Tolerable level of exceptions

The tolerable level of exceptions is a significant factor in forming a conclusion about the population. It is equivalent to the level of exceptions acceptable to the auditor. The sample size (n) is also affected by the relative difference between the tolerable level of exceptions and the expected level of exceptions. Given an expected level of exceptions, then the greater the tolerable level of exceptions, the smaller the sample size. The auditor therefore bears this relationship in mind when deciding on the sample size.

Control testing. In control testing, the tolerable level of exceptions is expressed as a percentage of the total number of units in the population, and may be referred to as either the tolerable occurrence rate or the tolerable deviation rate. This is the level of control deviations that is acceptable to the auditor. In other words, the tolerable level of control deviations is the maximum level of control deviations that the auditor considers could exist, whilst still planning (total or partial) reliance on the control procedure. As not all control deviations will result in a misstatement, the tolerable level could be, say, 5% or even 20% depending on the nature of the control procedure.

Substantive testing. In substantive testing, the tolerable level of exceptions is expressed either as a monetary amount or a percentage of the total value of the population and may be referred to as the tolerable level of misstatement. This is the same as the level of planning materiality for the particular class of transaction or account balance.

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