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    Distinguish between sampling risk and nonsampling risk

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    Distinguish between sampling risk and nonsampling risk.

    © BrainMass Inc. brainmass.com October 4, 2022, 3:56 pm ad1c9bdddf
    https://brainmass.com/business/finance/distinguish-between-sampling-risk-nonsampling-risk-381465

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    Problem: Distinguish between sampling risk and nonsampling risk?

    Solution:
    According the Public Company Oversight Board (PCOB) AU section 350 of Professional Standards for audit sampling states that audit sampling is applying an audit procedure to less than 100 percent of the items in an account balance or class of transactions in order to evaluate characteristics of the balance or class (www.pcobus.org). The auditor will use his knowledge of specific account balances and transactions, which might have misstatements, in planning his audit procedures including audit sampling (www.pcobus.org). There will be some degree of uncertainty associated with audit sampling because of time and cost to evaluate all account balances and class of transactions along with the negative consequences of wrong decisions by the auditor based on the conclusions of partial examination of data(www.pcobus.org). This degree of uncertainty is called audit risk and does not happen often.

    Audit risk can be due to uncertainties of both sampling and nonsampling factors. These risks are called sampling risk and nonsampling risk (www.pcobus.org). Sampling risk results from doing an audit procedure on less than 100 percent of the population of data. As a result of using a sample of the data, the auditor's conclusion would be different than his conclusion if he tested all the data of the account balances and class of transactions in sampling risk (www4.ncsu.edu). There are two types of sampling risk and they are statistical and non-statistical methods. Nonsampling risk result from human error and represent the risk that the selected audit procedure is not correct for the intended objective or the evidence from an audit procedure is misunderstood (www4.ncsu.edu).

    There are two features of sampling risk that can be seen in executing test of controls and they are (www4.ncsu.edu):
    ? The risk of assessing control risk too low (represent the risk that an audit sample supports the conclusion that the design and operation of the internal control is effective, when it is not).
    ? The risk of assessing control risk too high ( represent the risk that an audit sample supports the conclusion that the design and operation of the internal control is not effective, when it is effective).

    There are also two features of sampling risk that can be seen in executing substantive tests and they are (www4.ncsu.edu):
    ? The risk of incorrect acceptance (represent the risk that an audit sample supports the conclusion that a material misstatement is not in the data, when there is a material misstatement).
    ? The risk of incorrect rejection (represent the risk that an audit sample supports the conclusion that a material misstatement is in the data, when there is not a material misstatement).
    The risk of assessing control risk too low and the risk of incorrect acceptance demonstrate the effectiveness of audit test, while the risk of assessing control risk too high and the risk of incorrect rejection demonstrates the efficiency of an audit test(www4.ncsu.edu).

    References:
    http://www4.ncsu.edu/unity/users/b/buckless/www/AUSection350.html
    http://pcaobus.org/Standards/Auditing/Pages/AU350.aspx

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com October 4, 2022, 3:56 pm ad1c9bdddf>
    https://brainmass.com/business/finance/distinguish-between-sampling-risk-nonsampling-risk-381465

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