Presenter:
Michelle McEacharn, University of Louisiana at Monroe
Bruce Wampler, Louisiana State University in Shreveport
Description:
In this session, a classroom exercise that effectively demonstrates the concept of sampling risk in testing internal controls will be presented. The exercise has been used in multiple auditing sections and as part of a continuing professional education workshop for internal auditors.
After a trial run to ensure that the technique is understood, participants are asked to estimate the risk of assessing control risk too high (RACRTH) given increasing population error rates. In all cases, the population error rate is less than the tolerable rate, so the correct decision is to rely on the control. Each participant selects (or is provided) a random sample, determines how many of the actual exceptions would have been detected, and makes an accept/reject decision regarding the population. Empirical statistics (for the entire class) are calculated and compared to the theoretical probability of incorrect rejection. Participants then re-estimate RACRTH for the remaining population error rates, and the process continues through several iterations.
Participants experience the concept of sampling risk from a very real perspective by comparing empirical data to theoretical probabilities. Their predictions regarding the probability of incorrect rejection generally improve with each iteration, indicating an enhanced understanding of the concept of sampling risk.
