Tolerable Misstatement in Sampling

Lesson: Tolerable Misstatement in Sampling

This lesson delves into the concept of tolerable misstatement in sampling and its significance in auditing. It explores how the tolerable misstatement is used to quantify an acceptable level of error in a population, and its relation to audit risk, detection risk, control risk, and inherent risk. The lesson also explains the factors that an auditor considers in determining a tolerable misstatement appropriate for the population. Additionally, the connection between the tolerable misstatement and sample size is discussed, highlighting the inverse relationship between the two. Finally, the lesson touches upon the importance of considering an acceptable rate of deviation for attribute sampling and variable sampling in the context of tolerable misstatement.

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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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This concept of tolerable misstatement, we see this what's the tolerable level of detection risk, see that in audit risk. We have this concept of the tolerable misstatement. So what can you tolerate? What amount of misstatement in your sampling will you allow? You could say, what's the allowable level? That's another way to say it. The tolerable misstatement, it's a concept to quantify an acceptable level of error in a population. You could say, what's the acceptable level of audit risk? What's the acceptable level of detection risk, control risk, inherent risk? This can apply to so many things throughout the audit, but here we're talking about it in regard to sampling. It's the maximum amount of misstatement that the auditor is willing to accept without making an adjustment to the financial statements, as into the concept of materiality as well, if you think about it. The auditor has to use professional judgment, one do not have to use professional judgment, right? To determine a tolerable misstatement that's appropriate for the population. And this concept, it's based on the auditor's understanding of the risk of material misstatement, ding, ding, ding. As a check, what is the risk of material misstatement? That is going to be our inherent risk and control risk. The population and their assessment of the risk of not detecting material misstatement. Well, doesn't this sound like the audit risk formula? The risk of material misstatement is inherent in control risk. And then the assessment of the risk of not detecting material misstatement, that is gonna be detection risk, bringing it all together to our audit risk formula. Gosh, don't you just love, it's like poetry, it rhymes. It is also based on the auditor's assessment of the expected misstatement of the population and the auditor's assessment

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