Jamie Plane is testing the effectiveness of an important control for Blackheart Inc. Plane is placing a high level of reliance on this control and has assessed a relatively low risk of overreliance (5 percent) and tolerable rate of deviation (6 percent). Based on the acceptable risk of overreliance, expected population deviation rate, and tolerable rate of deviation, Plane determined a sample size of 60 items. The tests of controls revealed three deviations.
a. Calculate the sample rate of deviation.
b. Using AICPA sample evaluation tables, calculate the upper limit rate of deviation and allowance for sampling risk.
c. Why does the upper limit rate of deviation differ from the sample rate of deviation?
d. What would Plane’s conclusion be with respect to the operating effectiveness of the control? What options are available at this time?
e. Ignoring the effects on sample size, how would Plane’s decision to accept a higher risk of overreliance (10 percent) affect the conclusions made with respect to the operating effectiveness of the control?