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What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

Expert Solution

Step 1

Definition:

Sampling risk: Sampling risk is a risk that arises when the judgments based on the sample varies from the inferences that would have been made if the entire population was surveyed.

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The two types of sampling risks that 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 is considered the more important risk?
What is “tolerable misstatement”? How is this concept applied when auditors perform audit tests on a sample?