Question

John Doe, CPA, is interested in testing the fairness of the ending inventory balance during the audit of ABC Co. John has relatively little experience using statistical sampling methods and, quite frankly, doesn't like to turn anything over to random chance—especially the selection of items to test. John used a judgmental method of selecting items for testing. The method involves testing the inventory-item balances that he deems most risky or most likely to be misstated. John identified items to test based on size of balance, findings from prior years, age of inventory, description, and professional judgment.

He selected 26 items with a total book value of $720,000. In his “sample,” he found a combined $80,000 in overstatement errors. The book value of inventory on the entity's records is $1,090,000. Overall materiality for the engagement is $500,000. John's policy is to use 50 percent or less of overall materiality as tolerable misstatement for any one account.

Required:

a. What is your opinion of John's method of selecting his “sample”?

Answer 1

As the question says John doe is using a judgmental sampling method so let's first understand what is judgmental sampling

Judgemental sampling is that sampling in which an expert chooses the sample on the basis of his expert knowledge it is a kind of non probability sampling where the expert or research uses his judgement

Now Joe uses his judgement to select the sample here are the advantages of judgement sampling which means it has low margin or error approximately 3 to 5 percent it can be higher as well if the person as an command over the expert area then it can be more advantageous as given in the question Joe found good number of errors

But it has disadvantages as well because it is prone to researcher biasness Joe didn't do any biasness but he focuses more on the risky misstatements secondly it is not good for too large samples because chances of error becomes more and no way to judge the reliability of the expert

So this sampling is valid and good for the Joe inventory fairness.