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# Probability Proportional to Size Sampling

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Tweet## Analie Macalipay

on 11 October 2012#### Transcript of Probability Proportional to Size Sampling

Tests of Controls Substantive Tests 1. Define the objective of the test. 3. Determine the sample size. 2.Determine the procedures to be performed. 4. Select the sample. 5. Apply the audit procedures. 6. Evaluate the sample results. Specify the control procedures to be tested. Consider the effects of the following factors in determining the sample size. Acceptable sampling risk (Inverse)

Tolerable deviation rate (Inverse)

Expected population deviation (Direct) Acceptable sampling risk (Inverse)

Tolerable misstatement (Inverse)

Expected misstatement and population variation (Direct) Use any one of the following techniques: Use any one of the following techniques and stratify the population, when appropriate: Random number selection

Systematic selection

Haphazard selection Random number selection

Systematic selection

Haphazard selection

Value weighted selection Apply the audit procedures to the sample items. Decide whether the results supported the planned degree of reliance on internal control. Decide whether to accept account balance as fairly stated or to require further actions. Specify the purpose of the test and its relationship to the financial statement assertions. Determine if the appropriate audit procedures to be performed satisfy the objective.

Define the population and the conditions that constitute a deviation. Audit Sampling for Substantive Tests (Probability-Proportional-to-Size Sampling) Report by:

Analie Macalipay

BSA 4-11D Summary of the Basic Steps when Using Audit Sampling Techniques Probability-Proportional-to-Size Sampling applies the theory of attributes sampling to estimate the total peso amount of misstatement in a population. Assumptions Underlying PPS Sampling: expected misstatement rate in the population is small

amount of misstatement in physical unit should not exceed recorded book value of the item

PPS focuses on overstatements Advantages of PPS Sampling: PPS sampling automatically results in a stratified sample because items are selected in proportion to their peso amounts.

If no errors are expected, PPS sampling usually results in a smaller sample size than classical variables sampling.

A PPS sample can be designed more easily and sample selection can begin before the complete population is available. Disadvantages of PPS Sampling: If a PPS sample includes understatement errors, evaluation of the sample will require special design considerations.

When errors are found, PPS evaluation may overstate the allowance for sampling risk.

PPS sampling generally includes an assumption that the audited amount of a sampling unit should not be less than zero or greater than the recorded amount. Application of the Steps Using PPS Technique for Substantive Tests Planning 1. Define the test objectives.

2. Define the population characteristics.

3. Determine the sample size. Performance 4. Select sample items.

5. Perform the auditing procedures. Evaluation 6. Analyze exemptions.

7. Draw final conclusions. 1. Define the test objectives Sampling may be used for substantive testing to: 1. Test the reasonableness of assertions about a

financial statement amount.

2. Develop an estimate of some amount. 2. Define the population characteristics. • Define the population.

• Define the sample unit.

• Define a misstatement. population the monetary value of an account balance, such as accounts receivable, investment securities or inventory. sample unit an individual peso represents the sampling unit.

also called logical unit. misstatement a misstatement is defined as the difference between monetary amounts in the client’s records and amounts supported by audit evidence. 3. Determine the sample size. using the following inputs: • The desired confidence level or risk of incorrect acceptance.

• The tolerable misstatement.

• The expected population misstatement.

• Population size. 4. Select sample items. using this formula: using the following formula: where: n = sample size

PBV = population book value

RF = reliability factor

TM = tolerable misstatement

EM = expected misstatement

EF = expansion factor where: SI = sampling interval

PBV = population book value

n = sample size 5. Perform the audit procedures. After the sample items have been selected, the auditor conducts the planned audit procedures on the logical units containing the selected peso sampling units. 6. Analyze exemptions. Calculate the projected misstatement and the upper limit on the misstatement. using the following formula: where: ULM = upper limit on misstatement

PM = projected misstatement

BP = basic precision

IA = incremental allowance 7. Draw final conclusion. Thank you for

listening!! :)

Full transcriptTolerable deviation rate (Inverse)

Expected population deviation (Direct) Acceptable sampling risk (Inverse)

Tolerable misstatement (Inverse)

Expected misstatement and population variation (Direct) Use any one of the following techniques: Use any one of the following techniques and stratify the population, when appropriate: Random number selection

Systematic selection

Haphazard selection Random number selection

Systematic selection

Haphazard selection

Value weighted selection Apply the audit procedures to the sample items. Decide whether the results supported the planned degree of reliance on internal control. Decide whether to accept account balance as fairly stated or to require further actions. Specify the purpose of the test and its relationship to the financial statement assertions. Determine if the appropriate audit procedures to be performed satisfy the objective.

Define the population and the conditions that constitute a deviation. Audit Sampling for Substantive Tests (Probability-Proportional-to-Size Sampling) Report by:

Analie Macalipay

BSA 4-11D Summary of the Basic Steps when Using Audit Sampling Techniques Probability-Proportional-to-Size Sampling applies the theory of attributes sampling to estimate the total peso amount of misstatement in a population. Assumptions Underlying PPS Sampling: expected misstatement rate in the population is small

amount of misstatement in physical unit should not exceed recorded book value of the item

PPS focuses on overstatements Advantages of PPS Sampling: PPS sampling automatically results in a stratified sample because items are selected in proportion to their peso amounts.

If no errors are expected, PPS sampling usually results in a smaller sample size than classical variables sampling.

A PPS sample can be designed more easily and sample selection can begin before the complete population is available. Disadvantages of PPS Sampling: If a PPS sample includes understatement errors, evaluation of the sample will require special design considerations.

When errors are found, PPS evaluation may overstate the allowance for sampling risk.

PPS sampling generally includes an assumption that the audited amount of a sampling unit should not be less than zero or greater than the recorded amount. Application of the Steps Using PPS Technique for Substantive Tests Planning 1. Define the test objectives.

2. Define the population characteristics.

3. Determine the sample size. Performance 4. Select sample items.

5. Perform the auditing procedures. Evaluation 6. Analyze exemptions.

7. Draw final conclusions. 1. Define the test objectives Sampling may be used for substantive testing to: 1. Test the reasonableness of assertions about a

financial statement amount.

2. Develop an estimate of some amount. 2. Define the population characteristics. • Define the population.

• Define the sample unit.

• Define a misstatement. population the monetary value of an account balance, such as accounts receivable, investment securities or inventory. sample unit an individual peso represents the sampling unit.

also called logical unit. misstatement a misstatement is defined as the difference between monetary amounts in the client’s records and amounts supported by audit evidence. 3. Determine the sample size. using the following inputs: • The desired confidence level or risk of incorrect acceptance.

• The tolerable misstatement.

• The expected population misstatement.

• Population size. 4. Select sample items. using this formula: using the following formula: where: n = sample size

PBV = population book value

RF = reliability factor

TM = tolerable misstatement

EM = expected misstatement

EF = expansion factor where: SI = sampling interval

PBV = population book value

n = sample size 5. Perform the audit procedures. After the sample items have been selected, the auditor conducts the planned audit procedures on the logical units containing the selected peso sampling units. 6. Analyze exemptions. Calculate the projected misstatement and the upper limit on the misstatement. using the following formula: where: ULM = upper limit on misstatement

PM = projected misstatement

BP = basic precision

IA = incremental allowance 7. Draw final conclusion. Thank you for

listening!! :)