Tolerable Deviation Rate (TDR)
Definition
The maximum rate of control deviations the auditor is willing to accept before concluding that a control cannot be relied upon. Setting TDR too high understates risk; setting it too low inflates sample size unnecessarily.
- Full name
- Tolerable deviation rate (TDR)
- Function
- Threshold for control reliance decision
- Set too high
- Understates risk
- Set too low
- Inflates sample size unnecessarily
- Context
- Sampling in fraud audits and internal control testing
Common questions
How is TDR different from the expected population deviation rate?+
TDR is the ceiling the auditor is willing to accept, decided in advance, while the expected population deviation rate is the auditor's estimate of what the actual error rate probably is before testing. The gap between the two drives how large the sample needs to be.
Why does setting TDR too low waste audit effort in a fraud investigation?+
A very low tolerable rate demands tight statistical precision, which mathematically requires testing many more sample items to achieve, consuming audit hours on a control that may not carry proportionate fraud risk.
Can TDR differ between controls in the same audit?+
Yes, auditors typically set a lower TDR for controls tied to higher fraud or misstatement risk, such as those over cash disbursements, and a higher TDR for lower-risk controls, reflecting how much reliance each control needs to support.
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