How to Deal with Sampling Risk During an Audit
Although you can never guarantee that an audit is 100-percent accurate, the sample of records you choose is crucial to helping you achieve as much accuracy as possible. The choices you make when determining which records to review can help you reduce (but never eliminate) your sampling risk. A number of factors contribute to risk:
You’re looking at the records of a company you know only from the outside.
Management may be hiding errors.
The company may have made inadvertent mistakes in its reporting.
Employees may be trying to deceive you.
When selecting a sample of records to audit, you can run into two different types of detection risks: the risk of incorrect rejection and the risk of incorrect acceptance. Knowing both types of risks exist and keeping your auditor eye out for them can lower your chance of error. After you figure out about these two risks, you can discover how your firm sets the appropriate sampling risk percentage.
The risk of incorrect rejection
Sometimes you may decide that a certain record doesn’t represent the whole population of records, but it actually does. In other words, you incorrectly reject your sample and then gather more records in the same population to sample. This scenario most often happens when you second-guess yourself, which means it most often happens to inexperienced auditors. You’re looking at a lot of records, and sometimes you just get overwhelmed.
Making this type of error has two potential consequences:
It negatively affects the efficiency and cost of the audit, because you end up doing more work.
It tends to irritate the client.
To prevent this mistake, do thorough research before determining the size and content of your sample, choose the best sampling method, and realize that you’ll trust your judgment more with each job you successfully complete.
The risk of incorrect acceptance
Sometimes you may think a sample record is representative of the whole population when it’s not. For example, you may have a sample of 100 records out of an entire population of 500 records for accounts receivable. You compare the facts and circumstances of the 100 records to your client’s books and find no errors. You deem accounts receivable as being materially correct based on your sample. However, unknown to you, the other 400 records contain numerous errors that materially affect accounts receivable and gross receipts. Not good.
If you fail to detect a material misstatement in the company’s records because you’re looking at the wrong records, your audit’s effectiveness decreases. In the worst-case scenario, you could issue an unqualified report when it isn’t deserved.
The auditing firm you work for has policies that dictate many procedures you employ while sampling. Setting guidelines to be used across the board within the firm ensures audit consistency, increases efficiency, and reduces the amount of professional judgment that auditors have to use in the field.