Question

# AP10.7 (LO 8)  PPS sampling Edwards has decided to use probability-proportional-to-size (PPS) sampling in the audit of...

AP10.7 (LO 8)  PPS sampling Edwards has decided to use probability-proportional-to-size (PPS) sampling in the audit of a client's accounts receivable balance. Few, if any, errors of overstatement are expected.

Edwards plans to use the following PPS sampling table:

 5% RELIABILITY FACTORS FOR OVERSTATEMENTS Number of Overstatements Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 0 4.61 3.00 2.31 1.90 1.61 1 6.64 4.75 3.89 3.38 3.00 2 8.41 6.30 5.33 4.72 4.28 3 10.05 7.76 6.69 6.02 5.52 4 11.61 9.16 8.00 7.27 6.73

Required

1. a. Identify the advantages of using PPS sampling over classical variables sampling.
2. b. Calculate the sampling interval and the sample size Edwards should use, given the following information:
 Tolerable misstatement \$15,000 Risk of incorrect acceptance 5% Number of misstatements allowed 0 Recorded amount of accounts receivable \$300,000
3. c. Calculate total projected misstatement if the following three misstatements were discovered in a PPS sample:
 Recorded Amount Audit Amount Sampling Interval 1st misstatement \$  400 \$  320 \$1,000 2nd misstatement 500 0 1,000 3rd misstatement 3,000 2,500 1,000

(a). The advantages of using PPS sampling is that articulate its values in dollars as an alternative for deviation rate. When receivables are being tested,PPS sampling have an edge over advantage with insignificant unapplied customer credits, investemnt securities and plan

(b). Calcualtion of sample size

= BV*(RF value /TM) - (BV*EF)

= [\$300,000*3] / [(\$300,000*5%) - (3,000*1.60)]

= \$900,000 / 10,200

N = 88

Calculation of sample inteval

SI = BV /N

= \$300,000 / 88

= \$3,409

(c).

 Misstatement (a) Record Amount (b) Audit Amount (C) Sampling Interval (d) Taiting factor = (b-c)/b Projected Misstatement 1 \$400 \$320 \$1000 \$0.20 \$80 2 \$500 \$0 \$1000 \$1.00 \$500 3 \$3,000 \$2,500 \$1000 \$0.17 \$500

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