Question

The use of statistical sampling techniques in an audit of financial statements does not eliminate judgmental decisions. Required:

Identify and explain four areas in which judgment may be exercised by CPAs in planning a statistical test of controls.

Assume that the auditors' sample shows an unacceptable deviation rate. Discuss the various actions that they may take based upon this finding.

A nonstratified sample of 80 accounts payable vouchers is to be selected from a population of 3,200. The vouchers are numbered consecutively from 1 to 3,200 and are listed, 40 to a page, in the voucher register. Describe four different techniques for selecting a random sample of vouchers for inspection.

Answer 1

Identify and explain four areas in which judgment may be exercised by CPAs in planning a statistical test of controls.

When comparing non statistical with statistical less judgment will be used in statistical test. Judgment may be used in

1. Selection of sample size and method
2. Evaluation process of sampling
3. how many members and details of members are working on the case
4. Whether the controls are exists, if so they are working in accordance with the principles of GAAP.

For drawing a random sample, determine the appropriate statistical selection technique. The auditor must aware and recognize the merits and demerits of stratified, un stratified and systematic selection and also determine which sample is more economical.

Maximum tolerable rate of deviation required to be established, that requires judgment decisions on materiality, cost, time and the planned level of control risk.

Interpretation of sample results to check whether the results are supporting the auditor assessed level of control risk or any other samplings are required to reach conclusion.

Identification of critical errors or unacceptable deviation rates.

Identify and determine those circumstances under which statistical sampling are appropriate.

Assume that the auditors' sample shows an unacceptable deviation rate. Discuss the various actions that they may take based upon this finding.

1. Sample size should be increased to increase the precision of auditors’ estimate.
2. Auditors may expand their examination to those type of transactions that leads to deviation
3. Auditors should increase the assessed level of control risk and also increase the intensity of substantial procedures.

A non stratified sample of 80 accounts payable vouchers is to be selected from a population of 3,200. The vouchers are numbered consecutively from 1 to 3,200 and are listed, 40 to a page, in the voucher register. Describe four different techniques for selecting a random sample of vouchers for inspection.

Random sample:

An unbiased surveying technique, that is used to drawn of size of sample from the population in such a manner that every item in the sample will get equal chance to get selected. Items may be randomly selected by (1) use of random numbers (2) Random number generator: An audit software will be used to generate a list of 80 random numbers.

Systematic sample:

Systematic sample is type of probability method in which items from the population will be selected according to random sample point and a fixed periodic interval. Items may select by using (1) one random starting point (2) several random starting points.

One random starting point: if the 40^th voucher selected initially, every 40 the voucher will be selected from there on

Several random starting points: by using two random starting points select 40 vouchers of the 80 vouchers from each of the two sequences