Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

If an auditor's sample of 200 invoices shows 7 lacking approval, what is the allowance for the sampling risk given an upper deviation rate of 8%?

1. 3.5%

2. 4.5%

3. 1%

4. 5.5%

The correct answer is: 4.5%

To determine the allowance for sampling risk based on the information provided, it's important to understand how to calculate the upper deviation rate and its implications for the sampling risk. The auditor's sample of 200 invoices revealed 7 invoices that lacked approval. This results in a sample deviation rate of 7/200, which equates to 3.5%. However, when evaluating the population from which the sample was drawn, auditors must account for the possibility of errors not captured in the sample, hence the concept of an upper deviation rate is introduced. In this scenario, if the upper deviation rate is identified as 8%, this reflects the maximum expected deviation within the total population based on the sample examined. To establish the sampling risk, the auditor typically looks at how much allowance can be made for variability in the actual population. The upper deviation rate (8%) surpasses the actual observed deviation rate (3.5%), necessitating an allowance for the remaining risk that could arise from errors outside of the sample observed. Given this context, the allowance for sampling risk would be calculated as the difference between the upper deviation rate and the actual deviation rate: - Upper deviation rate: 8% - Actual deviation rate: 3.5% - Allowance for sampling