Selecting a Sampling Method

Choosing the right sampling method to achieve the desired information requires an auditor’s judgment. Using the information presented in this document calculate Requirement 1, Requirement 2, and Requirement 3.

Analyze your calculations and then write a one page paper on your analysis. Determine whether Anthony’s Orchard’s choice of PPS sampling is the most systematic approach and yields the desired results to satisfying their audit needs or whether the audit needs would be best satisfied through classical variables sampling. Evaluate the difference between classical variables sampling and PPS sampling.

Objective of the Test

The object of the test is to determine Anthony’s Orchard’s audit needs. The object of this Application Assignment is to determine the reasonableness of the Accounts Receivable balance.

Define the Target Population

Anthony’s Orchard audit team identified Accounts Receivable as the target population with a balance of $1,000,000.

Chose Sampling Technique

Anthony’s Orchard audit team selected PPS. Evaluate their selection of PPS. Determine whether this choice informs the audit’s needs.
The probability-to-size sampling or PPS is a sampling tool, which relies on the probability of selecting accounts receivable items to include in the audit since the population or the accounts receivable balances per costumer (or account or invoice) vary in amounts. The PPS technique ensures that the accounts receivables with smaller amounts.
On the other hand the classical variables sampling uses and assumes normal distribution to estimate the misstatement, in dollar amounts, of the balances in the accounts receivables accounts.
Calculating Sample Size

Determine the sample size of Anthony’s Orchard’s audit. Calculate the sampling size and the sample interval in the field provided based on the information in the audit below.

Note: The Expansion Factor for risk at 5% of incorrect misstatements is 1.6. With number of overstatements of (0) and risk of incorrect acceptance, the Reliability Factor is 3.
Tolerable Misstatement™ ($40,000)
Risk of incorrect Acceptance .05
Expected misstatement ($8,000)

Requirement 1: Calculate the Sampling Size and the Sample Interval

Calculate the Sampling Size in order to calculate the Sample Interval.

Calculate Sampling Size = Calculate Sample Interval =
(Recorded amount of Populationreliabilities factor)/(Tolerable misstatement-(Expected misstatementExpansion factor))=($1,000,0003)/(($40,000-($8,0001.6))=110

Sampling interval=Book value of population/Sample size=$1,000,000/110=$9,091

Selecting a Sample Method

The method Anthony’s Orchard chose for selecting the sample was systematic. Determine whether the classical variables sampling method would have been the more systematic choice to satisfy Anthony’s Orchard’s audit needs.

Conducting Sample Procedure

Anthony’s Orchard conducted the sample procedure. As you work through the following steps, determine whether the procedure yields the desired results.

PPS Sampling Procedure

Complete the table below by calculating the Sampling Interval and the8 Projected Misstatement.
Book Value Audit Value Misstatement Taint Percent Sampling Interval Projected Misstatement
$125 $100 $25 25% $9,091 $9,09125%=$2,272.75 $12,000 $1,000 $11,000 – N/A $11,000 $50 $40 $10 20% $9,091 $9,09120%=$1,818.20
Requirement 2: Calculate the Projected Misstatements

Requirement 3: Calculate and Interpret the Upper Limit on Misstatements

Decision Matrix: The tolerable misstatement is $40,000.

If the upper limit of the misstatements is below the tolerable misstatements, then account receivable is reasonable. If the upper limit of the misstatements is above of the tolerable misstatements, then the account receivable is not reasonable.

Note: The Expansion Factor for risk at 5% of incorrect misstatements is 1.6. With number of overstatements of (0) and risk of incorrect acceptance, the Reliability Factor is 3.

Basic Precision = Reliability Factor * Sampling Interval
= 3.0 * $9,090
= $27,270

Calculate the Incremental Allowance for Projected Misstatements

Reliability factor Increment Increment Less one Projected Misstatements Incremental Allowance
3.0 –
4.75 1.75 .75 2272 1704=22720.75 6.30 1.55 .55 1818 999=1818.55
Total 2703

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