- 25 Marks
AA – L2 – Q43 – Audit Sampling
Describe use of statistical and judgmental sampling in auditing revenue system of a manufacturing company. Describe use of statistical and judgmental sampling in direct confirmation of trade receivables. Describe use of statistical and judgmental sampling in verifying year-end trade receivables. Discuss advantages and disadvantages of statistical vs. judgmental sampling in audit. Explain why auditing accounting estimates is difficult for auditors.
Question
You are planning the audit of the revenue system and year-end trade receivables of Porter Manufacturing.
The company has revenue of approximately $15 million and all of its sales are made on credit. The year-end value of trade receivables is approximately $3 million, and there are about 1,000 customers on the sales ledger.
You have been asked by the partner in charge of the audit to consider whether it would be appropriate to use statistical or judgmental sampling in your audit work.
Required:
(a) Describe and illustrate, by the use of suitable examples, the way in which statistics and judgement can be used in audit sampling, in relation to:
(i) the audit of the revenue system
(ii) writing directly to trade receivables, asking them to confirm the balance owed
(iii) the verification of year-end trade receivables
(b) Based on your answer to (a), above, discuss the advantages and disadvantages of the use of statistical or judgmental sampling.
(c) Explain why the audit of accounting estimates is a difficult area for the auditor.
(d) List the audit evidence you would seek in respect of a provision for damages in respect of an action brought by a customer for breach of contract.
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