Why Do Auditors Generally Use a Sampling Approach to Evidence

question 33

Multiple Choice

Why do auditors generally use a sampling approach to evidence gathering?

• A)Auditors are experts and do not need to look at much to know whether the financial statements are correct or not.
• B)Auditors must balance the cost of the audit with the need for precision.
• C)Auditors must limit their exposure to their auditee to maintain independence.
• D)The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

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Definitions:

Discount Rate

The interest rate the Federal Reserve charges commercial banks for short-term loans, or a rate used to discount future cash flows to their present value.

IRR Method

The Internal Rate of Return method, a capital budgeting technique that calculates the rate of return at which the net present value of all the cash flows (both positive and negative) from a project or investment equals zero.

Nonconventional Flows

Atypical or irregular cash flows in an investment, complicating the assessment of an investment's value or project's profitability.

Profitability Index

A calculation that measures the relative profitability of an investment, by dividing the present value of future cash flows by the initial investment cost.