Audit risk can be controlled through the scope of the auditors test procedures

Audit risk can be controlled through the scope of the

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Audit risk can be controlled through the scope of the auditor’s 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 auditor’s 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 and (2) the risk of incorrect acceptance, which is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated. 8-4
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Chapter 08 - Audit Sampling: An Overview and Application to Tests of Controls 8-22 a 6, b 5, c 7, d 1, e 4, f 2, g 3 8-23 1. In this scenario, the stratum of loans greater than $1 million is tested in total. Since the entire population is tested, it does not involve sampling. Sampling is involved in the second strata because the auditor is only examining 15 of the 450 loans in the strata. 2. If the analytical procedures used do not include statistical techniques (e.g., regression analysis), then the use of analytical procedures does not involve sampling. 3. Since the auditor has haphazardly selected less than 100% of the population’s transactions, sampling is involved in such a test. 4. In this case, the auditor has decided not to audit the account because it is immaterial. This approach does not involve sampling. 8-24 a. The text includes Jenny’s step 3 within the second step of attributes sampling. The remaining steps of attribute sampling are as follows: 2. Define remaining population characteristics—define the control deviation conditions.
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