Question

The two (2) types of sampling risks auditors face include the risk of incorrect acceptance and the risk of incorrect rejection. What do each of these mean and how will each impact the audit process and the audit results? Which do you consider the more important risk?

Answer 1

Audit sampling : means the application of audit procedure to less than 100 % of total items of a population and where all the sampling units has a equal chance of selection to help auditor in forming a reasonable conclusion about entire population.

Audit sampling risk : it means the risk of auditor giving an inappropriate opinion on financial statements which is materially mistated.

The sampling risk arises as while performing audit sampling all the items are not examined because it will be costly and impracticable to check all of clients records.

There are two types of audit risks:

1. Risk of incorrect acceptance : when auditor draw result that an account balance is correct instead that account balance is correct. In this situation, it affects the audit effectiveness and is more liable to lead to an inappropriate audit opinion.
2. Risk of incorrect rejection : when audit sample collected indicates that there is risk of material misstatement, when this is not actually the case. In this situation, the sampling incorrectly effects audit efficiency as it would usually lead to additional work to establish that initial conclusion were correct .

Conclusion:

After the above discussion, it can be concluded that the risk of incorrect acceptance is more important risk because due to incorrect acceptance the auditor has drawn an inappropriate opinion about the financial statement that will affect the whole organisation.

As it will is it will produce a wrong impression to investors,shareholders, creditors, bankers and all other stakeholders of the organisation which can affect the smooth working of the business.