What is tolerable error in sampling?
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Show This course provides a continuation of the intensive conceptual and applied introduction to auditing in society begun in Auditing I: Conceptual Foundations of Auditing. It focuses on a conceptual framework that is applied by audit professionals to assess, evaluate, and manage audit risks and evidence. View Syllabus Reviews
SB Jul 8, 2020 Thank you Dr. Mark for this amazing, well tailored course of Audit practices. I really enjoyed it and got a lot of information in the audit procedures. DM Feb 15, 2021 A good learning experience for individuals interest in professional development as a practicing auditor. From the lesson Module 5: Verification of Management Assertions I: Attribute Sampling In this module, you will be introduced to the concept of sampling. We will cover non-statistical and statistical sampling, but we will emphasize a form of statistical sampling called attribute sampling. You will learn about sampling risk as well as about three important determinants of sample size: risk of incorrect acceptance, tolerable error, and expected error. You will learn that population size actually has a small effect on sample size, contrary to lay theories the position population size as one of the most important determinants of needed sample sizes. You will also learn about key steps involved in planning and performing attribute sampling, the critical role of professional judgement during many of these steps, and you will learn about some specific audit procedures for verifying management’s assertions related to their controls. Taught By
Expected error rate is the likelihood that there is an error in the population. As an auditor, you would make this judgement based on prior year audits, walkthrough procedures performed, or any other assessments that may indicate whether there is a low or high chance of an error in a population. Expected error rate has a direct relationship with sample size. That means that if the expected error rate is high, then the auditor should increase the sample size. If the expected error rate is low, then the auditor should decrease the sample size. What is an example of relationship between sample size and expected error rate? Imagine yourself in Sonoma California, and you are the owner of a small little winery. The winery is expected to bottle at least 100 pinot noirs this year. As the winemaker, you must sample the wine and make sure that it is drinkable and that it has not gone bad, right? The winemaker must decide how many bottles of wine to sample to feel comfortable that customers will not end up with a bad bottle of wine. If the winemaker has a LOW reason to believe that the wine would be bad, they would have a LOW expected error rate. In that case, they would likely test a LOWER amount. If the winemaker has a HIGH reason to believe that the wine could be bad, then they would have a HIGH expected error rate. In that situation, the winemaker would test a HIGHER amount. At the end of the day, the winemaker must make a judgement call on how many bottles of wine to test before concluding that the wine can be sold to customers and they will not end up with a bad bottle of wine! What does tolerable error mean?Tolerable error is the maximum error in the population that auditors are willing to. accept and still conclude that the audit objective has been achieved. Tolerable error is considered during the planning stage and, for substantive procedures, is related to the auditors' judgment about materiality.
How is tolerable error calculated?D = Tolerable error (0.05) N = (1.96)2 X 0.028 X (I – 0.28) (0.05)2 = 3.8416 X 0,028 X 0.972 0.0025 = 41.82 The calculated minimum sample size is 42.
Why is tolerable error important?Tolerable error is the maximum error the auditor is willing to accept in a population. Tolerable error is an idea that allows the auditor to put on planning materiality at the level of the individual account balance. The idea is used to: Determine the significance of accounts.
Is tolerable error the same as performance materiality?Tolerable misstatement is the application of performance materiality to a particular audit sampling procedure and may be the same amount or an amount smaller than performance materiality.
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