Sampling Risk in Audit
Definition
Sampling risk is a risk that the auditor’s conclusion may be different if it is based on the entire population instead of a sample. This type of risk always exists when auditors perform the audit test on a sample of transactions rather than the entire population.
Usually, it is impossible or impractical for auditors to have time to review every record in an entire population; hence, they need to determine and rely upon a sample in performing their audit tests and making a conclusion based on the sample.
Sampling risk is the risk that the items auditors select as a sample do not represent the entire population being tested. In this case, auditors may make an incorrect conclusion as a sample being examined does not truly represent the population.
However, there may be a case that the erroneous inferences about a population from a sample are not due to the sample not representative of the population, but due to audit procedures are not appropriately performed.
Sampling Risk vs Non-Sampling Risk
| Sampling Risk vs Non-Sampling Risk | |
|---|---|
| Sampling risk | Sampling risk is the risk that the conclusion based on a sample may be different from the conclusion that would be reached if the entire population was tested using the same audit procedure.
There is always a risk that a conclusion made from a sample may not be correct since auditors do not examine 100% of the entire population. Hence, uncertainty always exists when auditors make a projected result since the result is based only on a small part of the population. The smaller the sample is the bigger the uncertainty is and the bigger the risk is, and vice versa. Auditors can control and measure the sampling risk if the statistical sampling is used in determining sample size and selecting the sample items. In this case, auditors can measure how much the risk they face and control it by either increase or decrease sample size to have a reasonable low risk. However, if non-statistical sampling is used instead, the risk here cannot be measured or controlled. |
| Non-sampling Risk | Non-sampling risk is the risk that auditors make an incorrect conclusion for any reason that is not related to sampling risk.
It may occur due to auditors use inappropriately audit procedures or incorrectly interpret the audit evidence that they have obtained. It may also occur due to auditors fail to detect a material misstatement that had occurred on the financial statements. This risk usually happens due to the lack of knowledge in performing any particular audit procedure. Hence, proper training and adequate supervision by the senior audit staff can help reduce a significant chance of the risk to occur. |
Sampling Risk Related to Audit Tests
Below is how the sampling risk is related to the audit tests and results of the audit work.
| Sampling Risk Related to Audit Tests | |
|---|---|
| Sampling Risk Related to Test of Controls | When testing the internal control system of the client, auditors usually use sampling to test the effectiveness of the control. In this case, they may make an incorrect inference from a small sample size.
This may lead to them making an incorrect acceptance of internal control as reliable when the internal control should be rejected. Hence, they may perform less work on tests of details making the audit not effective and not meet audit quality standards. This is the risk of assessing control risk too low. On the other hand, they may reject internal control reliance when internal control is actually effective. This may lead to them performing more work on tests of details than necessary making the audit work not efficient. This is the risk of assessing control too high. |
| Sampling Risk Related to Test of Details | In tests of details, auditors usually select only a small sample size of the account to test. Then they would make projections of the found misstatement to the population to determine whether the misstatement found in the sampling test is material or not and whether they can accept the account book value or not.
In this case, there is a risk that they may accept the book value of the account when it actually contains material misstatement; and it would be detected if a bigger sample or a whole population were to be tested instead. Usually, there is no additional test performed in this kind of error. This leads to financial statements are issued with a material misstatement. This is a serious issue as auditors give a clean opinion on the financial statements that contain material misstatement. On the other hand, there is also a risk where auditors reject the book value of the account but the book value is actually correct. In this case, as they reject the population that doesn’t contain material misstatement, the client usually demands them to perform additional work to prove that the book value is actually correct. Hence, it makes audit work not efficient, though additional work usually corrects the wrong inference. |