Definition
Expected Error refers to the extent of errors that an auditor anticipates discovering when conducting substantive tests on an entire population or on a sample from that population during an audit. This expectation helps in planning the nature, timing, and extent of audit procedures and can impact the overall assessment of audit risk.
Examples
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Inventory Counts: An auditor might anticipate a specific percentage of errors in the physical count of inventory, based on past audits or the complexity of the inventory system.
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Accounts Receivable: If an auditor expects errors in the recording of accounts receivable, they may choose to examine a larger sample of receivable transactions to determine the extent of misstatements.
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Payroll Calculations: In audits where payroll calculations are complex, the auditor might expect certain errors due to manual entry, miscommunication, or software errors, and therefore plan substantive tests accordingly.
Frequently Asked Questions (FAQs)
Q1: Why is expected error important in auditing?
A1: Expected error helps auditors in planning their substantive tests by estimating how likely they are to find errors and thereby helps in managing and mitigating audit risk.
Q2: How does expected error affect the size of the audit sample?
A2: Higher expected errors typically require larger sample sizes to ensure that the tests are sufficiently rigorous to detect deviations, whereas lower expected errors might justify smaller sample sizes.
Q3: What is the relationship between expected error and tolerable error?
A3: Tolerable error is the maximum error in a population that auditors are willing to accept without altering their opinion, while expected error is the error level that auditors expect to find and informs the audit planning process.
Q4: Can expected error be zero?
A4: Although it is theoretically possible for expected error to be zero, it is rare. In practice, auditors usually expect some level of error due to inherent limitations in any process.
Q5: How do prior audits influence expected error?
A5: Results from prior audits can provide insights into expected errors, helping in shaping realistic expectations and refining audit plans for future engagements.
Related Terms
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Substantive Tests: Tests performed by auditors to detect material misstatements in financial statements.
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Tolerable Error: The maximum error in a population that auditors are willing to accept and still conclude that the audit objectives have been met.
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Audit Risk: The risk that auditors might give an inappropriate opinion on financial statements.
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Sampling Risk: The risk that the sample chosen does not accurately reflect the population as a whole.
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Detection Risk: The risk that auditors’ procedures will not detect a material misstatement.
Online References
- American Institute of CPAs (AICPA) - Auditing Standards
- PCAOB Standards
- IFAC - International Auditing and Assurance Standards Board
Suggested Books for Further Study
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“Auditing and Assurance Services” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley - This book provides comprehensive coverage of contemporary auditing practices and theories.
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“Principles of Auditing & Other Assurance Services” by Ray Whittington - An essential resource for understanding the principles and practices in the field of auditing.
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“Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Karla M. Johnstone, Audrey A. Gramling, and Larry E. Rittenberg - Focuses on the practical implementation of risk-based auditing.
Accounting Basics: Expected Error Fundamentals Quiz
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