The objective of an audit is to reveal the truth about financial statements and express an opinion. Apart from the needs of the organization, other users of the financial statements need to rely on the financial statements. Financial institutions, investors, customers among others rely on the financial statements to make a decision regarding the organization (Gramling et al., 2012). An audit should thus be thorough and accurate. There is no room for mistakes or unnecessary assumptions in auditing.

Smith is auditing Golf Corporation financial statements for the three years ended August 2016. In the prior year’s audit, Smith used the simple variable sampling but changed the technique to probability proportional to size technique in the current year. However, Smith knew that the PPS would result in a smaller sample size than the simple variables sampling and assumed that such a sample would be stratified population. The judgment of the auditor is very significant (Ciprian, 2015). One needs to make many assumptions and statements and not all of them will always be right. However, there are the accepted standards in auditing. Among the standards is the use of a representative sample. The sampling method and the sample size are issues that are significant for accurate results.

Some of the assumption made by Smith does not meet the standards of auditing. For one the assumption that the use of PPS would result in a stratified sample is wrong. One arrives at a stratified sample by dividing the population into strata and then using simple random sampling to get a sample size. Smith did not follow this procedure. In addition, after determining the sample size, which was 60, Smith resulted to using only 58 since 2 of the samples were large. These were just samples, and there were other items in the population capable of replacing two large samples. However, instead of using a sampling technique to identify more samples, Smith selected the three largest samples that had not hit the sample. This in sampling is not representative but biased. Again, Smith also assumed three of the customers who had insignificant balances.

Smith was auditing the accounts for three years ending August 2016. In the previous year, he used simple variable sampling, but he decided to change the technique to PPS in the current year. This presents a case of inconsistency. The judgment of the auditor should be consistent to ensure that the results are accurate and dependable. Auditing is all about determining that there is compliance with the organizational standards. In this case, nothing is insignificant (Ciprian, 2015). The fact that some accounts have low balances does not mean they are insignificant. Smith assumed that because he was auditing to determine an overstatement, then the balances of twenty are insignificant. An overstatement of 1 dollar is still an overstatement.

When Smith found an audited balance of $ 3000 recorded as $ 4000, he assumed that the $ 1000 was a misstatement, but when he found an audited balance of $ 2000 recorded as $ 1900, he assumed the $ 100. This was guided by the fact the auditing was to determine an overstatement and not an understatement. Though, an audit may be looking for a particular problem, other problems that arise needs clearing. Smith assumed the $ 1000 as a misstatement instead of following up with the accounts. There is no consistency in the audit since recording $ 1000 as a misstatement but $ 100 as an overstatement represents a case of inconsistency. Consistency is very vital in auditing.

From the start, Smith expected to find many overstatements but still decided to use the PPS sampling technique, which results in a low sample as compared to simple variable sampling. If he expected to find many overstatements, then it was only good to use a larger sample size. There was no way he could find many overstatements in a small sample. The sampling method, in this case, was wrong in that it generated a small sample.

It is agreeable that some procedures and assumptions made by Smith were consistent but others were not. This raises concerns about the authenticity of his findings that there was no overstatement in the balance. As Ciprian (2015) states, an auditors work revolves around providing a professional, objective and independent opinion on the compliance of the financial statements. When an auditor makes wrong assumptions and misconceptions about issues such as sampling techniques, then, his opinion requires further review.

It is clear that Smith has made several mistakes in the procedure he used. There are inconsistencies in his procedure and nay investor who happens to read the audit report might question the procedure. In addition, his results revealed that there was no overstatement in the balance. If his audit was accurate, the problem might be even greater come next year. Also, an audit for understatements is in order since Smith found an understatement of $ 100 but assumed it since he only concentrated on overstatements.

References

Ciprian, M. (2015). Current Concepts On Selection Techniqeus In Financial Auditing. Annals of Faculty of Economics, 1(1), 1009-1015.

Gramling, A. A., Rittenberg, L. E., & Johnstone, K. M. (2012). Auditing. Mason, OH: South-Western/Cengage Learning.

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