Probability-Proportional-to-size (PPS) Sampling Flashcards
What is PPS Sampling?
It is not an item, an account, BUT an INDIVIDUAL DOLLAR
This is the ultimate stratification
Example: AR may have 7500 customer and $3,000,000 outstanding. The population is seen as 3,000,000 individual items.
What are the advantages of PPS?
Efficiency- If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than the other sampling methods
What is the disadvantage of PPS?
Detecting negative balances (understatements) or zero (unrecorded) balances.
Most appropriate when concern is related to overstatements and existence concerns
How do you determine the sample size?
1) The reliability factor (from AICPA tables)
2) Population book value (total dollar amount)
3) Tolerable misstatement (net of any expected misstatement)
How do you select the sample?
PPS are usually selected using a “systematic selection” with a random starting point and a specified “sample interval”
How do you determine the sample interval?
Population book value / sample size
What are projected misstatement?
For items having a book value greater than or equal to the sample internal, the “projected misstatement is the actual misstatement identified
What is the sample size calculation for PPS?
(Reliability Factor X Population Total) / Tolerable misstatement, net of expected misstatements
How do you calculate the sample interval?
Population book value / Sample Size
