Audit testing procedures

Example: Tolerable level comparison: control testing

The actual level of exceptions (9%) exceeds the tolerable level (3%). This indicates the control procedure is not sufficiently reliable. Assuming the auditor considers that the tolerable level does not need revision, then as the estimated actual rate of deviation exceeds the tolerable rate, the auditor would normally extend the testing before deciding to scrap reliance on the control.

However, in this case, the auditor would need to extend the sample size by over 100 and find no further deviations in order for the estimated occurrence rate to drop to the tolerable level of 3%. Even if this outcome was considered possible, the extended procedures may not be cost effective [fn]. Assuming that further control testing would not be cost-effective, the auditor will decide not to rely on the control procedure and instead put greater reliance on the results of revised (for example, increased quantity of) substantive procedures.

The auditor then notifies management that the control is not effective (at least for audit purposes) and provides his/her reasoning. In addition, the auditor makes a note for next year's working papers that if reliance on this control is considered, then consideration should be given to stratifying the population into three strata rather than two, with control risks of high, moderate and low.

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