Definition of Expected Deviations Rate
The Expected Deviations Rate is a measure used in auditing to estimate the frequency or extent of deviations (non-compliance) from established control procedures within a population or sample of a population. Auditors use this rate to assess the efficacy of internal controls and to determine the appropriate sample size for compliance testing. It helps in evaluating whether the existing control systems are working effectively to reduce risks of errors and fraud.
Examples
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Audit of Inventory Controls: An auditor reviews a sample of inventory transactions and expects an expected deviations rate of 5%, meaning that the auditor anticipates finding non-compliance in 5% of the inventory transactions.
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Payroll Audit: While auditing the payroll system, an auditor predicts that 2% of payroll entries will not comply with the company’s control procedures, thus setting the expected deviations rate at 2%.
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Expense Report Audit: For auditing employee expense reports, an auditor might expect an expected deviations rate of 3%. This expects that out of 100 reports, 3 will likely show deviations from the control standards in place.
Frequently Asked Questions
What is the role of the Expected Deviations Rate in auditing?
The Expected Deviations Rate helps auditors determine the effectiveness of control procedures and influences the sample size needed for compliance testing. If high deviation rates are expected, a larger sample might be needed to get reliable audit results.
How is the Expected Deviations Rate determined?
It is typically based on historical data, previous audit results, industry standards, and the auditor’s professional judgment and experience with similar audits.
Why is the Expected Deviations Rate important?
Expected Deviations Rate is crucial as it helps in planning the audit procedure, especially in deciding sample sizes. Proper estimation ensures that audits are efficient and effective, providing reliable assurance about the control environment.
What happens if the actual deviation rate exceeds the expected deviations rate?
If the actual deviation rate is higher than expected, it may indicate potential weaknesses in internal controls, necessitating deeper investigation, larger sample sizes, or even a revision of audit plans or controls.
Can Expected Deviations Rate be zero?
While it is theoretically possible, expecting zero deviations is unrealistic in most practical scenarios. Auditors typically assume some level of deviations for planning purposes.
Related Terms with Definitions
- Compliance Test: Audit tests designed to ensure that control procedures are being followed correctly.
- Sample: A subset of items selected from a larger population, used to estimate characteristics of the whole population.
- Control Procedures: The policies and procedures established to ensure the orderly and efficient conduct of business.
- Deviation: An instance of non-compliance or failure to follow established control procedures.
Online References
Suggested Books for Further Studies
- “Principles of Auditing & Other Assurance Services” by O. Ray Whittington and Kurt Pany
- “Audit and Assurance Essentials: For Professional Accountancy Exams” by Katharine Bagshaw
- “Internal Auditing: Assurance and Advisory Services” by Urton Anderson, Michael Head, and Sri Ramamoorti
Accounting Basics: “Expected Deviations Rate” Fundamentals Quiz
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