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Module G

Module G. Variables Sampling. 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. 1. Introduction (continued).

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Module G

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  1. Module G Variables Sampling Module G

  2. 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 Module G

  3. 1. Introduction (continued) • Types • PPS Sampling • Classical methods (omit pages 811-820) • mean per unit • difference estimation • ratio estimation Module G

  4. 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 Module G

  5. 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 Module G

  6. 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 Module G

  7. 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 Module G

  8. 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) Module G

  9. 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 Module G

  10. 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 Module G

  11. Expansion Factor Table Module G

  12. 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 nonprobabilisticselection technique Module G

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

  14. 4. Classical Methods (cont) • Mean per Unit • Difference Estimation • Ratio Estimation • Example Module G

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