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=
A
SD U N
n
E r
N
) X x (
2
= o
1
) (
2
=
n
X x
s
Standard deviation
Population SD
Sample SD
Calculation of planned allowance for
sampling risk (A):
r
a
U
U
TM
A
+
=
1
TM = tolerable misstatement
U
a
= Incorrect acceptance coefficient (Table 9-8)
U
r
= incorrect rejection coefficient (Table 9-8)
Calculation of adjusted allowance for
sampling risk (A):
TM = Tolerable misstatement
U
a
= Incorrect acceptance coefficient (Table 9-8)
SD
C
= Sample (calculated) standard deviation
n = sample size
n
SD U N
TM A
C a
=
'
Estimated total audited value
= Mean audited value x Number of accounts
Acceptance interval
= Estimated total audited value +/- Adjusted
allowance for sampling risk
Projected misstatement
= Estimated total audited value Book value of
population
Determination of required sample size
Must consider IR, CR and AP risk
Evaluation of results
Compare projected misstatement to tolerable
misstatement.
As PM approaches TM then likelihood of
material misstatement increasing.
Rule-of-thumb: if PM exceeds 1/3 of TM, PM
becoming too high
Applies the theory of attributes sampling to
estimate the total dollar amount of misstatement
in a population.
Population is defined by the individual dollars
comprising the populations book value ($1 = 1
item).
Relatively easy to use and often results in smaller
sample sizes than classical variables approaches.
Assumptions underlying PPS sampling:
Expected misstatement rate in the population is small.
Amount of misstatement in physical unit should not
exceed recorded BV of the item.
PPS focuses on overstatements.
) (
0
EF EM TM
RF PBV
n
=
PBV = population book value
RF = reliability factor (Table 9-14)
TM = tolerable misstatement
EM = expected misstatement
EF = expansion factor (Table 9-15)
Systematic selection is generally used with PPS
sampling:
n
PBV
SI =
SI = sampling interval
PBV = population book value
n = sample size
IA BP PM ULM + + =
ULM = upper limit on misstatement
PM = projected misstatement
BP = basic precision
IA = incremental allowance
Allowance for sampling risk
Projected misstatement (PM)
If BV < SI, PM = TF x SI
TF = tainting factor = (BV AV) / BV
BV = book value
AV = audit value
If BV > SI, PM = actual misstatement
Allowance for sampling risk
Basic precision = SI x RF
0
Incremental allowance
If no misstatements in sample found, IA = 0
If misstatements found:
For misstatements in which BV < SI, rank
order projected misstatements from largest
to smallest, multiply by corresponding
incremental factor (from Table 9-14) and
sum to calculate IA.
Compare ULM to TM:
If ULM < TM, conclude that population is
not misstated by more than TM at the
specified level of sampling risk.
If ULM > TM, conclude that the sample
results do not provide enough assurance
that the population misstatement is less
than the TM and balance adjustment may
be warranted.