Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

(b) In the context of audit sampling, distinguish between the following terms:
(i) Sampling risk and non-sampling risk (4 marks)
(ii) Tolerable error and expected error (4 marks)
(iii) Audit risk and detection

i) Sampling Risk and Non-Sampling Risk
Sampling risk is the risk that the auditor‘s conclusion, based on a given sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure i.e. either the auditor wrongly concludes that control risk is higher than it actually is or that a material error exists when in fact it does not.

Non-sampling risk refers to risks arising from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the sample size e.g. use of inappropriate procedures on the mis-interpretation of audit evidence.

ii) Tolerable Error and Expected Error
Tolerable error refers to the maximum error in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved his audit objective.

Expected error on the other hand refers to the rate of deviation from the prescribed control procedure that the auditor expects to find in the population. This determine the sample size taken the auditor i.e. the higher the expected error, the smaller the sample size.

iii) Audit Risk and Detection Risk
Audit risk is the chance of damage that may occur to the audit firm as a result of giving wrong audit opinion. This could be in form of monetary damages to client as compensation or loss of reputation.

Detection risk is part of audit risk and is the risk that an auditor‘s substantive procedures will not detect a misstatement in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes.

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