In substantive testing this is the risk that the sample supports the conclusion

In substantive testing this is the risk that the

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In substantive testing, this is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is actually materially misstated. Stop and Think: Which of the above risks relates primarily to audit ef fi ciency and which relates primarily to audit effectiveness? The risk of incorrect rejection (a Type I decision error) relates to the ef fi ciency of the audit. This type of decision error can result in the auditor conducting more audit work than necessary in order to reach the correct conclusion. The risk of incorrect acceptance (a Type II decision error) relates to the effectiveness of the audit. This type of decision error can result in the auditor failing to detect a material misstatement in the fi nancial statements. This can lead to litigation against the auditor by parties that rely on the fi nancial statements. Because of the potentially severe consequences of a Type II deci- sion error, auditors design their sampling applications to keep this risk to an accept- ably low level. Auditors typically focus only on Type II decision errors in determining LO 8-2
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Chapter 8 Audit Sampling: An Overview and Application to Tests of Controls 273 their sample sizes, because Type I decision errors affect ef fi ciency and not effectiveness and because, by controlling for the risk of Type II errors, they also obtain relatively good coverage for the risk of Type I errors. For these reasons, in this chapter we do not address the potential implications on sampling applications of Type I errors. Audit procedures can also involve nonsampling risk. Nonsampling risk is the risk that the auditor reaches an erroneous conclusion for any reason that is not related to sampling risk; for example, auditor error, testing the wrong population, failing to detect a misstatement when applying an audit procedure, or misinterpreting an audit result. When applying audit sampling to substantive tests of details, both sampling and nonsampling risk make up the auditor’s detection risk. While statistical sampling allows the auditor to quantify and control sampling risk, no sampling method allows the auditor to measure nonsampling risk. The uncertainty related to nonsampling risk can be controlled by adequate training, proper planning, and effective supervision. Three Important Factors In the preface to the chapter, we asked you to imag- ine that you were an apple inspector and we asked you to consider what informa- tion you would like to have before you began testing apples. While you would want answers to all the questions listed in the preface, you will fi nd that three of the factors listed there are the most important inputs to determine sample sizes for all types of audit sampling. These three inputs are (1) desired level of assurance in the results (or con fi dence level), (2) acceptable defect rate (or tolerable error), and (3) historical defect rate (or expected error).
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