Test Of Control -Sample Size

Question 1

Test of control

Answer 1

Let’s break down the factors influencing sample size for tests of controls, along with their effects on sample size, and provide practical examples to illustrate each point.

Explanation: When testing controls, the auditor determines a sample size that reduces sampling risk to an acceptable level. Sampling risk here is the risk that the auditor’s conclusion based on the sample differs from the conclusion they would reach if the entire population were tested.

1. Increase in Extent to Which Auditor’s Risk Assessment Takes into Account Relevant Controls
   
   • Effect: Increase in sample size.
   • Example: If the auditor places more reliance on the effectiveness of internal controls, they will need a larger sample to ensure these controls are operating effectively.
2. Increase in Tolerable Rate of Deviation
   
   • Effect: Decrease in sample size.
   • Example: If the auditor can tolerate a higher rate of control deviations (e.g., 5% instead of 3%), the sample size can be smaller.
3. Increase in Expected Rate of Deviation of the Population to Be Tested
   
   • Effect: Increase in sample size.
   • Example: If the auditor expects a higher rate of deviations (e.g., based on past audits), they will need a larger sample to accurately assess the control’s effectiveness.
4. Increase in Auditor’s Desired Level of Assurance That the Tolerable Rate of Deviation Is Not Exceeded by Actual Rate of Deviation in Population
   
   • Effect: Increase in sample size.
   • Example: If the auditor wants higher assurance that the actual deviation rate does not exceed the tolerable rate, they will need a larger sample.
5. Number of Sampling Units in Population
   
   • Effect: Negligible impact on sample size.
   • Example: The total number of transactions or controls in the population generally has a negligible effect on the sample size required.

Let’s consider an auditor testing the effectiveness of a company’s internal control over cash disbursements. The company processes 10,000 cash disbursements annually.

1. Extent of Risk Assessment: The auditor relies heavily on the internal control system.
   
   • Effect: Increase sample size.
   • Sample size: 100 transactions.
2. Tolerable Rate of Deviation: The auditor sets a tolerable deviation rate at 5%.
   
   • Effect: Decrease sample size.
   • Sample size: 80 transactions.
3. Expected Rate of Deviation: The auditor expects a 2% deviation rate based on past audits.
   
   • Effect: Increase sample size.
   • Sample size: 90 transactions.
4. Desired Level of Assurance: The auditor wants high assurance that the actual deviation rate does not exceed 5%.
   
   • Effect: Increase sample size.
   • Sample size: 110 transactions.
5. Number of Sampling Units: The population consists of 10,000 transactions.
   
   • Effect: Negligible impact.
   • Sample size: Remains 110 transactions.

By considering these factors, the auditor can determine an appropriate sample size to test the effectiveness of controls over cash disbursements.

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