Relationship between Audit Risk and Sampling

Relationship between Audit Risk and Sampling

First recap:

• Audit risk = risk the auditor gives a wrong opinion on financial statements that are materially misstated.
• Sampling = auditor tests only part of the population (not 100%), then makes a conclusion about the whole.

Because auditors use sampling, there is always a chance that:

• The sample looks okay, but the population actually has material misstatement.
• That chance is part of detection risk → audit risk.

1. Where Sampling Fits in the Audit Risk Model

Audit risk model:

AR = IR × CR × DR

Detection Risk (DR) = risk that audit procedures (including sampling) fail to detect a material misstatement.

When auditors use sampling:

• Sampling risk = risk that the sample is not representative, so auditor reaches wrong conclusion.
• Sampling risk is a component of detection risk.

So:

• Higher sampling risk → higher detection risk → higher audit risk
• Lower sampling risk → lower detection risk → lower audit risk

2. How Audit Risk Affects Sampling

If the auditor wants LOW audit risk, they must reduce detection risk, so they must also reduce sampling risk.

How to reduce sampling risk?

• Increase sample size
• Use better selection methods (e.g. random, systematic)
• Ensure representative samples
• Use appropriate population and clear sampling procedures

So:

Acceptable audit risk LOW

➜ Detection risk LOW

➜ Sampling risk LOW

➜ Bigger / better sample, more careful sampling

Acceptable audit risk HIGHER (still acceptable)

➜ Detection risk can be higher

➜ Sampling risk can be higher

➜ Smaller sample may be enough

If auditor wants…	Effect on DR	Effect on Sampling
Very low audit risk	Must be low	Larger sample, more reliable selection
Can accept higher AR	Can be higher	Smaller sample may be acceptable

Exam-style Short Answer (Model)

You can write something like this in exam:

Audit risk and sampling are closely related through detection risk. When auditors use sampling, there is a sampling risk that the selected sample is not representative and material misstatements in the population are not detected. 

This contributes to detection risk and therefore audit risk. If the auditor wants to keep audit risk low, detection risk and sampling risk must also be reduced, usually by increasing the sample size and using more appropriate sampling methods. 

If a higher audit risk is acceptable, the auditor may use smaller samples.