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Unformatted text preview: Chapter 08 - Audit Sampling: An Overview and Application to Tests Of Controls 8-1 CHAPTER 8 AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS Answers to Multiple-Choice Questions 8-11 c 8-16 b 8-12 a 8-17 b 8-13 a 8-18 d 8-14 c 8-19 d 8-15 a 8-20 c Solutions to Problems 8-21 a. The auditors justification for accepting the uncertainties that are inherent in the sampling process are based upon the premise that (1) the cost of examining all of the financial data would usually outweigh the benefit of the added reliability of a complete (100%) examination and (2) the time required to examine all of the financial data would usually preclude issuance of a timely auditors report. b. The uncertainties inherent in applying auditing procedures are collectively referred to as audit risk. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Audit risk can be controlled through the scope of the auditors test procedures with the audit risk model providing a framework to follow. Detection risk, which is a component of the audit risk model, is composed of two risks or uncertainties: sampling risk and nonsampling risk. c. Sampling risk arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditors conclusions may be different from the conclusions he or she would reach if the test were applied in the same way to all items in the population. Nonsampling risk includes all the aspects of audit risk that are not due to sampling and can occur because the auditor used an inappropriate audit procedure, failed to detect a misstatement when applying an appropriate audit procedure, or misinterpreted an audit result. When performing a test of controls, the auditor can commit two types of decision errors: (1) the risk of incorrect rejection or of assessing control risk too high, which is the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control, and (2) the risk of incorrect acceptance or of assessing control risk too low, which is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. When performing substantive tests, the related decision errors are: (1) the risk of incorrect rejection, which is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated, Chapter 08 - Audit Sampling: An Overview and Application to Tests Of Controls...
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- Spring '11