Tolerable Misstatement vs Expected Misstatement: Which One Is the Limit?
Tolerable misstatement is the maximum the auditor can accept. Expected misstatement is what the auditor thinks is likely already in the population.
Tolerable misstatement
The auditor sets a maximum monetary misstatement that can exist in the population without causing the audit objective to fail.
Expected misstatement
The auditor estimates how much misstatement is likely to exist before selecting or evaluating the sample.
Sample-size effect
If expected misstatement rises closer to the tolerable limit, the auditor generally needs more evidence and therefore a larger sample.
Evaluation
Projected misstatement from the sample is compared with the auditor's tolerable threshold and other audit evidence.
The takeaway
Higher expected misstatement generally pushes sample size up, while higher tolerable misstatement can allow sample size to fall, all else equal.
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FAQ
Is tolerable misstatement the amount the auditor expects to find?
No.
Does higher expected misstatement usually increase sample size?
Yes.
Can higher tolerable misstatement reduce sample size?
Generally yes, all else equal.