Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 585

General Sampling. Alex Fishkin is trying to decide on a new location for an ice cream and candy shop. He has decided that if the average number of children per household within a one-mile radius of a proposed shop exceeds 1.3, it would be financially successful and would provide him an annual net income of $50,000 (the minimum acceptable amount). If not, he would stand to lose his initial investment of $150,000.
Required:
a. What factors would influence Fishkin's decision to use sampling to answer this question?
b. What are some of the advantages and disadvantages of using sampling to answer this question?
c. Define sampling risk. Describe two different outcomes that may reflect Fishkin's exposure to sampling risk. Which of these outcomes would be of more concern to him?
d. If the initial investment was $10,000 instead of $150,000, how do you think Fishkin would evaluate the potential outcomes of the two sampling risks noted in (c)?
e. Define nonsampling risk. Describe some potential nonsampling risks that Fishkin could encounter in this application.