How can variable sampling risk impact the efficiency or effectiveness of an audit?
Audit risk is comprised of inherent risk, control risk, and detection risk. The level of substantive testing that the audit performs is based on detection risk, which is set after the audit team assesses inherent risk and control risk.
Variable Sampling – Substantive Testing
When the audit team is performing substantive testing, they will use variable sampling to determine the amount of samples to test.
Once of the main risks related to variable sampling is that the audit team makes an incorrect conclusion based on their substantive testing. As you can see below, the two risks are incorrect acceptance and incorrect rejection.
Incorrect Acceptance = Ineffective audit: Incorrect acceptance occurs when the audit team concludes that based on the substantive testing performed, there are no material misstatements in the population, but in fact, there are misstatements. So in essence, they incorrectly accepted the tests results. Since there actually is a misstatement in the population that wasn’t identified, then the audit team performed in an ineffective audit.
Incorrect Rejection = Inefficient audit: Incorrect rejection occurs when the audit team concludes that based on the substantive testing performed, there is a misstatement, but in fact, a misstatement does not exist in the population. Since they concluded that there was a misstatement, the audit would be required to perform additional substantive testing. Since they performed additional substantive testing that wasn’t necessary, that costs more time and money, which leads to an inefficient audit.
Back To All Questions