Module G Variables Sampling Accounting 4081Module G

Accounting 408Module G2 1. Introduction Variables sampling variable - a measure possessed by every member of the population (dollar) Monetary method Used in substantive testing Used to substantiate an account balance or estimate an account balance

Accounting 408Module G3 1. Introduction (continued) Types PPS Sampling Classical methods (omit pages ) mean per unit difference estimation ratio estimation

Accounting 408Module G4 2. PPS Sampling Introduction called various names relatively new method developed specifically for auditing Sampling unit each dollar in the population number of physical items is irrelevant example of selecting a sample

Accounting 408Module G5 2. PPS Sampling (continued) Characteristics of PPS advantages automatically accomplishes stratification (greater chance of including larger dollar amount items) with low error rates, requires smaller sample sizes than classical methods generally easier to use than classical methods no need to measure the standard deviation of the population

Accounting 408Module G6 2. PPS Sampling (continued) disadvantages provides conservative (higher) estimate of misstatement zero or negative items have no chance of being selected and require special consideration less useful for understated account balances or omission errors less useful for high expected error rates requires a book value for each item

Accounting 408Module G7 2. PPS Sampling (continued) Works best when searching for overstatements with a low expected error rate Assumptions low expected error rate (< 10%) population contains > 2,000 items the amount of any error cannot be more than the reported BV of the item

Accounting 408Module G8 2. PPS Sampling (continued) Statistical conclusion: I am X% confident that the dollar amount of error in the account does not exceed $Y. Where: X = confidence level Y = sample result (UL)

Accounting 408Module G9 2. PPS Sampling (continued) Evaluation of results if UL < tolerable misstatement—accept balance investigate causes of misstatements. if UL > tolerable misstatement—cannot accept balance increase sample size (usually not recommended) or adjust balance for difference Example - handout

Accounting 408Module G10 2. PPS Sampling (continued) A/R Balance:$650,000 Risk of Incorrect Acceptance: 5.0% Expected Error: Case A:$ 0 Case B:$ 6,500 Tolerable Error:$19,500

Expansion Factor Table Expansion Factors for Risk of Incorrect Acceptance Risk of Incorrect Acceptance 1%5%10%15%20%25%30%50% Factor Accounting 408Module G11

Accounting 408Module G12 3. Nonstatistical Methods Does not measure auditor’s exposure to sampling risk Permitted under GAAS Differences does not consider sampling risk in determining sample size or evaluating sample results may use nonprobabilistic selection technique

Accounting 408Module G13 4. Classical Methods Introduction based on normal distribution theory requires an estimate of the population’s standard deviation sampling unit - physical items in population

Accounting 408Module G14 4. Classical Methods (cont) Mean per Unit Difference Estimation Ratio Estimation Example