Probability-Proportional-to-size (PPS) sampling

Question 1

What is the relevant “sampling unit “ in PPS sampling?

Answer 1

An individual dollar associated with the financial statement element involved.

Question 2

What is the primary advantage of PPS sampling?

Answer 2

Efficiency—If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods.

Question 3

What is the primary disadvantage of PPS sampling?

Answer 3

PPS sampling does not work very well in dealing with understatements or zero (unrecorded) balances.

Question 4

State the formula for calculating sample size for PPS sampling.

Answer 4

n = “Reliability factor” × Book value/ Tolerable misstatement (net of expected misstatements)

Question 5

State the formula for calculating sampling interval for PPS sampling.

Answer 5

Sampling interval = Tolerable misstatement (net of expected misstatements) / Reliability factor; or alternatively Sample interval = Population book value / Sample size

Question 6

What is the projected misstatement for accounts having a book value greater than or equal to the sample interval?

Answer 6

The projected misstatement is the “actual “ misstatement identified.

Question 7

What is the projected misstatement for accounts having a book value less than the sample interval?

Answer 7

The projected misstatement is based on the “tainting percentage “ applied to the sample interval.