Exception Rate

This article covers meaning & overview of Exception Rate from operations perspective

Published by MBA Skool Team in Operations and Supply Chain Terms Last Updated: February 23, 2024Read time:

What is Exception Rate?

Exception rate is the maximum rate of compliance exceptions that is or can be tolerated by auditors. Program materiality is what defines tolerable exception rate for most types of compliance and its’ requirements.

Materiality is considered in relation to each major program. The quantitative thresholds used for audit finding and A-133 compliance audit. Generally threshold kept for audit finding is lower than Circular A-133 audit.

Professional judgment is paramount in determining major program materiality. The tolerable exception rate for a compliance sample testing nonmonetary compliance attributes as well as monetary compliance attributes is normally equal to or lowers than the level of materiality for expressing an opinion on the auditee’s compliance with requirements having a direct and material effect on each major program. The compliance testing sample size table is based on a 5 percent tolerable exception rate for both monetary and nonmonetary attributes. If program materiality is set lower than 5 percent, then the tolerable exception rate would be lowered, and the minimum sample sizes may also be needed to be adjusted upwards. The Sampling Audit Guide provides guidance and tables for auditors who desire to design audit samples for different exception rates.


This article has been researched & authored by the Business Concepts Team which comprises of MBA students, management professionals, and industry experts. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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