Question

Question 7 Many populations which auditors audit are skewed. There is a large number of smaller transactions, but the number of larger transactions tails off, making the population look like an F distribution. Required: a. Is it appropriate to perform statistical sampling from such a population? b. Why is it appropriate, or why it is not appropriate, to perform statistical sampling from such a population? c. If the auditor uses parametric statistics (based on a normal distribution), will those statistics be well specified (that is, will they be accurate)? Provide evidence for your answer; an unsupported answer is worthless

Answer 1

Its is appropriate to use statistical sampling by the auditor , where the large transaction of a firm are of smaller amount, and larger amount transactions tails off.

As

Statistical sampling

Sampling means testing less than 100% of the items in the population for some characteristic and then drawing a conclusion about that characteristic for the entire population. Traditionally, auditors use ‘test check’ (or judgmental sampling, non-statistical sampling) approach. This means checking a pre-determined proportion of the transactions on the basis of the auditor’s judgement. This sampling technique can be effective if properly designed. However, it does not have the ability to measure sampling risk and thus audit conclusions reached becomes rather difficult to defend.

For statistical sampling techniques, there is a measurable relationship between the size of the sample and the degree of risk. Statistical sampling procedure uses the laws of probability and provides a measurable degree of sampling risk. Accepting this level of risk, (or conversely at a definite assurance level) the auditor can state his conclusions for the entire population. In sum, statistical sampling provides greater objectivity in the sample selection and in the audit conclusion.

The basic hypotheses of statistical sampling theory are:

1. The population is a homogeneous group.

There is no bias in the selection of items of the sample. All items of the population have equal chance of being selected in the sample.

Parametric statistics is a branch of statistics which assumes that sample data comes from a population that follows a probability distribution on a fixed set of parameters.

Here the auditor can use for stock verification and where the assets valuations cannot be done appropriatly and for budgeting of future sales Parametric statistics can be used.