Question 1
It is impossible for the external auditor to audit and investigate each and every transaction of the business because of the number of transactions. Therefore, to provide a reasonable assurance, the auditor sets, a sampling size according to the standards of auditing and his professional knowledge to reduce the number of testing. This reduction in the number of testing does not affect the overall view of the audit because all the important and risky areas are covered in the sample size set by the auditor at the planning stage of the audit. The main advantage of sampling at the planning stage is that it reduces the chances of over-auditing and save the time. ("Auditing and sampling risk", 2013)
Question 2
The sampling risk occurs when the vital transaction which is material goes unidentified due to the sample size set at the planning stage. For example, the transactions more than $1000 are set for the further investigations. However, in the accounts there numbers of small transactions which are making a material amount. Therefore, in these circumstances, it is the sampling error and the auditor must take proper actions to deal with the minor errors or misstatements. Similarly, if the controls are weak in any department, then it is the duty of the auditor to increase the sample size and reduce the materiality level relevant to that specific department. Moreover, if the controls are weak and the auditor is unable to identify the weak controls, then it is highly probable that the sample risk will increase. ("Auditing and sampling risk", 2013)
Question 3
The controls are the checks set or designed by the management of the company and the responsibility or the main concern of the auditor regarding internal controls is to test their efficiency and the effectiveness. The auditor observes, re-perform or monitor the controls to determine the level of controls. If the results of tests of controls are good, then the auditor reduces the level of substantive or detailed testing. However, if the controls are weak, then the auditor inform to the relevant management and perform detail substantive testing to provide reasonable assurance. (Hoffelder, 2013)
Question 4
The main concern at the test of details stage is to identify the errors and the misstatements at the assertion level or gather the audit evidence. At this stage, the auditor inspects that if the material accounts in the financial statements are following the completeness, accuracy and the validity concepts. For example, the ownership of the assets can be verified by reviewing the purchasing receipts of the assets. The risky areas identified at the initial stage of the audit are tested in detail at this stage and the auditor must produce an evidence or assertion to support the misstatement or errors. ("Tests of control and substantive testing")
Question 5
The statistical sampling means that when an auditor follows a proper method such as random method, systematic sampling or the monetary sampling to reduce the sampling risk. These defined techniques are used to reduce the sample risk and increases the chances of all the transactions to be selected at the random chances or on the basis of any formula. The non-statistical sampling refers to the professional judgment or the knowledge of the auditor regarding the client. The examples of non-statistical sampling are block sampling and haphazard sampling. The non-statistical sampling methods are not recommended by the auditing standards because the sampling must give a chance to the all of the transactions to be selected equally. Therefore, to reduce the sample risk, it is recommended that the auditors must use statistical sampling methods. ("Audit Sampling Requires Auditor Judgment", 1994)
References
Auditing and sampling risk. (2013, July 09). Retrieved April 07, 2016, from
http://www.topcaats.com/auditing-and-sampling-risk/
Hoffelder, K. (2013, October 30). Poor Internal Control Tests Hurt Financial Statement Audits.
Retrieved April 07, 2016, from http://ww2.cfo.com/accounting-tax/2013/10/poor-internal-controls-tests-hurt-financial-statement-audits/
Audit Sampling Requires Auditor Judgment. (1994, December). Retrieved April 07, 2016, from
http://www.resourcemanagement.com/Audit_Sampling.html
Tests of control and substantive testing. Retrieved April 07, 2016, from
https://www.icas.com/education-and-qualifications/tests-of-control-and-substantive-testing-student-blog
