Question

CPAs may decide to apply nonstatistical or statistical techniques to audit testing. List and explain the advantages of applying statistical sampling techniques to audit testing. a. List and discuss the decisions involving professional judgment that must be made by the CPAs in applying statistical sampling techniques to tests of controls.

b.You have applied attributes sampling to the client's pricing of the inventory and discovered from your sampling that the sample deviation rate exceeds your tolerable rate. Discuss the courses of action you take.

Answer 1

List of Advantage of Statistical sampling Techniques

1. To Sketch Conclusion about a population withoout testing all of the transactions or balance in the population as a whole.

2. To focus on high risk or high value items, and to distinguish between elements of population which may subject to differing internal controls.

CPAs have decision whether to use a statisical or non statisical sampling approach which is a matter for the professional jugdement. However, sample size is not a valid creterion to distinguish between statiscial and non statiscial approach.

Based on results of sample, auditor shall treat that items as a deviation from prescribed test of control or test of detail.

CPAs have to determine error in sample type of error are tolerable error - tolerable misstatement (monetary), tolerable rate of deviation (quatity) and unavoidable error. Based on evalution CPAs have recevied reasonable conclusion about the population that has been tested.

If CPA conclude that audit sampling has provided a reasonable basis for conclusion about population that has been tested, the auditor may:

a. Request management to investigate misstatement that have been identified and potential for further misstatement and to make neccessary adjustment.

b. Tailor nature, timing and extend of those further audit procedure to best acheive the require assurance. The auditor might extend audit procedure, conclude on that basis.