Chap008 - Chapter 08 Audit Sampling An Overview and...

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Chapter 08 - Audit Sampling: An Overview and Application to Tests Of Controls CHAPTER 8 AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS Answers to Review Questions 8-1 Audit Sampling is the application of audit procedures to less than 100 percent of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population. When the number of items or transactions in these populations is large and the items cannot be tested via computer assisted audit techniques (e.g., physical examination, confirmations), it is not economical for auditors to test 100 percent for the population; instead they use sampling to gather sufficient audit evidence. The justification for accepting some uncertainty from sampling is due to the trade-off between the cost to examine all of the data and the cost of making an incorrect decision based on a sample of the data. 8-2 Type I and Type II errors are the two types of decision errors an auditor can make when deciding that sample evidence supports or does not support a test of controls or a substantive test based on a sampling application. In reference to a test of controls, Type I and Type II errors are: Risk of incorrect rejection (Type I) : the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control. Also commonly referred to as the risk of assessing control risk too high or the risk of underreliance. Risk of incorrect acceptance (Type II) : the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. Also commonly referred as the risk of assessing control risk too low or the risk of overreliance. In reference to substantive tests, Type I and Type II errors are as follows: Risk of incorrect rejection (Type I) : the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated. Risk of incorrect acceptance (Type II) : the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated. The risk of incorrect rejection relates to the efficiency of the audit because such errors can result in the auditor’s conducting more audit work than necessary in order to reach the correct conclusion. The risk of incorrect acceptance relates to the effectiveness of the audit because such errors can result in the auditor failing to detect a material misstatement in the financial statements. This can lead to litigation against the auditor by the parties who relied on the financial statements.
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