In determining the sample size, the auditor should consider whether sampling risk is reduced to an acceptably low level. Show
Sample size is affected by the level of sampling risk that the auditor is willing to accept. The lower the acceptable risk, the greater the sample size will need to be. Examples of some factors affecting sample sizes, taken from the ISA, are shown in Tables 1 and 2. TABLE 1: Some factors influencing sample size for substantive tests Factor Impact on sample size Inherent risk1 The higher the assessment of inherent risk, the more audit evidence is required to support the auditor’s conclusion. 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.  Previous Question Next Question Back To All Questions Yes, there is a direct relationship between sample size and population variability. Population variability is how similar or dissimilar items in a population are. If the population variability increases, then that means that the items in the population aren’t as similar as the auditor expected. This increases the level of risk, so the audit team... Read More Will sample size increase or decrease if the assessed level of risk is higher than expected?If the assessed level of risk is higher than what the auditor originally determined in the planning phase, then the audit team should increase their sample size or choose a testing method that provides for higher quality evidence. Read More Will sample size increase or decrease if there is a decrease in the tolerable misstatement?There is an inverse relationship between sample size and tolerable misstatement, so the sample size would increase if the tolerable misstatement decreases. Our sites
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Sampling risk is the possibility that the items selected in a sample are not truly representative of the population being tested. This is a major issue, since an auditor does not have the time to examine an entire population and so must rely upon a sample. One error that can arise from sampling risk is that the auditor erroneously concludes that there are fewer problems with the population than expected, which can lead to an incorrect audit opinion. Or, the auditor erroneously concludes that there are more problems than expected, and so expands the sample size to see if this is really the case, which is not a good use of his time. Detection risk is the possibility that an auditor will not locate a material misstatement in a client's financial statements via audit procedures. This is particularly likely when there are several misstatements that are individually immaterial, but which are material when aggregated. The outcome is that an auditor would conclude that there is no material misstatement of the financial statements when such an error actually exists, which would then lead to the issuance of an erroneously favorable audit opinion. How to Reduce Detection RiskThe auditor is responsible for managing detection risk. The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. Examples of the tests that may be conducted are classification testing, completeness testing, occurrence testing, and valuation testing. There will always be some amount of detection risk in an audit, since audit procedures do not comprehensively examine every business transaction - instead, they only review a sampling of these transactions. Detection is one of the three risk elements that comprise audit risk - which is the risk that an inappropriate audit opinion will be issued. The other two elements are inherent risk and control risk. Is sampling risk part of detection risk?Sampling risk for substantive tests is one form of detection risk. The lower the sampling risk the auditor is willing to accept, the larger the sample size. Other substantive procedures may provide audit evidence regarding the same financial statement assertions and reduce detection risk.
What is detection risk examples?Applying an audit procedure incorrectly. For example, when an auditor applies the wrong acceptable ratio when using ratios to evaluate the face value accuracy of an account balance.
What are the 2 types of sampling risk?Types of sampling risk. Risk of under reliance,. Risk of over reliance,. Risk of incorrect rejection, and.. Risk of incorrect acceptance.. What are the two components of detection risk?Detection risk is linked up with the other links i.e. The business risk, material misstatement risk and its two components which are the control risk and the inherent risk.
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