Question

1. Audit sampling requires that the auditor collect only a relatively small sub-sample of data, thereby initiating detection risk, i.e., the risk. . . that, based on the sample the auditor takes, the auditor will fail to detect a material misstatement in the financial statements. Data analytics seems to present a panacea to that notion of risk because, by auditing 100% of the sample, detection risk by definition is lower.
   1. It seems like data analytics is the perfect answer to the audit risk problem. So, comment on a variety of reasons that auditors might not be willing to rely on data analytics to drive audit risk down.
   2. Which do you think is costlier: sampling or data analytics? What are the different costs between sampling and data analytics?
   3. What role does cost-benefit play in the choice between employing statistical sampling versus data analytics?
2. Data analytics enables auditors to audit all transactions, rather than just a sample of transactions.
   1. Do you think that as the use of data analytics increases on audit engagements, the need for sampling will decrease?
   2. What role might the PCAOB or AICPA play in helping auditors determine when and how to incorporate data analytics into the audit?

Answer 1

Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristics of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn

When designing a sample the auditor determines tolerable misstatement in order to address the risk that the aggregate of material misstatement may cause the financial statements to be materially misstated and provide a margin for a possible undetected misstatements.

The risk that the auditors conclusion based on a sample may be different from the conclusion if the entire population was subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusion:

• In case of test of controls that the controls are more effective than they actually are, or in case of substantive procedure the material misstatement does not exist where in fact it does and vice-versa

The risk of under reliance and the risk of incorrect rejection affect audit efficiency as it would ordinarily lead to additional work to the auditor or the entity which would lead to initial conclusions were incorrect. The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely to lead to erroneous opinion than financial statements than either the risk of under reliance or the risk of incorrect rejections.

Sample risk is affected by the level of sampling risk by the auditor.