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MCQ Quickie (AUD): An auditor desired to test credit approval on 10,000 sales invoices processed...

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:

a. 5.5%
b. 4.5%
c. 3.5%
d. 1%

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Tags: AUD, MCQ Quickies (AUD)

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Replies to This Discussion

Explanation:

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%

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