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An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%.
The allowance for sampling risk was:
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The allowance for sampling risk is 4.5%. It is the difference between the upper precision limit of 8% and the sample deviation rate of 3.5% (seven errors in a sample of 200 items).
The actual sample deviations must be considered in the calculation of the allowance for sampling risk. The actual sample deviations were 7 invoices out of 200. The percentage of deviations is subtracted from the upper precision limit to arrive at the allowance for sampling risk.
Upper precision limit 8.0%
Sample deviation rate (7 / 200) less 3.5%
Allowance for sampling risk = 4.5%
The answer is B 4.5%