Sampling Questions

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    Topic
  • #175911
    xibadx
    Participant

    1) What is the difference between: Control Risk & Risk of Assessing Control Risk Too Low?

    wouldn’t the “risk” of assessing a risk too low, be the risk itself?

    My question comes from a question: If risk of assessing control risk too low is lowered, then the sample size will increase. I’m not understanding why… clarification needed please.

    2) What is the difference between: Allowance for Sampling Risk & Sample Deviation Rate?

    Thanks

    All passed on first try - Licensed CPA Texas
    Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

Viewing 9 replies - 1 through 9 (of 9 total)
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  • #393725
    xibadx
    Participant

    Basically, for number 1: Risk of assessing CR too low = Risk auditor is willing to accept.

    this is very confusing, is the terminology really correct?

    All passed on first try - Licensed CPA Texas
    Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

    #393726
    GreenMonkey
    Member

    Control risk is the risk that a misstatement (or inherent risk) will not be caught or corrected by the client's internal controls.

    The risk of assessing control risk too low means that the auditor puts too much trust into the client's controls when they shouldn't. Therefore because AR= IR x CR x DR… if the auditor assesses the control risk to be low, then the acceptable DR rises (meaning that less sampling/testing needs to be performed). Therefore, the risk is that if the auditor believes that the controls are effective when in reality they are not… then the risk that they issue an incorrect opinion (because they have performed less testing) is higher.

    Does that make sense?

    REG- 91
    AUD- 97
    BEC- 91
    FAR- May

    #393727
    samdiegoCPA
    Member

    I was reading over that for ten mins earlier today too! I couldn't get it straight – I'm gonna read your explanation a few times @greenmonkey – I think I have it down now but that's just for the time being, I need to remember it for Tues

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #393728
    GreenMonkey
    Member

    It can be very difficult to keep it all straight- especially initially. When in doubt, think about the Audit Risk formula. That really helps me conceptualize questions that would otherwise be confusing.

    REG- 91
    AUD- 97
    BEC- 91
    FAR- May

    #393729
    xibadx
    Participant

    GreenMonkey: I agree with your explanation, that's what “assessing a risk too low” would mean.. but in that case Becker's simulations is wrong:

    If risk of assessing CR too low went from 5% to 1%, then according to becker, the sample size should be INCREASED.

    from common sense: if we are lowering a risk of having assessed a risk too low, that is good news and sample size should be decreased

    All passed on first try - Licensed CPA Texas
    Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

    #393730
    GreenMonkey
    Member

    If the risk of assessing CR too low decreased (from 5% to 1%) then that means that the CR has increased. Essentially by lowering the risk of assessing CR too low from 5% to 1% the auditor is saying that they aren't as comfortable with the controls and therefore trust them less. That means that CR has increased.

    And because CR has increased, DR needs to be lowered… meaning that the sample size will increase.

    Essentially, in summary, “the risk of assessing CR too low” has an inverse relationship with CR itself.

    REG- 91
    AUD- 97
    BEC- 91
    FAR- May

    #393731
    GreenMonkey
    Member

    By the way, where are you seeing this Simulation in Becker? I don't see it in A3.

    REG- 91
    AUD- 97
    BEC- 91
    FAR- May

    #393732
    samdiegoCPA
    Member

    Mindf*&*ck

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #393733
    GreenMonkey
    Member

    If an auditor assesses controls to be sufficient, they will assume a low Control Risk (CR) when determining Detection risk (and the nature, extent, and timing of testing to be performed). So if the CR is assumed to be low, DR will be high, and the number of samples will be relatively low.

    However, there is a risk that the auditor assesses the control risk too low (they think the controls are good when in reality they suck) and therefore not enough tests are performed to conclude the correct audit opinion.

    In an effort to minimize the risk of assessing the control risk too low (in the problem lowering that risk from 5% to 1%), the auditor will need to increase the control risk itself (i.e. rely LESS on the controls in testing to avoid the risk of relying on the controls too much). Therefore, DR is lower and the extent of testing (e.g. # of samples) increases.

    Does that make sense? It is helping me to explain this… so sorry if I'm overdoing it. LOL

    REG- 91
    AUD- 97
    BEC- 91
    FAR- May

Viewing 9 replies - 1 through 9 (of 9 total)
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