Variable Sampling

Question 1

When is ratio estimation most effective?

Answer 1

differences are proportional to book values bc there is a correlation between individual differences and book values

Question 2

why would an auditor stratify a population into meaningful groups??

Answer 2

the population has high variable recorded amounts

separating the population into homogeneous groups will help auditor to select transactions that meet specific audit objectives and then perform substantive procedures more efficiently

Question 3

stratified mean per unit (MPU) is more efficient than unstratified MPU bc?

Answer 3

stratification allows auditor to separate population based on size hence produces an estimate that has precision with smaller sample size

-reduced sample size and variability

Question 4

increasing the level of control risk is directly related to sample size

Answer 4

true

Question 5

what is the advantage of using classic variables sampling vs PPS sampling (probability proportional to size sampling)?

Answer 5

while PPS utilizes dollar units for sampling where the inclusion of zero and negative balances would need special considerations

classing variables sampling does not need special consideration for zero and negative balances

Question 6

what four factors does variable sampling depend on?

Answer 6

relies heavily on the normal bell curve

1) standard deviation (variability of population)
2) tolerance misstatements- larger tolerance the less the sample size is required to achieve the large confidence interval (allowance for sampling risk)
3) Risk of incorrect acceptance (type 2 error)
4) population size (explicitly) while in attribute sampling then population size was implicitly

Question 7

Allowance for Sampling Risk Formula

Answer 7

A= ZalphaN(S/radicaln)

A=allowance for sampling risk
Zalpha= coefficient of reliability (and confidence)
N= population size
S= estimated populations standard deviation
n=sample size

Question 8

5 factors that drive sample size

Answer 8

1) variability of pop (direct)
2) tolerable of misstatement (incorrect)
3) risk of incorrect acceptance (inverse)
4) population size- explicit (direct)
5) risk of incorrect rejection (inverse)

Question 9

3 approaches to classical variable sampling

Answer 9

1) difference in estimation (estimate population value by focusing on the dollar difference between sample items audit value and their book value)

d=(av-bv)/n
D=d*N
AV=BV+D

2) ratio estimation (estimate population value by focusing on the relationship between sample audits audit value and book value)

R=av/bv

3) mean per unit estimate (estimate populations audit value by first calculating samples audit value

AV=R*BV

Question 10

PPS Sampling

Answer 10

groups population into individual dollar items with extreme degree of stratification (more efficient when there are few differences between audit and book values)

Question 11

what are the two parameters of variable sampling

Answer 11

mean and variance

Question 12

what are the 8 steps in variable sampling plan

Answer 12

1) identify the sampling objective
2) identify the relevant population
3) select specific sampling technique
4) calculate the sampling size
5) determine method of selection (random vs systematic)
6) conduct sample
7) evaluate the sample
8) document the procedures (stratification)