BAC 3624

Question 1

Advanced Auditing

Tutorial 10 Q & A

State the advantages of using statistical sampling rather than non-statistical sampling
(judgemental sampling).
Answer
The advantages of using statistical sampling rather than judgemental sampling (non-statistical
sampling) include:
(1) the size of the sample is determined objectively having regard to the degree of risk associated
with the area being tested.
(2) bias is eliminated.
(3) results of statistical sampling can be more easily justified as being representative of the
population as a whole, thus increasing the level of confidence in the results of testing the sample.
As a consequence of this, the conclusion drawn from the results of sample testing are more
easily justified where an audit client disputes the audit conclusions.
(4) The emphasis on risk assessment by the auditor in the determination of the sample size
encourages the auditor to concentrate on significant issues (for example a high degree of control
risk), which may not otherwise be considered.
(5) In instances when there is a large population, the use of statistical sampling techniques may
reduce the sample size, and therefore the amount of audit work required, as compared to the
sample size that would be selected using judgement sampling methodology.
(6) The auditor may justifiably conclude with a definite level of confidence that the conclusions
drawn from the sampling test is within stated precision limits.

BAC 3624

Advanced Auditing

Tutorial 10 Q & A

Question 2
Marie Claire Sdn Bhd. specialises in the sale of expensive caravans. Annual revenue is in the
region of RM 10 million. About 100 cars are sold each year. Invoices are completed manually.
The audit manager is starting to plan the audit of Marie Claire Sdn Bhd. The audit senior and
audit assistant assigned to the audit are helping the manager as a training exercise.
Comments are being made about how to select a sample of sales invoices for testing.
We should check all invoices suggests the audit manager.
How about selecting a sample using statistical sampling techniques adds the audit senior.
Why waste time obtaining a sample? asks the audit assistant. He adds taking a random sample
of invoices by reviewing the invoice file and manually choosing a few important invoices will be
much quicker.
Required: Explain each of the sample selection method suggested by the audit manager,
audit senior and audit assistant, and discuss whether or not they are appropriate for
obtaining a representative sample of sales invoices.
ANSWER 2
The audit manager suggests checking all invoices, effectively ignoring any statistical sampling; in
other words this is not statistical sampling. Audit tests will be applied to all of the sales invoices.
This

approach

may

be

appropriate

for

the

audit

of

Marie

Claire

Sdn.

Bhd

because:
The population is relatively small and it is likely to be quicker to test all the items than spend
time constructing a sample.
All the transactions are not large but could be considered material in their own right, e.g.
compared to project. As all the transactions are material, then they all need to be tested.
2

BAC 3624

Advanced Auditing

Tutorial 10 Q & A

The audit senior suggests using statistical sampling. This will mean selecting a limited number of
sales invoices from the population using probability theory ensuring a random selection of the
sample and then applying audit tests to those invoices only. This approach may be appropriate
because:
The population consists of similar items (i.e. it is homogeneous) and there are no indications of
the control system failing or changing during the year. There is the query about how long it will
take to determine and produce a sample, which may make statistical sampling inappropriate in
this situation.
The audit assistant suggests using random sampling, which the junior assistant appears to
understand as manually choosing which invoices to look at. The approach therefore involves an
element of bias and is not statistical or true random sampling.
While this approach appears to save time, it is not appropriate because:
The sample selected will not be chosen randomly but on the whim of the auditor. Human
nature will tend to avoid difficult items for testing.
Also, as invoices will not have been chosen using statistical sampling, no valid conclusion can
be drawn from the results of the test. If an error is found it will be difficult estimate that error on to
the population.

BAC 3624

Advanced Auditing

Tutorial 10 Q & A

Question 3
Audit sampling is defined as applying an audit procedure to less than 100 percent of the
population. The fact that an audit involves sampling is noted in the scope paragraph of the
auditors report, which contains the phrase "An audit includes examining, on a test basis." When
an auditor uses sampling, an element of uncertainty enters into the auditor's conclusions.
Required:
a. Explain the auditors justification for accepting the uncertainties that are inherent in the
sampling process.
b. Discuss the uncertainties that collectively embody the concept of audit risk.
ANSWER
a. The auditor's justification for accepting the uncertainties that are inherent in the sampling
process are based upon the premise that (1) the cost of examining all of the financial data
would usually outweigh the benefit of the added reliability of a complete (100%) examination
and (2) the time required to examine all of the financial data would usually preclude issuance
of a timely auditor's report.
b. The uncertainties inherent in applying auditing procedures are collectively referred to as audit
risk Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the
opinion or financial statements that are materially misstated. Audit risk can be controlled
through the scope of the auditor's test procedures with the audit risk model providing a
framework to follow. Detection risk, which is a component of the audit risk model, is
composed of two risks or uncertainties: sampling risk and non-sampling risk.