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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.


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  • What happens if control risk is set too high or too low?

    Audit risk is comprised of inherent risk, control risk, and detection risk. Depending on how the audit team assesses control risk, they would set detection risk, which determines the level of substantive testing that should be performed. To assess control risk, the audit team would use attribute sampling to determine if the controls were operating effectively. Attribute Sampling – Controls Testing As mentioned above, when an audit team is testing controls, they would perform attribute sampling to understand if the control works or doesn’t work. The whole point of performing controls testing is to assess control risk. If control risk is high, then the audit team team would conclude that controls are not operating effectively and they will not rely the company’s internal controls. If control risk is low, then the audit team would conclude that controls are operating effectively. Now there is a risk that the audit team incorrectly assesses the company’s internal controls. They can either deem control risk to be too high or control risk to be too low. Control risk too high = Inefficient audit: This means that the audit team felt that controls were not designed and operating effectively, so they won’t rely on the internal controls. As a result, the audit team would have to lower detection risk and perform more substantive testing procedures (which costs more time and money). However, since control risk could have been set lower, then the team performed more substantive testing procedures than necessary, which means they essentially over audited. Control risk too low = Ineffective audit: This means that the audit team felt that controls were designed and operating effectively, so they would rely on the internal controls. As a result, the audit team would increase detection risk and perform fewer substantive testing procedures (which saves time and money). However, since control risk should have been set higher, then that means that more substantive testing should have been performed. Since more performed fewer substantive procedures than they should have, there is a chance that the team won’t identify a misstatement and the audit won’t be effective.

  • What is sampling risk?

    Sampling risk is considered the risk that the sample will not represent the actual population. When conducting tests based on samples, the assumption is that the sample is indicative of the entire population. The auditor should apply professional judgment in assessing sampling risk. In performing substantive tests of details, the auditor is concerned with two aspects of sampling risk: Risk of incorrect acceptance/ risk of incorrect rejection and the risk of assessing control risk too low/ risk of assessing control risk too high.

  • What is a material misstatement?

    Material misstatements represents the financial statements presented by a client that are not in conformity with Generally Accepted Accounting Principles, in all material respects and indicate the auditor’s belief that the financial statements, taken as a whole, are materially misstated. Misstatements can result from errors or fraud and may consist of any of the following: 1) An inaccuracy in gathering or processing data from which financial statements are prepared. 2) A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under generally accepted accounting principles. 3) The omission of a financial statement element, account, or item. 4) A financial statement disclosure that is not presented in conformity with generally accepted accounting principles. 5) The omission of information required to be disclosed in conformity with generally accepted accounting principles. 6) An incorrect accounting estimate arising, for example, from an oversight or misinterpretation of facts; and 7) Management’s judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate.