6. What is statistical sampling? What is non-statistical sampling? Explain the strengths and weaknesses of each approach.

Statistical sampling and non-statistical sampling are two approaches auditors use when selecting a subset of items from a population for testing. Statistical sampling uses the laws of probability to select and evaluate a sample. This approach helps auditors quantify sampling risk and project findings to the population. The sampling is random, and risk can be measured. Non-statistical sampling relies on the auditor's professional judgment. The sample is chosen without randomization based on judgment. The sampling risk is not quantifiable, and results cannot be projected to the population.

The strengths of statistical sampling include the ability to quantify the level of sampling risk. The result is supported by probability theory, which provides ease of justification for conclusions to users and in court. The findings can be projected to the entire population, which is useful in estimating misstatement amounts. The approach does not carry auditor influence or bias in the sample selection. The weaknesses of statistical sampling include its complexities, as users and auditors must understand how statistical concepts and calculations work. It is often time-consuming and requires planning, documentation, and computation. Statistical sampling could be costly and require specialized tools or software, and additional training for auditors is sometimes necessary. Sometimes statistical sampling is not warranted, especially in small samples or when auditors require a specific item to be reviewed.

The strengths of non-statistical sampling are its simplicity and flexibility with quicker and easier applications. It is cost-effective and does not require many resources or training. It can be implemented without statistical software. Non-statistical sampling allows auditors to target high-risk or material items that may not be selected in a random sample. The weaknesses of non-statistical sampling are the inability to quantify sampling risk. It is less defensible and harder to justify the sample size and selection if challenged by regulators. There is a potential for bias since some samples may not be represented in the selection.

7. Explain non-sampling risk. Give an example and explain how it relates to auditing.

Non-sampling risk is the risk of errors in the audit process that occur for reasons other than sampling risk. These errors include misinterpreting evidence, using inappropriate procedures, or failing to detect a deviation. These errors can lead to an inaccurate assessment of a control's effectiveness, even if the sample was properly selected. An example of non-sampling risk is when an auditor selects a well-designed, representative sample of transactions to test a control, but misinterprets the evidence and concludes that the control is effective. There were clear deviations present, but the auditor misinterpreted the results. The auditor's judgment is important because the results are affected by its reliability. These risks could lead to incorrect conclusions about financial statements or internal controls.