Nathan Matthews conducted a test of controls where the tolerable deviation rate was set at 6 percent and the expected population deviation rate was 3 percent. Using a sample size of 150, Matthews performed the planned test of controls. He found six deviations in the sample, and he calculated the computed upper deviation rate to be 7.8 percent.

Required:

a. Based on the sample results, what allowance for sampling risk is included in the computed upper deviation rate of 7.8?

b. Assume that Matthews preliminarily assessed control risk as “low.” Given the results above, the auditor could decide to do one of three things:

(1) Increase the sample size,

(2) Increase the preliminary assessment of control risk, or

(3) Not adjust the preliminary assessment of control risk. Describe how Matthews could justify each of those three actions.