Question

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

(AICPA adapted)

Answer 1

Answer :

(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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