Auditing discussion
- Explanation of the auditor’s justification for accepting the uncertainties that are inherent in the sampling process.
There are two main justifications for the acceptance of uncertainty that are inherent in the sampling process in auditing. One of these justifications is time. The process of auditing is usually long, and this is because of multiple transactions to be examined, some of which may be assumed. Besides that, there is also the element of cost. In this case, it is noted that the process of auditing is expensive, especially when it comes to the examination of all transactions. Therefore, the elements of cost and time substantiate the acceptance of uncertainty.
- Discussion of the uncertainties that collectively embody the concept of audit risk.
Three main uncertainties embody the concept of audit risk, and these are the inherent, control, and detection risk. Inherent risk is one that occurs when there is an affirmation of misstatement as a result of errors that are material. Control risk, on the other hand, revolves around the timely prevention of inherent risk, while detection risk relates to the susceptibility of misstating the financial statements, and this cannot be detected using audit procedures.
- Discussion of the nature of sampling risk and nonsampling risk. Including the effect of sampling risk on tests of controls.
Sampling risk occurs when there is some probability that the sample may not represent the whole population. The effect of this is that the auditor may arrive at a wrong conclusion, and it is the main reason as to why the auditor accepts some levels of uncertainty.
There two main types of sampling risks, and these are Type I (Risk of incorrection rejection). In this regard, in the course of testing the controls for efficiency, the sample has the probability that the assessed levels of efficiency are higher than the true operating efficiency. This risk can lead to wrong material misstatement. Apart from Type I, there is the Type II (Risk of incorrect acceptance). In this case, when testing the controls for efficiency, the sample has the probability that the assessed levels of efficiency are lower than the true operating efficiency. The risk here is that the sample does not support material misstatement.
On the other hand, when it comes to non-sampling risk, this is the one that occurs when the auditor fails to detect misstatement. The effect of non-sampling risk is that it can lead to misinterpretation of audit results. This risk cannot be quantified, and can only be controlled using the knowledge, expertise, and judgment of the auditor.