Question

Suppose that in the Prendergast model the probability of public servants' identification of applicants’ true types equals p$\geq$1/2 and does not depend on public servants' efforts. Therefore the only purpose of an audit is to correct unavoidable errors made by public servants and not penalize them should such errors be found.
Assuming c(x)= $x^{2}$, and p=0.6, what should be the cost of an audit caused by a customer complaint? What should be the cost of a random audit of cases where no complaints were filed? (Enter two numbers in respective order)

Answer 1

Answer:

⤵️⤵️

A pendulum is a rod hanging vertically from its top end (or a weight called a bob hanging from a string) that swings from side to side due to the force of gravity.

Example -: A pendulum works by converting energy back and forth, a bit like a rollercoaster ride.

Answer 2

Explanation:

Audit sampling is an investigative tool in which less than 100% of the total items within the population of items are selected to be audited. It is an auditing technique that provides supporting evidence that allows auditors to issue audit opinions without having to audit every single item and transaction.

Audit Sampling

Auditing Explained

Auditing is the process by which a company’s financial records are verified and examined. It is to ensure that the transactions on the financial records are accurately and fairly represented.

Since financial statements are prepared internally by companies and organizations, there is a high risk of manipulation and fraudulent behavior surrounding the preparation of the statements.

Types of Auditing

Auditing is important in ensuring that companies are representing their financial statements fairly and accurately. There are three types of auditing:

Internal audits are performed by the internal employees of an organization, but they are usually not distributed outside of the company.

External audits are performed by external parties that are seen as having more unbiased opinions since internal audits may be influenced by conflicts of interest.

Government audits are performed by government entities to ensure that financial statements have been prepared accurately. In the U.S., the Internal Revenue Service (IRS) performs audits that verify the accuracy of a taxpayer’s tax returns. The IRS’s counterpart in Canada is the Canada Revenue Agency (CRA).

Auditing Importance

Financial statements are prepared per accounting standards and are meant to provide useful information for relevant decision-makers. However, the information provided needs to be accurate and fairly presented.

Auditing is important to ensure that entities are not misrepresenting their financial statements so that relevant stakeholders do not make decisions based on faulty financial statements. It is important in establishing trust and efficiency within the financial system.

Purpose of Audit Sampling

No matter what kind of audit is being performed – internal, external, or government – audit sampling needs to be used so that auditors can complete their audits without wasting resources in checking every single item. The objectives of audit sampling are as follows:

Gather enough evidence to conclude an audit opinion

Reduce the number of resources used

Provide the basis for auditors to issue a conclusive audit opinion

Detect any errors or fraud that can occur

Prove that auditors have completed their audit fully in accordance with auditing standards

Used as a tool for investigating

Audit Sampling Importance

When auditing financial statements, it is not feasible to audit and check every single item within the financial statements. It will be very costly and will take a lot of resources and time to do so.

Audit sampling enables auditors to make conclusions and express fair opinions based on predetermined objectives without having to check all of the items within financial statements. The auditors will only verify selected items, and through sampling, can infer their opinion on the entire population of items.

There are two forms of sampling:

1. Statistical audit sampling

Statistical audit sampling involves a sampling approach where the auditor utilizes statistical methods such as random sampling to select items to be verified. Random sampling is used when there are many items or transactions on record.

Consider a company with more than 100 inventory transactions on its records. Using statistical sampling is recommended due to the high number of transactions.

For example, with statistical sampling, ten items are selected from the total population randomly. Every single item within the 100 has an equal probability of being selected and tested for accuracy as a result. Again, it benefits auditors since they can still make an audit opinion but do not have to check all 100 transactions.