[Peter]

Hello! Can someone please explain to me why this is the answer to this question? Becker’s explanation just isn’t doing it for me. It seemed to me when reading the answer that a deviation from a control activity would mean either a higher rate of misstatements or an equal rate of misstatements than had the control activity been properly followed. Or, I can imagine it would be a lower rate if the control was extremely bad, and messing up the proper procedure more than it would without the control. But “ordinarily” expected to be lower? Am I misreading something?

Which of the following statements is correct concerning statistical sampling in tests of controls?

b.Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

Choice “b” is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate.

AUD - 92
BEC - 87
FAR - NINJA in Training
REG - 90

FAR exam hopefully by mid February 2018!

[Kaygmail]

I believe that was a tricky question, I marked it to review too. I found the source on Becker textbook on A5-8, the paragraph under Tolerable Deviation Rate.
Here is what I think:
We have basically two deviations to consider: Deviation # 1 in a given population, and deviation # 2 in the auditor's selected sample.
For instance, we want to confirm whether invoices are always stamped “paid”, and are always voided in a I/C environment of a client.
As we are selecting the sample, we want to make sure that the deviation # 2 (in my sample) is not greater than the tolerable rate (By the way, It is still us the auditors who would set the tolerable rate based on how we see the I/C operating, and based on prior audits etc, basically judgement!) At the same we want to be objective enough as not to base our assessment of the I/C just on judgment, but rather also on some statistical “unbiased” sampling.
So again we want to make sure that deviation in my sample is less than tolerable rate (Let set the tolerable rate @ 6%. Two things will happen:
1. my sample will deviate @ 2%, but that will still be under 6% (the maximum rate I can tolerate)
2. My sample will deviate @ 8% and that will be greater than 6%.
Option 1 is good. Option 2 is no good!
Now in option 1, my sample did not deviate more than 6%, so I can conclude that my invoices are generally voided except for some of them (the 2%).
At this level, I am also going to conclude (based on my sample) that my invoices did not deviate much in the big population too (deviation #1), and that the client internal control is not that bad!

“So while deviations (they mean deviation # 1 in the big population) from pertinent controls (they mean important control of voiding invoices when paid) increase the risk of material misstatement (They mean that we can still assume that some invoices were not voided in reality) , such deviations (deviation #2 in the sample) do not necessarily result in misstatements (They mean such deviation #2 do not result in misstatement in my sample as the deviation is still 2% and not greater than what I can tolerate @ 6%)”

I agree the question is so confusing and the wording in the textbook is even worse. Yet this is how I see it.

Hope this helps.

Thanks

AUD - 89
BEC - NINJA in Training
FAR - 77
REG - 80

The CPA, you cannot live with it and you cannot live without it!

[NebCPA]

Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

You have two types of errors – control deviation/deficiencies and financial statement misstatements. Having a control deficiency does not mean there is a financial statement misstatement. Having a financial statement misstatement, generally means there is a control deficiency.

Example:

The company has a control where they do bank statement reconciliations. You sample two months, Jan and Feb, and find that a bank reconciliation was not performed for Feb. You have a control deviation and possibly a control failure. However, this does not mean that the cash financial statement caption is incorrect on the financial statements. You’ll send a confirmation to the bank and the bank will confirm cash is correct. The fact that the reconciliation was not performed, does not mean cash is incorrect on the financial statements.

In this situation, the deviation rate in the control (bank reconciliation) did not result in a misstatement. The take away from the statement is that control failures do not always result in financial statement misstatements. Controls are in place to prevent/detect/correct errors, but a lack of controls does not mean there are financial statement errors. Thus, deviations from control activities at a given rate, result in misstatements at a lower rate – ie, controls fail more often than financial misstatements occur.

[Author]

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