Question

In: Accounting

"The auditor's conclusions are based on samples." Do you think that the use of samples increases...

"The auditor's conclusions are based on samples." Do you think that the use of samples increases the risks of the auditor arriving at an incorrect conclusion?

Solutions

Expert Solution

" The Auditor's conclusions are based on samples"

Firstly Let us undersatnd the meaning of the term " Sampling". The Statement no. 39 of the Statement on Auditing Standards define Sampling as

"Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class."

Hence Sampling involves the application of audit procedures on some part of the population.

For eg: If an auditor wants to obtain reasonable assurance on the existence of fixed assets, he can decide to simply test check the sample of significant fixed assets available with the entity and not every fixed asset.

Factors such as the cost and time required to examine all of the data justify the need of sampling. Hence the statement is correct " The auditor's conclusions are based on samples.

Uncertainity and Audit Sampling:

The sampling increases the overall risk of material misstatements being overlooked by the auditor as there is a sampling risk involved whenever the auditor decides to form the basis of opinion based on sample

Sampling Risk refers to the risk that when a compliance or a substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions he would reach if the test were applied in the same way to all items in the account balance or class of transactions.

In performing substantive tests of details the auditor is concerned with two aspects of sampling risk:

a. The risk of incorrect acceptance is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated.

b. The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated.

The auditor is also concerned with two aspects of sampling risk in performing compliance tests of internal accounting control:

a. The risk of overreliance on internal accounting control is the risk that the sample supports the auditor's planned degree of reliance on the control when the true compliance rate does not justify such reliance.

b. The risk of underreliance on internal accounting control is the risk that the sample does not support the auditor's planned degree of reliance on the control when the true compliance rate supports such reliance.

The overalll risk of incorrect conclusions is the sum total of both the sampling and the non sampling risk

Arithmetically, we can say

Overall Risk = Sampling Risk + Non Sampling Risk

If the auditor applies the substantive and compliance procedures on the entire population, the sampling risk becomes zero and the overall risk of incorrect conclusions will be equal to only the non sampling risk.

Hence the use of sampling increases the risks of ausitor arriving at the incorrect conclusions.


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