Question

Question 3 (5 + 5 + 4 = 14 Marks)
a. Match FIVE of the 11 audit sampling terms (1-11) with the five definitions
provided below in items (i-v):
1. attributes sampling
2. block sample selection
3. haphazard sample selection
4. non-statistical sampling
5. probability proportional to size
6. random selection
7. representative sample
8. sampling distribution
9. statistical sampling
10. stratified sampling
11. systematic sample selection
i the use of mathematical measurement techniques to calculate formal
statistical results and quantify sampling risk.
ii a statistical, probabilistic method of sample evaluation that results in an
estimate of the proportion of items in a population containing a characteristic
of interest.
iii a non-probabilistic method of sample selection in which items are chosen
without regard to their size, source, or other distinguishing characteristics.
iv a method of sampling in which all the elements in the total population are
divided into two or more subpopulations that are independently tested and
statistically measured.
v a sample in which every possible combination of items in the population has
an equal chance of constituting the sample.
Required:
State the above individual definition (i to v) is defined as which audit sampling item?

Suggested Answer for part a:
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b. Describe the audit risk model and the interrelationships of its components. Which
components of the audit risk model can be controlled by the auditor?
Suggested Answer for part b:
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BUACC5935 Auditing and Assurance Services Semester 2 2020

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c. Outline the difference between tests of control and substantive tests and give an
example of a substantive test.

Answer 1

a)
1) the use of mathematical measurement techniques to calculate formal
statistical results and quantify sampling risk - statistical sampling

2) a statistical, probabilistic method of sample evaluation that results in an
estimate of the proportion of items in a population containing a characteristic
of interest - attributes sampling
3) a non-probabilistic method of sample selection in which items are chosen
without regard to their size, source, or other distinguishing characteristics-  non-statistical sampling
4) a method of sampling in which all the elements in the total population are
divided into two or more subpopulations that are independently tested and
statistically measured - stratified sampling
5) a sample in which every possible combination of items in the population has
an equal chance of constituting the sample - Random Selection
b)
The audit risk can be defined as the risk that the auditor will not discern errors or intentional miscalculations during the process of reviewing the financial statements of a company or an individual
Components of Audit Risk

1. Inherent Risk
   Inherent risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls
   

2. Control Risk
   Control risk is the risk that a material misstatement would not be prevented, detected or corrected by the accounting and internal control systems

3. Detection Risk
   Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements. An auditor must apply audit procedures to detect material misstatements in the financial statements, whether due to fraud or error.
   Relationships among the Audit Risk Components
   For a specified level of audit risk, there is an inverse relationship between the assessed levels of inherent and control risks for an assertion and the level of detection risk that the auditor can accept for that assertion
   c) Outline the difference between tests of control and substantive tests and give an
   example of a substantive test.

   Substantive testing or substantive procedure is the technique used by the auditor to obtain the audit evidence in order to support auditor opinion. Substantive testing is part of the substantive audit approach and it is performing at the execution stage of the audit.

   It is different to test of control. The number of samples in substantive testing is depending on many factors. For example, the audit approach that considered by the audit manager or partner whether they decided to use a systematic approach, a substantive audit approach or else.

   Normally, if the audit approach to be used is substantive, then the volume of samples to be reviewed is higher than a systematic approach.

   It is different from the control test. In control testing, auditor wants to assess the internal control that designed and implement by auditor especially the internal control over financial reporting.