PPS Sampling Technique:
The sampling unit is defined as an individual dollar within a population.
Once a dollar is selected, the entire account containing that dollar is audited.
PPS uses attribute sampling theory to express conclusions in dollar amounts rather than as a rate of occurrence.
Advantages:
Automatically emphasizes larger items by stratifying the sample.
Requires a smaller sample size if no errors are expected.
Disadvantages:
Requires special design considerations for zero balances, negative balances, and understated balances.
The sampling interval is determined by dividing the tolerable misstatement by the reliability factor.
Sample size is calculated as the recorded amount of the population divided by the sampling interval.
Tolerable misstatement is the maximum dollar error allowed without causing material misstatement in the financial statements.
Reliability factors correspond to the risk of incorrect acceptance and are typically obtained from tables.
Sample Selection:
A random start is selected, followed by systematic selection of every nth item.
Items greater than the interval are automatically selected.
Evaluation of Sample Results:
Errors found in the sample are projected to the interval.
Projected error and allowance for sampling risk are compared with the tolerable misstatement.
Nature and Cause of Deviations:
Deviations can be due to errors (unintentional) or fraud (intentional).
Possible Relationship to Other Audit Phases:
Discovering fraud requires broader consideration than errors.
Dual-Purpose Samples:
Samples used for both testing controls and substantive procedures.
ADAs should be chosen based on the purpose and objectives of the procedure.
Data should be grouped by common characteristics for evaluation.
Further analysis is required to determine if identified items represent actual misstatements.
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was: