Tolerable deviation rate definition
/The tolerable deviation rate is the largest percentage variance experienced in audit sampling that an auditor will accept in order to rely upon a specific control. If the deviation rate is higher than this threshold value, then the auditor cannot rely upon the control. Thus, it is the largest failure rate that an auditor will allow for a control procedure, while still concluding that the control is operating effectively.
Characteristics of the Tolerable Deviation Rate
The key characteristics of the tolerable deviation rate are as follows:
Determined by audit risk. The tolerable deviation rate is set based on the auditor's assessment of the risk associated with a control's failure.
Inverse relationship with sample size. A lower tolerable deviation rate requires a larger sample size to ensure sufficient assurance.
Impact on control effectiveness. If the actual deviation rate exceeds the tolerable rate, the auditor may conclude that the control is ineffective and may require substantive testing.
Based on materiality considerations. The tolerable deviation rate reflects how much control failure the auditor can tolerate before it materially impacts financial statements or operational integrity.
Higher for less critical controls. Controls with less impact on financial reporting or operations may have a higher tolerable deviation rate, while key controls require a stricter threshold.
Used in attribute sampling. Tolerable deviation rate is often applied in attribute sampling, where the auditor tests whether a control is functioning as intended.
In summary, the tolerable deviation rate represents the auditor's threshold for acceptable errors in a control process, influencing audit planning, sample size, and conclusions about internal control effectiveness.