Lesson: Determining Allowance for Sampling Risk

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo explains the concept of allowance for sampling risk, which is the maximum amount of error acceptable when using a sample to make generalizations about a population. The lesson provides an example where an auditor validates the authorization for 15,000 sales invoices, with a sample of 300 invoices analyzed. By calculating the difference between the upper deviation rate (given in the example) and the sample deviation rate (based on the sample problems), Nick illustrates how to determine the allowance for sampling risk. This concept is essential for auditors when determining the accuracy of their audit testing on transactions and account balances.

Updated: June 22, 2023 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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I'll move on. I know you all love examples. I've heard it from many users giving feedback, you love examples, so here's another example. And with this example, we're going to determine the allowance for sampling risk. What is that? We'll talk about what it is, we'll talk about all these different components. Let's see. Well, the allowance for sampling risk is the maximum amount of error that is acceptable when using a sample to make generalizations about a population. That's the amount that you can be wrong. The whole point of using a sample is to get a generalization about the population. It's to understand the attributes of the population without having to test the whole population. And the allowance for sampling risk is the maximum amount of error in that. The maximum amount you can get that wrong. It's also referred to as the allowance for sampling variability. Sounds a lot nicer. It sounds like a cleaner, easier, and less threatening way to say that. It's also used to determine the sample size that is necessary for accurate results. The allowance for sampling risk is an estimate of the potential for error due to sampling, and it's based on the desired level of confidence in the results. If you want a higher confidence, if you want more confidence in your results, you are going to have a lower allowance for sampling risk. It's going to be measured as a percentage, and it's used to determine the margin of error for a survey or experiment, and in this case, what is our survey or experiment? This is going to be our audit testing on different transactions and account balances. Here's our nice formula. We get the allowance for sampling risk, and that's going to be made up of the

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