Which sampling method is best for auditing sales returns with a concern for fraud?

The discovery sampling method is particularly well-suited for auditing scenarios where there is a concern for fraud, especially in the context of sales returns. This method focuses on identifying the presence or absence of specific characteristics within a sample, such as fraudulent transactions. It is aimed at detecting rare events, like fraudulent activities, rather than estimating a characteristic's average or total.

In the case of sales returns, where the risk of fraudulent returns may be low but significant for the overall control environment, discovery sampling allows auditors to concentrate their efforts on uncovering instances of fraud. By testing a limited number of transactions that are flagged or have higher inherent risks, the auditor can effectively identify whether fraud exists without needing a comprehensive examination of all sales returns. If instances of fraud are detected within the sample, this could trigger a deeper investigation, thereby effectively mitigating risks associated with sales return fraud.

This targeted approach enhances the efficiency of the audit process while addressing the critical concern for fraud, making it a preferred choice in auditing contexts where the primary objective is to identify potential anomalies and instances of fraudulent activity.