Tests of Controls - Substantive Testing Payroll(Argent)

The lead auditor has assessed the internal controls at their retail client as being effective, and the auditor intended to rely on the operative effectiveness of the internal controls around payroll in determining the nature, timing, and extent of substantive procedures. There is no evidence of fraud.

The control activities include controls that ensure that part-time staff are paid at the correct rate. The results of testing the relevant control are: sample size 40; tolerable deviation rate 5 percent; exceptions noted: one instance of part-time staff paid an incorrect hourly rate.

Required

a) (3 marks) What is a tolerable deviation rate?

b) (5 mark) Explain why the exception is evidence that the control did not work effectively in this case.

c) (7 marks) Explain in general terms what impact the control test results would have on the nature, timing, and extent of substantive testing.

Thank you for your time in advance :)