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1. An auditor accumulates sufficient and relevant evidence to be able to express an opinion about the fair presentation of Financial Statements of the client company. While accumulating evidence, the auditor selects samples of transactions and account balances. Can you describe what is sampling risk and how to control it? 2. How does sampling risk compare with nonsampling risk? Please comment. 3. In selecting items for examination, an auditor considered three alternatives: (a) random number table selection, (b) systematic selection, and (c) random number generator selection. Which, if any, of these methods would lead to a random sample if properly applied?

Paper For Above instruction

In auditing, the process of sampling plays a crucial role in gathering sufficient and appropriate evidence to form an informed opinion on the financial statements' fairness. Sampling involves selecting a subset of transactions or account balances for detailed inspection, rather than examining the entire population. This approach is efficient and practical, but it introduces the element of sampling risk, which can impact the auditor’s conclusions.

Understanding Sampling Risk

Sampling risk refers to the probability that the auditor's conclusion based on a sample may be different from the conclusion that would be reached if the entire population were examined. This risk can manifest in two primary ways: overreliance on misstatements that are not representative of the entire population or failure to detect material misstatements. Effective control of sampling risk involves designing and implementing sampling procedures that minimize this risk to an acceptable level.

One of the fundamental methods to control sampling risk is to increase the sample size. Larger samples tend to provide more accurate representations of the population, thus reducing the likelihood of incorrect conclusions. Furthermore, employing appropriate sampling techniques—such as random sampling—helps ensure that each item in the population has an equal chance of selection, minimizing the risk of bias.

Comparison of Sampling Risk and Nonsampling Risk

While sampling risk pertains to the potential errors arising specifically from the sampling process, nonsampling risk relates to errors that occur outside the sampling procedure. These include mistakes in applying audit procedures, misinterpretation of evidence, or errors in judgment. Nonsampling risk can be mitigated through thorough training, proper procedures, and supervision.

In essence, sampling risk is inherent in the process of selecting and testing a subset, whereas nonsampling risk relates to human errors or procedural oversights. Both risks can lead to incorrect audit conclusions, but the strategies to control them differ: increased sample size and proper sampling methods address sampling risk; meticulous planning, training, and review reduce nonsampling risk.

Selection Methods and their Randomness

Regarding the methods for selecting items for examination, three alternatives are considered: (a) random number table selection, (b) systematic selection, and (c) random number generator selection.

All three methods can produce a random sample if properly applied. Random number tables and random number generators are explicitly designed to select items without bias, ensuring each item has an equal probability of inclusion. Systematic selection, where items are picked at regular intervals after a random start, can also result in a random sample, provided the starting point is chosen randomly and the sampling interval is appropriate, and the list is not ordered in a way that introduces bias.

In practice, random number tables and generators are often preferred for their convenience and perceived objectivity. Systematic sampling is advantageous for its simplicity and ease but requires careful implementation to prevent biased results, especially if the list has inherent patterns.

Conclusion

Sampling risk is an inherent component of audit sampling and can be managed effectively through appropriate sampling techniques, increasing sample size, and rigorous audit procedures. Comparing it with nonsampling risk highlights the importance of comprehensive audit planning and execution to minimize both types of risks. The choice among random number tables, systematic, and random number generator methods depends on the specific circumstances, but all, if correctly applied, can yield a random and representative sample, supporting the auditor's conclusion.

References

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