An auditor carries out attribute sampling to test a control. The auditor uses bona fide representative sampling techniques to select a sample. The tolerable error rate (TER) is 6%.

	CASE 1	CASE 2
Sample error rate (SER) found by auditor	SER = 4.2%	SER = 7.2%
Auditor's conclusion CAN rely/CANNOT rely on tested control

The auditor will never know the actual population error rate. But, for purposes of this exercise, let's assume that we know what the actual population error rate is, and hence we know whether the controls are effective or not in reality. In the boxes below, indicate where, despite bona fide sampling techniques, the auditor must have ended up with a NON-REPRESENTTIVE SAMPLE.

	CASE 1	CASE 2
Reality A Controls are effective
Reality B Controls are ineffective

Which situation leads to an INEFFICIENT audit? Which leads to an INEFFECTIVE audit? Which is worse?

Is it possible to draw an inappropriate conclusion even if the auditor uses representative sampling techniques?

Dan Scribner - PART 1

Dan Scribner is interested in testing the fairness of the ending inventory balance at an audit client. Assume Dan used good statistical sampling techniques and he selected 26 items with a total book value of $720,000. In his sample, he found a combined $80,000 in overstatement errors. The book value of the inventory on the client's books is $1,090,000.

Overall materiality for the engagement is $500,000. Dan's audit firm policy is to use 50 percent or less of overall materiality as tolerable misstatement for any one account.

a) What is the projected error in the population?

b) Is the inventory account materially misstated?

c) By how much should you ask the client to adjust the inventory account?

PART 2

Assume instead that Dan has relatively little experience using statistical sampling methods and decided to use a judgmental method of selecting items to test.

The method involves testing the inventory balances that he deems most risky or most likely to be misstated. Dan identified items to test based on size of balance, findings of prior years, age of inventory, description, and professional judgment. Assume Dan's judgment sample resulted in 26 items as above, and he found $80,000 in overstatement errors.

What is your opinion of Dan's method of selecting his sample?

Evaluate Dan's results. Does he have sufficient evidence to conclude that the balance is fairly stated?