Question

1. Explain sampling risk and non-sampling risk?

2. Why we need to obtain an understanding of the internal control?

3. Identify the types of audit evidence that are tested using audit sampling techniques?

Answer 1

Sampling risk: In general the auditor may not perform 100% examination of clients books of aaccounts whether due to constraints in time or cost. Then auditor performs the audit based on the selected sample. Therefore there exists a risk that the conclusion drawn by the auditor based on the sample may be different from that of the conclusion he could have drawn when the accounts has been audited. The risk that auditor could draw wrong conclusions is called sampling risk.

Non sampling risk: It is due to incorrect examination of books of accounts by the auditor, it is failure of auditor to catch mistake or a misstatement in books of accounts.Therefore non sampling risk is the risk that auditor is not able to identify the mistake or misstatement that exists in books of accounts.

2. Need to obtain an understanding of internal control :

a. provide a basis for deciding whether to test the operating effectiveness of a control so that it can be relied upon when determining the nature, timing and extent of substantive procedures

b. aid in designing effective substantive procedures

c. act as the first test of transactions in a sample

d. obtain useful information regarding entity-level controls

3. Audit evidences that are tested using audit sampling techniques:

a. random selection.

b.systematic selection.

c. monetary unit sampling.

d. haphazard selection, and.

e. block selection