Page 115 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Auditors when wanted to express any opinion, they require a sort of homework in shape of the
audit evidences, he wanted to judge the entire sample but practically it’s not possible because it’s
a time taking process and resources are also limited. He therefore cannot apply the procedures
for the judgment to the entire population due to limited time and resources. For getting the
evidences, he applies the procedure on the sample which is the small part of the population for
knowing the judgment; there is always a chance that the result which is obtained by this procedure
applied on the sample would be error free, this is known as the sampling risk.
The effectiveness and the efficiency lie on the auditor who can reduce the sampling risk by
picking up the reasonable or the correct small part of the population or the sample. Carefully
selected sample will decrease the rate of sampling risk. If the rate of the sampling risk shows the
increasing position, it means that the auditor has opinioned in the financial statement that
everything or every transaction or record here are written finely but he would not have proven
of it. Manager of the company will mark the auditor’s opinion as illogical as if there is no
reasoning behind it and thus the chances of misstatement in the financial report will also increase.

Did u know? The increasing rate of the sampling risk will affect the overall efficiency of the
business.

Here auditor has to play a serious job to allocate the reasonable sample for applying the further
procedure to reduce the sampling risk.
Overall tax audit risk is made up of the risk of inaccurate records and the risk of misapplication
of the tax law. Both of these risks are made up of two components as well.
1. Risk that there are errors (inherent risk).

2. Risk that procedures will not find errors (audit risk).
Audit risk, in turn is made up of two components, the risk that a procedure is not effective and
sampling risk. Sampling risk is the probability that the sample results are not representative of
the entire population. In general, factors that may lessen sampling risk include:
1. Taking larger size samples

2. Using random sample selection methods
3. Stratifying the sample
4. Properly defining the test objective

5. Properly defining a deviation
6. Exclusion of non-recurring, non-systematic errors.
7. Properly evaluating errors.

Self Assessment

Fill in the blanks:
5. The …………….. and the ……………… lie on the auditor who can reduce the sampling risk
by picking up the reasonable or the correct small part of the population or the sample.

6. Carefully selected sample will …………… the rate of sampling risk.

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