Report

Module G Variables Sampling Accounting 408 Module G 1 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 408 Module G 2 1. Introduction (continued) Types PPS Sampling Classical methods (omit pages 811-820) Accounting 408 mean per unit difference estimation ratio estimation Module G 3 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 408 Module G 4 2. PPS Sampling (continued) Characteristics of PPS advantages Accounting 408 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 5 2. PPS Sampling (continued) disadvantages Accounting 408 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 6 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 408 Module G 7 2. PPS Sampling (continued) Statistical conclusion: I am X% confident that the dollar amount of error in the account does not exceed $Y. Accounting 408 Where: X = confidence level Y = sample result (UL) Module G 8 2. PPS Sampling (continued) Evaluation of results if UL < tolerable misstatement—accept balance if UL > tolerable misstatement—cannot accept balance investigate causes of misstatements. increase sample size (usually not recommended) or adjust balance for difference Example - handout Accounting 408 Module G 9 2. PPS Sampling (continued) A/R Balance: Risk of Incorrect Acceptance: Expected Error: Case Case Tolerable Error: Accounting 408 $650,000 5.0% A: $ 0 B: $ 6,500 $19,500 Module G 10 Expansion Factor Table Expansion Factors for Risk of Incorrect Acceptance Factor 1% 1.9 Accounting 408 5% 1.6 Risk of Incorrect Acceptance 10% 15% 20% 25% 1.5 1.4 1.3 1.25 Module G 30% 1.2 50% 1.1 11 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 408 Module G 12 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 408 Module G 13 4. Classical Methods (cont) Mean per Unit Difference Estimation Ratio Estimation Example Accounting 408 Module G 14