Question

Show me some pictures of some objective of using probability proportional to size sampling (PPS) to test account balances.

How do an individual use PPS to test account balances and what is the purpose of the sample size and the sampling interval?

Answer 1

Probability proportional Size – is a sampling method. . This method of sampling from a finite population in which size measure is available for each population unit before sampling .

Probability of selecting unit is proportional to its size.

This method of sampling dividend into two parts -1 ) Multistage Sampling 2) Single stage sampling

Normally follow Hansen – Hurvitz estimator in the case of PPS with replacement sampling and the Horvitz- Thompson estimator in the case of probability proportional to size without replacement Sampling.

Proportionate Sampling is a sampling strategy ( a method for gathering participants for a study) used when the population is composed of several subgroups that are vastly different in number .

Stage to follow –

1. Calculate the sample size for each strata
2. Separate population data into strata .
3. List of primary sampling units and their population sizes . Each cluster has its own Cluster Population size
4. Calculate the cumulative sum of population size
5. Determine number of cluster that will be sampled in each strata
6. Determine the Number of individual to be sampled from each cluster
7. Divide the total population by the number of clusters to be sampled

Probability Proportional Sample size ( PPS) sampling – mainly dollar based sampling approach where the population is te number of dollars in the account balance examined

PPS is an effective sampling approach when the auditors is testing for overstatement

To use PPS , auditor must determine the allowable risk of the sample falling to detect a material misstatement

Test of detail risk

Detection risk is the risk that the substantive audit procedures will fail to detect material misstatement

High Inherent risk mean the auditor is examining transactions that are susceptible to misstatement

Auditor want to be more careful while determining sample procedures

To achieve the lower risk of failing to detect , the sample size mist be increased

PPS sample are usually selected using a fixed interval sampling approach

Sample size is computed by dividing the account book value by the sampling interval

Sample items are often selected using a fixed interval approach :

Every 1th dollar after a random start

A random start is required to give every dollar in the population an equal chance to be included in the sample

Items with zero balances have no chances of being selected usig PPS

Based on sample result , the auditor computes the upper misstatement limit ( UML)

UML represents – Maximum dollar overstated that might exist in the population

UML is sum of – basic precision + Most likely misstatement + Incremental allowance for sampling error