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Assessing Control Risk and Upper Deviation

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6.Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%?
A)The auditor is willing to live with a deviation rate of 7% before deciding not to rely on the control.
B)There is a 5% chance that the deviation rate in the population is less than 7%.
C)There is a 5% chance that the deviation rate in the population exceeds 7%.
D)There is a 95% chance that the deviation rate in the population equals 7%.

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C.

Tolerable rate. The maximum population deviation rate the auditor is willing to accept without altering the planned assessed level of control risk. For example, a low (3-7%) rate might be used if substantial reliance on the control is planned. The tolerable rate is inversely related to sample size.

Risk of assessing control risk too low (RACRTL). The maximum risk the auditor is willing to accept of incorrectly concluding that the population deviation rate is less than or equal to the ...

Solution Summary

This solution identifies the correct answer and justifies why by defining and explaining the concepts of tolerable rate, risk of assessing control risk too low, and expected population deviation rate. References used are included.

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Auditing Practice Exam Questions: Audit Risk; audit reports; sampling

1. Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the auditors' substantive procedures.
a. True
b. False
c. True if control risk is set a maximum
d. False because you don't know the inherent risk level

2. What is the audit risk model?
Audit risk: AR
Control risk: CR
Inherent risk: IR
Detection risk: DR
Risk of material misstatement: ROMM

a. AR = CR x IR x DR
b. DR = CR x IR x AR
c. ROMM = CR x IR x DR
d. AR = ROMM x CR x IR x DR

3. An unqualified opinion indicates that the financial statements present the entity's financial condition, results of operations, and cash flows in conformity with GAAP.
a. True
b. False

4. For the copy of the purchase order that goes to the receiving department, it is best to:
a. leave off the description of the goods
b. leave off the quantity of the goods ordered
c. leave off the name of the vendor
d. provide duplicates, one to keep and one to forward to accounting

5. The auditors' report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.
a. True
b. False

6. Which of the following types of auditors' reports requires an explanatory paragraph to support the opinion?
a. adverse opinion
b. qualified opinion
c. disclaimer of opinion
d. all of the above

7. Statistical sampling plans ensure that samples are selected randomly from the population by removing auditor judgment from the sampling process.
a. True
b. False, you can never remove judgment completely as results are always interpreted
c. False, statistical sampling only permits a computation of sampling risk
d. False, there is no way to ensure random sampling

8. The risks of incorrect acceptance in variables sampling and of assessing control risk too low in attributes sampling both relate to
a. effectiveness of an audit
b. efficiency of an audit
c. assessment of control risk during planning phase
d. amount of substantive testing needed

9. The audit team will choose to reduce the reliance on controls if the ________ is greater than the ________.
a. tolerable rate of deviation; upper limit rate of deviation
b. upper limit rate of deviation; tolerable rate of deviation
c. expected rate of deviation; tolerable rate of deviation
d. tolerable rate of deviation; expected rate of deviation

10. Which of these is characteristic of the sampling process?
a. sampling identifies what belongs in the population
b. sampling requires judgments on the part of the auditor
c. sampling is normally more effective than looking at all the items in the population
d. sampling is not influenced by the definition of the population

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