Question

1.Which of the following accurately describes non-sampling risk? (Several choices may be correct.)

a.Risk the auditor misinterprets the evidence and draws the wrong conclusion.

b.Risk the auditor reaches an inappropriate conclusion when sampling.

c.Risk increases if the auditor’s sample is too small.

d.Risk is determined by the auditor’s expertise and experience.

e.Exists only when every item in a population is tested.

2. Bob Downe is auditing Red Gum Home Furniture (RGHF), a manufacturer and retailer of boutique home furniture. RGHF was founded 25 years ago by a husband and wife team and has grown rapidly in the last five years as solid, environmentally friendly, wooden furniture has grown in popularity. However, although RGHF’s owners have attempted to expand the administration department to keep pace with the growth in sales, some systems are not operating as effectively as they should. This is partly due to difficulty in attracting and retaining accounting staff with appropriate experience and skills.

RGHF’s owners have recently realized that they need to increase pay and improve conditions for the accounting staff to avoid having periods with unqualified staff, particularly for sales invoices processing. The staff shortages have resulted in slow performance in processing invoices, sending out customer statements, and collecting cash from account customers. In addition, there have been numerous mistakes in processing sales invoices, some of which have been discovered after customer complaints.

Bob is selecting a sample of sales invoices for substantive testing. All documents relating to sales invoices for the last five years are stored in boxes in the shed behind the office. The shed is very small and the boxes are stacked on top of each other because the shelves are full. Due to the damp conditions, some labels have peeled from the boxes, so it is not clear which boxes relate to the current year.

Which of the following apply to this audit?(several choices may be correct)

a.Bob needs to ensure he selects a sample of sales invoices from the entire year.

b.Bob should consider stratifying the sample to make sure that the sample includes time periods where staff conditions were different.

c.To gather evidence about existence of the accounting records, Bob would sample the invoices and then trace the details of the transactions to the sales journal.

d.Bob should consider the patterns in customer complaints—do they relate to specific periods or specific types of sales?

e.Controls appear weak, and therefore Bob should consider performing a substantive audit.

f.Even if Bob is planning a substantive audit, he should still select a small sample of controls to test when planning the audit.

g.There is no issue if Bob grabs the invoices closest to the door, as these most likely relate to the year under audit.

Answer 1

Solution 1

Non sampling risk is a risk that an auditor, due to lack of proper knowledge of any of the audit procedures, does not detect the potential misstatements or draws an inappropriate conclusion due to incorrect interpretation of audit evidence.

Therefore options a,b & d describes non sampling risk.

Option c is related to sampling risk as it involves risk associated with selection of a particular sample size.

Non sampling risk may also exist when a sample of population is tested.

Therefore answers are options a,b & d.

Solution 2

Option a) Bob has to select samples of sales invoices from the entire year so as to cover the entire period under audit.

Option b) Stratifying the samples to ensure that sample includes time periods where staff conditions were different would help the auditor to ensure that he had selected the areas with high risk of material misstatements.

Option c) The existence check is an appropriate step.

Option d) This step would help in identifying areas requiring high audit attention.

Option e) With inadequate number of qualified staff and inadequate control over documentation, the internal controls are considered to be weak or deficient. Therefore Bob should perform substantive procedures.

Option f) Even though Bob has planned to perform substantive testing, he has to test a small sample of controls in order to identify the weakness and give appropriate suggestions to reduce or mitigate the control deficiencies.

Option g is incorrect. Bob's action wouldn't be appropriate. He cannot make such assumptions especially when there is no proper documentation process or system in place. Also he cannot simply grab the client documents he finds as his responsibility as an auditor is to audit the books of accounts and other documents made available to him for the audit.

Therefore the answers are a,b,c,d,e & f.