TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES

College of Business Education

363 Pascual Casal St, Quiapo, Manila

Module 5: Discussion

Requirements:

1. Explain why higher expected rate of deviation in population leads to larger

sample size.

The expected rate of deviation in population is directly related to sample

size; thus, it must be lower than the tolerable rate if the control is relied upon. In
the sense that when an auditor expects more errors, the larger sample size it
would need to make a reasonable estimate of the actual rate of deviation. If fewer
errors are expected, the smaller sample size it needs. If the expected rate of
deviation in the population is larger—in other words, there is an expectation that
the control may not work effectively—the auditor needs more evidence—and
therefore a larger sample size—to support a conclusion that the control functions
effectively. This consideration is based on the auditor’s understanding of the
business changes in personnel or internal control. In most cases, high expected
control deviation rates result in little, if any, reduction in the assessed risk of
material misstatement.

2. Explain why higher acceptable rate of deviation for planned reliance on internal
control leads to smaller sample size.

The tolerable rate of deviation is defined as the maximum deviation rate

from a prescribed control that the auditor believes can occur in the sample and
still permit a conclusion that the control is functioning effectively in the
population. You would accept a deviation rate without changing your reliance on
the control; the expected rate is the auditor's best estimate. For example, if the
auditor is willing to accept a larger risk of making an incorrect acceptance error
based on professional judgment, the sample size needed to provide the auditor
with sufficient evidence becomes smaller. If the auditor is willing to accept a

Arroyo, Venice Marie C. PROF. MA. CARLOTA ARIZALA 1

ACTCY22S1-B20 ACCTG 023- Auditing and Assurance Principles
 TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES
College of Business Education
363 Pascual Casal St, Quiapo, Manila

larger tolerable deviation rate, the sample size needed becomes smaller.
The logic behind the inverse relationship between the tolerable rate of deviation
and the sample size is that more audit evidence (i.e., a larger sample size) is
needed to support an assumption that controls fail "rarely" rather than "very
frequently."

3. Differentiate beta risk from alpha risk, and their effect on the auditor's report.

The risk of sampling occurs when the test sample does not genuinely
reflect a population. The auditor's assessment would also be incorrect. There are
two types of errors in evaluation or sampling risk: alpha and beta risk.

The possibility of alpha arose when the auditor was skeptical and concluded that
internal control is not dependable when it is, actually or that there is material
misstatement (in case of the substantive test) when in fact, there isn't. Alpha risk
affects the efficiency of the audit because the auditor will perform procedures
more than what is necessary. It is called the risk of under reliance during internal
regulation since it points out the cost of insufficiency. At the same time, it is the
risk of incorrect rejection in the substantive test (you reject the balance as
mistaken if it is not). 

 Beta risk is Alpha risk's counterpart. At beta harm, the auditor is positive and
finds that the internal control is accurate or that the account's balance is not
mistaken materially. The efficacy of the audit is affected. It is wrong in the
substantive test (you accept the account balance or transaction as not materially
misstated when in fact, it is). The auditor is concerned more with the BETA risk
than with the alpha risk, which greatly affects the audit performance. The auditor
must be in a position to detect the mistakes.

4. Differentiate variable sampling from attribute sampling.

Arroyo, Venice Marie C. PROF. MA. CARLOTA ARIZALA 2

ACTCY22S1-B20 ACCTG 023- Auditing and Assurance Principles
 TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES
College of Business Education
363 Pascual Casal St, Quiapo, Manila

The main difference between these two is their characteristics. In contrast,

attribute sampling measures qualitatively the presence or absence of internal
control procedures, while variable sampling primarily measures the quantitative
aspect used during substantive testing.

Attribute sampling means that the object being sampled would either
possess or lack certain qualities or attributes. The data are in the form of the
"attribute" and either comply or not comply with the results. It is frequently
employed to test whether the internal controls of a company are appropriately
followed or not. It would be difficult and extremely expensive to conduct a
meaningful audit without relying on controls. The procedure entails sampling
specific actions, such as paying an invoice for a specified sum and then
analyzing the process.

On the other hand, variable sampling is a technique for estimating the

value of a particular variable within a population. The information is in the
"variable" form, and the outcome is measured at an overall level that measures
the conformity degree. Thus, it is usually about checking "how much," "how
good," or "how bad." For example, is the mug color yellow or not? — it talks
about an attribute feature. How light the color yellow is? — it is about the variable
information.

5. Do you have any clarifications with our topic?

I don’t have any clarifications with our topic.

Arroyo, Venice Marie C. PROF. MA. CARLOTA ARIZALA 3

ACTCY22S1-B20 ACCTG 023- Auditing and Assurance Principles
 TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES
College of Business Education
363 Pascual Casal St, Quiapo, Manila

Honor Pledge for Graded Assignments

“I affirm that I have not given or received any unauthorized help on this assignment and
that this work is my own.”

Arroyo, Venice Marie C. PROF. MA. CARLOTA ARIZALA 4

ACTCY22S1-B20 ACCTG 023- Auditing and Assurance Principles