Classical Variables Sampling vs. Probability-to-Size Sampling

Choosing the right sampling method to achieve the desired information requires an auditor's judgment. Using the information presented in the Week 5 Application form (linked below), by Day 7 of this week 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.

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.

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 =

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 the Projected Misstatement.

Book Value	Audit Value	Misstatement	Taint Percent	Sampling Interval	Projected Misstatement
$125	$100	$25	25%
$12,000	$1,000	$11,000	-
$50	$40	$10	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
6.30	1.55	.55	1818	999
			Total	2703

Week 5 Application: Classical Variables Sampling vs. Probability-to-Size Sampling 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. 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. 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 Calculate SamplingExpected Size = misstatementCalculate Sample($8,000) Interval = Selecting a Sample Method Requirement 1: Calculate the Sampling Size and the Sample Interval The method chosetofor selecting sampleInterval. was systematic. Calculate theAnthony's SamplingOrchard Size in order calculate thethe Sample 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 the Projected Misstatement. Requirement 2: Calculate the Projected Misstatements Book Value Audit Value $125 $100 $12,000 $1,000 $50 $40 Misstatement $25 $11,000 $10 Taint Percent 25% 20% Sampling Interval Projected Misstatement 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 3.0 4.75 Increment 1.75 Increment Less one .75 2272 Projected Misstatements Incremental Allowance 1704 6.30 1.55 .55 1818 Total 999 2703 By Day 7 save your Application as a \".doc\" or \".rtf\" file with the filename last name+your first initial_Week5. For example, Susan Ride's assignment filename would be \"RideS_Week5\". In the Dropbox, click on the Submit an Assignment link, choose the Week 5: Application basket, and then add your Application as an attachment