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Auditing Sample Methods

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1) Why do auditors find it necessary to use sampling? What are the risks associated with sampling? How might these risks affect the audit conclusion?

2) What are some of the different types of sampling methods available to the auditor? How does the auditor decide which method to use? How might the different methods affect the audit?

3) Fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit. Fraud is typically described as arising from two types of misstatements, fraudulent financial reporting and misappropriation of assets. Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive financial statement users where the effect causes the financial statements not to be presented, in all material respects, in conformity with generally accepted accounting principles (GAAP). Misstatements arising from misappropriation of assets (sometimes referred to as theft or defalcation) involve the theft of an entity's assets where the effect of the theft causes the financial statements not to be presented, in all material respects, in conformity with GAAP. Misappropriation of assets can be accomplished in various ways, including embezzling receipts, stealing assets, or causing an entity to pay for goods or services that have not been received. Comments?

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Solution Summary

This solution discusses why auditors use sampling, the risks of sampling, types of sampling, and deciding which methods to use. This solution also discusses different types of frauds and misstatements based on the discussion presented. All questions are thoroughly answered.

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1) Auditors use sampling because often, it isn't feasible to use the entire population in an account. With today's advanced auditing software, I can run an entire population through an auditing program to test for certain audit assertions, but I would still want to pull and analyze the documents supporting the account balance. If the account population is 100,000 (like A/R accounts for very large companies), I can't test all 100,000 documents for the accounts. It would be a major time and money drain. I set an appropriate sample size based on the population, and then test that percentage. The main risk associated with sampling is that the sample won't be ...

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