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During the course of an audit, the auditor attempts to obtain sufficient relevant and reliable evidence to provide the satisfaction that the financial records are...

      

During the course of an audit, the auditor attempts to obtain sufficient relevant and reliable evidence to provide the satisfaction that the financial records are completed and accurate. One of the ways that the auditor obtains satisfaction is to select representative samples of transactions and balances for detailed testing, such samples being made using either statistical of non-statistical methods.

Required:
a) Describe the main factors which influence the auditor in determining the size of the sample he will use for his detailed testing.
b) Describe three areas where the judgment will be exercised by the auditor when using statistical sampling.

  

Answers


Wilfred
a) The following factors influence the auditor in determining the size of the sample for his detailed testing.
- The tolerable error or deviation rate- the larger the tolerable error or deviation rate, the smaller the sample size.
- Auditor‘s assessment of inherent risk. The higher the auditor‘s assessment of inherent risk, the larger the sample size. Higher inherent risk implies that there is a greater risk that the financial balance will be misstated. To reduce this risk the
auditor will need to extend the level of testing. This is achieved by testing a larger sample.
- Auditor‘s assessment of control risk. The higher the auditor‘s assessment of control risk, the larger the sample size. A high control risk implies that little reliance can be placed on effective operation of internal controls. To reduce the audit risk the auditor will need to extend the level of testing, this is achieved by increasing the size of the sample.
- Expected error. This refers to the total error that the auditor expects to find in the population. The greater the amount of error the auditor expects to find in the population, the larger the size of the sample needed in order to make a reasonable
estimate of the actual amount of error in the population.
- Auditor‘s required confidence level. The greater the degree of confidence that the auditor requires that the results of the sample are in fact representative of the actual amount of error in the population, the larger the sample needs to be.

b) Three areas where judgement is exercised by the auditor in using statistical sampling
Although statistical sampling applies probability theory in making sampling decisions it is not possible to eliminate the need to apply judgement in certain stages of the sampling process. These include:
(I) In planning the sample the auditor will need to apply his judgement in identifying the most appropriate population from which the sample will be selected. This is because after determining the audit objective, the auditor will need to identify the most appropriate population that will be tested to meet the audit objective. E.g. if the audit objective is to test debtors for recoverability the most appropriate population will be an aged debtors listing. The selection of this will require the use of judgement.
(II) Assessment of the tolerable risk, inherent risk, deviation risk and control risk requires the use of judgement. These factors are relevant in determining the appropriate size of the sample.
(III) Judgement is required in evaluating the effect of the results obtained after testing the sample units and also in concluding whether the audit objectives have been achieved.


Wilfykil answered the question on February 21, 2019 at 07:16


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