Audit Sample and Sampling Risk

Whenever a sampling approach is used (as opposed to testing an entire population) sampling risk is introduced. Sampling risk arises from the possibility that the conclusions that the auditor draws from testing the audit sample may be different from the conclusions that they would draw if the entire population had been tested.

In an audit context we are usually testing a population to determine whether an account balance is materially misstated. Sampling risk can be split into two areas, the risk of incorrect acceptance and the risk of incorrect rejection.

The risk of incorrect acceptance is the risk that the conclusion drawn from the audit sample is that the account balance is not materially misstated, when the population is actually materially misstated. The risk of incorrect rejection is the risk that the conclusion drawn from the audit sample is that the account balance is materially misstates, when in reality the population is not materially misstated.

Sampling risk can also be thought of in terms of detection risk – the possibility that the audit sample will not detect a misstatement that exceeds the maximum tolerable error (materiality). Detection risk is a planning concept and the auditor specifies it before selecting and testing the audit sample. It is one of the factors that must be considered in determining the sample size. It is easiest to explain this with the help of an example:

If you have a population of 10 items, and are selecting a sample of 2 from this population there are 45 possible combinations that you could select. If there is one “bad item” in the population, there are 9 possible combinations that you could select that contain the bad item, or 36 possible combinations that do not contain the bad item.

In this very simple situation the risk of selecting a sample that does not contain the bad item is 36/45 or 80% – far higher than the 10% you might assume given that there is only 1 bad item out of the population of 10.

This example also highlights the impact of the audit sample size on the detection risk. If we sample 3 items, there are 120 possible combinations and 84 possible combinations that do not contain the bad item. In this case the sampling risk is 84/120 or 70%.

In practice the auditor will specify the level of detection risk that they are comfortable with, and use this to determine the audit sample size.

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Heike Ziegler

HEIKE ZIEGLER – YOUR #1 MARKET MULTIPLIER & BRAND MAGNIFIER Heike Ziegler is Founder and CEO of HZH International Brandconsulting UG and CELEBRITY BRAND MOVEMENT a company of HZH INTERNATIONAL BRANDCONSULTING UG specializing in brand, market and business development of brands, retailers and technology service partners in the fashion & lifestyle industry. Heike´s goal is to help you achieve brand-performance and enter new markets faster and easier than you ever imagined. As a veteran fashion designer with an international background, Heike masters complex topics such as the organization of an Omni-channel platform from the ground up and the implementation of new technologies as a service. Future-oriented trading strategies are made possible through advanced automated marketing and the analysis of the difficulties of users (brands & retailers) with a focus on the development and expansion of their intensive B2B relationships. Heike Ziegler provides solutions to strengthen the business performance of hundreds of fashion brands and retailers across Europe, from support through dedicated service networks and data conversion from marketing to providing a complete retail platform for brands and retailers to bring about long-term results. HZH-IBC serves as a platform for e-commerce, web application services/professionals, and for the creation of automated online marketing for the development of Omni-channel e-commerce solutions and trade applications for brands and retailers in the fashion & lifestyle sector. To transform the HZH-IBC platform into a marketplace where fashion and lifestyle brands meet with the trade for the successful sale of products and the joint business development, existing co-operations are being expanded and new partnerships are being developed. If you have any questions about Heike Ziegler success strategies and services, please email hzh@internationalbrandconsulting.com or call +49-172-913-999-5 or skype heike.ziegler60.