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Unformatted text preview: 8-1 Solutions for Chapter 8 Tools to Gather Audit EvidenceReview Questions: 8-1. The three main tools the auditor might use in gathering and evaluating audit evidence are: •Audit sampling •Generalized Audit Software •Analytical procedures 8-2. Non-sampling riskis the risk that the auditor makes an improper assessment of inherent and/or control risk or did not apply audit procedures carefully. It can be minimized through: (1) Good hiring, training and supervision practices; and (2) Careful and knowledgeable review of audit documentation and audit procedures. Sampling riskis the risk that the misstatement projections based on the sample results lead to the wrong conclusion about the population because of a non-representative sample. Sampling risk can be reduced by increasing the sample size – to the extreme of auditing the entire population therefore eliminating sampling risk altogether. 8-3. Factors to consider when choosing between statistical and nonstatistical sampling include: •Need to quantify and control sampling risks. •Additional cost of designing, selecting, and evaluating a statistical sample. •Availability of computer software to assist in designing, selecting, and/or evaluating the sample. •Ability of the audit staff to properly implement statistical sampling. 8-4. a. Tolerable deviation ratedepends on the significance of the control procedure being tested and the degree of reliance the auditor wishes to place on it. The auditor, in essence, considers the effect of the failure on potential material misstatements in the financial statements. The tolerable failure rate is the rate beyond which the failure of an important control procedure could lead to material misstatements in the financial statements. b. Expected failure rateis usually based on prior year experience, knowledge of factors likely to cause it to be different this year (such as a change in the system or personnel), and/or expectations based on experience with other clients with similar systems and personnel. If prior experience does not exist with the client, the auditor can make an estimate from a preliminary sample. Alternately, the auditor could use judgment to make a conservative estimate. 8-2 c. Allowable risk of assessing control risk too low (sampling risk) is usually set equal to the overall audit risk. However, the choice is a matter of audit judgments and should be modified to reflect the business risk of the client. 8-5. a. An increase in sampling risk results in a smaller sample because the auditor is willing to accept more risk of the audit conclusion being in error. As a general sampling rule, the more risk the auditor is willing to take of being wrong, the smaller will be the sample size....
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This note was uploaded on 12/18/2010 for the course ACCT 4321 taught by Professor Na during the Fall '10 term at University of Houston-Victoria.
- Fall '10