What is no sampling risk How does it occur?
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Where sampling is used, the auditor must accept a risk that the sample is not representative of the population from which it is drawn and that the wrong conclusion may be drawn from the test. Show Sampling risk may result in: Need help? Get subscribed!To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action. Sampling Risk in AuditDefinition Related posts:
Nonsampling risk includes all the aspects of audit risk that are not due to sampling. An auditor may apply a procedure to all transactions or balances and still fail to detect a material misstatement. Nonsampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. For example, confirming recorded receivables cannot be relied on to reveal unrecorded receivables. Nonsampling risk also arises because the auditor may fail to recognize misstatements included in documents that he examines, which would make that procedure ineffective even if he were to examine all items. Nonsampling risk can be reduced to a negligible level through such factors as adequate planning and supervision (see section 311, Planning and Supervision) and proper conduct of a firm's audit practice (see section 161, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards). [As amended August, 1983, by Statement on Auditing Standards No. 45.] (See section 313.) Non-sampling risk is the risk that despite having selected an appropriate sample, the auditors will arrive at wrong conclusion. If the auditor has chosen right sample and still makes the faulty conclusion due to other reasons, it is known to be a Non sampling risk. Auditors here have mistakenly used the inappropriate procedure for judging the entire sample which leads him to make the non-sampling risk. Auditors need to give the opinion on the financials for their truthfulness and fairness. He cannot gives the opinion by applying audit procedures to the selected samples rather than on the entire population. If the sample which he has selected is not correct, the situation is said to result in sample risk while if he had picked the right sample but have not applied the correct procedure, then the situation will be referred as the non-sampling risk. The sample which the auditors selected to judge the whole population should be reasonable. Just picking up the right sample is not enough. The auditor also have to apply a correct procedure to make a good judgment of the sample. The wrong procedure will increase the non-sampling risk which has the greatest impact on the financial statement and cause it to be a misleading presentation of the entire firm. Non Sampling risk takes place in the following situations: 1- Inappropriate procedure: The situation where the auditor has chosen the right sample but has applied the wrong audit procedure. 2- Misinterpret the audit evidence: When the procedure auditor has applied is correct but he did not properly understand the evidence. 3- Unable to recognize misstatement: The situation where there is the misstatement present but the auditor fails to recognize it. Before we look at the definition of non-sampling risk, let’s understand the background why we are even discussing this question i.e. why we even have something with the name “non-sampling risk” In order to express an opinion, auditor needs sufficient appropriate audit evidence. To obtain audit evidence, auditor applies range of audit procedures. But due to limited time and resources and also to conduct audit efficiently, auditor does not apply audit procedures to the whole population in consideration. Instead, he carefully selects reasonably small proportion, which is called sample, from such population and apply audit procedures on the selected sample and the conclusions drawn from such sample are later used to assess the risk in the whole population. In simple words, in order to understand the whole population, small part (which is representative of whole population) is selected and assessed. And on the basis of assessment of this small part, whole population is judged. This technique i.e. applying audit procedures to less 100% items inside a relevant population is called sampling. As auditor will NOT assess every item inside population, it is possible that auditor might understand population incorrectly and his decision might have been different if the whole population was assessed instead of just a sample from population. This is sampling risk. But while applying sampling approach any wrong conclusion reached by auditor is NOT always because of sampling. Auditors might draw wrong inferences because of such reasons which are not connected with sampling technique itself. For example, auditor applied sampling technique, got the audit evidence and the audit evidence was reported correctly but auditor’s interpretation about the evidence was wrong. Now, wrong interpretation is auditor’s own fault and is not a fault of sampling and such mistake cannot be termed as sampling risk. Therefore, the risk that auditor will reach conclusion for any reasons not because of the sampling technique and sampling risk is called Non-sampling risk. Examples of non-sampling risk include:
By looking at the examples of non-sampling risk we can understand that auditor might end up expressing wrong opinion, therefore, non-sampling risk is definitely a part of audit risk. Now audit risk is a function of risk of material misstatement and detection risk. We should know to which component sampling and non-sampling risk belong.
I concluded this on the basis of last sentence of para A5 of ISA 450 – Evaluation of Misstatements Identified During Audit which states: “Undetected misstatements could exist because of the presence of sampling risk and non-sampling risk “ So, it is understood that these risks cause detection risk and for the same reason these are components of detection risk. Special thanks to Asfar Khan for assisting in answering this question. Previous article10 questions to ask yourself before you start SELF STUDY Next articleWhat is Sampling risk in auditing? Hasaan Fazal Teaching professional business subjects to the students of FIA, ACCA, CIMA, CA etc. He also found ACCA LIVE which is Pakistan's first portal to provide online classes and distance learning solutions to FIA/ACCA students. At PakAccountants.com he is busy making study material for different qualifications. Beside writing articles he answers questions asked using ASK TUTOR! What are the cause of nonNonsampling risk is the risk that the audit tests do not uncover existing exceptions in the sample. Two causes of this risk are: Auditor failure to recognize exceptions. Inappropriate or ineffective audit procedures.
What is sampling risk How does it occur?10 Sampling risk arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions he would reach if the test were applied in the same way to all items in the account balance or class of transactions.
What is sampling and nonNonsampling risk includes all audit risks other than sampling risk. Or, stated differently, nonsampling risk is the probability of arriving at an incorrect conclusion, despite having selected a correct sample. Examples of nonsampling risk are: Applying inappropriate audit procedures.
How is nonNonsampling risk can be reduced to a negligible level through such factors as adequate planning and supervision (see section 311, Planning and Supervision) and proper conduct of a firm's audit practice (see section 161, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards).
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