ACCA Advanced Audit and Assurance (AAA) Practice Exam

What defines the tolerable rate of deviation in an audit context?

1. A rate of deviation that auditors set to ensure assurance

2. A fixed percentage determined by the entity's management

3. The actual rate of deviation in the population

4. A measure of the effectiveness of internal controls

The correct answer is: A rate of deviation that auditors set to ensure assurance

The tolerable rate of deviation in an audit context is indeed defined as a rate that auditors set to ensure a reasonable level of assurance regarding the effectiveness of internal controls. This rate represents the maximum level of deviation from prescribed controls that an auditor is willing to accept before concluding that the control system is inadequate. When auditors plan their tests of controls, they consider how much deviation from the expected controls is acceptable without undermining the confidence in their conclusions about the reliability of those controls. If the rate of deviation exceeds this predetermined threshold, it could indicate that the internal controls are not operating effectively, which would prompt auditors to reconsider their audit strategy, possibly increasing their substantive testing. In contrast, the other choices do not capture the essence of the tolerable rate of deviation. A fixed percentage suggested by management does not consider the auditor’s risk assessment and is not established by the auditor based on their professional judgment. The actual rate of deviation describes existing conditions rather than a threshold established for acceptable variance. Lastly, while the tolerable rate may imply something about the effectiveness of internal controls, it is not a direct measure of effectiveness itself, but rather a guideline for auditors to evaluate the internal controls against.