation rate=Number of deviationSample size×100=4100×100=4%

Determine ULRD by using AICPA sample evaluation tables.

According to the AICPA sample evaluation tables, the ULRD for 4 deviations of 100 sample size at 5% risk of overreliance is 9%.

Determine allowance for sampling risk.

Allowance for sampling risk = Upper limit rate of deviation  Sample rate of deviation=9% 4%=5%

Hence, the sample rate of deviation, upper limit rate of deviation and allowance for sampling risk is 4%, 9% and 5% respectively.

c.

Determine the sample rate of deviation.

Sample deviation rate=Number of deviationSample size×100=8100×100=8%

Determine ULRD by using AICPA sample evaluation tables.

According to the AICPA sample evaluation tables, the ULRD for 8 deviations of 100 sample size at 10% risk of overreliance is 12.7%.

Determine allowance for sampling risk.

Allowance for sampling risk = Upper limit rate of deviation  Sample rate of deviation=12.7% 8%=4.7%

Hence, the sample rate of deviation, upper limit rate of deviation and allowance for sampling risk is 8%, 12.7% and 4.7% respectively.

To determine

Write the comments for the relationship of each factor to the ULRD.

Expert Solution
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Explanation of Solution

The difference of ULRD in (a) and (b) is due to decrease in number of deviation from 8 (in a) to 4 (in b). Here, the decrease in ULRD from 14% to 9% indicates that the number of deviations and sample rate of deviation is directly proportional to ULRD.

The difference of ULRD in (a) and (c) is due to increase in the risk of overreliance from 5% (in a) to 10% (in c). Here, the decrease in ULRD from 14% to 12.7% indicates that the risk of overreliance is inversely proportional to ULRD.

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Chapter F Solutions

Auditing & Assurance Services (Auditing and Assurance Services)

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