Question

If the risk of material misstatement is low and detection risk is high _______.

1) then a smaller sample size should be selected
2) then a larger sample size should be selected
3) then control risk should be assessed as high
4) the auditor should consider outsourcing the audit work to the internal audit function

Answer 1

If the risk of material misstatement is low and detection risk is high, a smaller sample size should be selected. Hence, the correct answer is option (1).

Step-by-step explanation:

The relationship between risk and sample size in audit planning follows an inverse relationship. When the risk of material misstatement is low (meaning that inherent risk and control risk are low), the auditor may choose to reduce the sample size because they have greater confidence in the reliability of the financial statements.

Conversely, if detection risk is high (meaning that the auditor's procedures are less effective in detecting misstatements), a smaller sample size would help compensate for the higher detection risk. Therefore, a smaller sample size is typically selected when the risk of material misstatement is low and detection risk is high.