Final answer:
Judgment sampling allows auditors to utilize known information about the population when auditing financial statements, but its effectiveness depends on context and risks of bias. It neither always produces superior results nor is it always inappropriate when statistical methods are available.
Step-by-step explanation:
The use of judgment sampling in an audit of financial statements has various implications depending on the context. While it is not accurate to say judgment sampling is never appropriate, typically, option 2) allows the auditor to better use known information about the population being tested is often considered correct. Judgment sampling allows auditors to focus on areas that they believe to be of greater risk or significance based on their professional judgement. It is not always the case that judgment sampling is inappropriate when statistical methods are available, as each method has its strengths and weaknesses. Moreover, it is misleading to claim that judgment sampling always produces superior results at a lower cost, as it heavily depends on the auditor's expertise and the specifics of the sampled population.
In situations where the auditor has a strong understanding of the population characteristics and there are specific areas of higher risk, judgment sampling can be very effective. However, larger samples and random sampling methods can often produce more representative results and are less prone to bias. In short, the appropriateness and effectiveness of judgment sampling depend on the audit context and should be weighed against other sampling methods.