1) What influences the auditor’s assessment of tolerable misstatement? 2) Explain the advantages and disadvantages of using probability-proportionate-to-size sampling when testing the existence of accounts receivable

Answer:

1. The auditor’s assessment of how much of misstatement can be tolerated without changing the user’s decision using the information depends on overall materiality and the influence of a population on a financial statement user’s decision making.

2.

The advantages of PPS sampling are:

• It is generally easier to use than classical variables sampling because the auditor can calculate sample sizes and evaluate sample results by hand or with the assistance of tables,
• The size of a PPS sample is not based on any measure of the estimated variation of audit values,
• PPS sampling automatically results in a stratified sample because items are selected in proportion to their dollar values,
• PPS systematic sample selection automatically identifies any item that is individually significant if its value exceeds an upper monetary cutoff,
• If the auditor expects no misstatements, PPS sampling will usually result in a smaller sample size than under classical variables sampling,
• A PPS sample can be designed more easily, and sample selection may begin before the complete population is available.
  In contrast, PPS sampling has the following disadvantages:
• It includes an assumption that the audit value of a sampling unit should not be less than zero or greater than book value. When understatements or audit values of less than zero are anticipated, special design considerations may be required.
• If understatements are identified in the sample, the evaluation of the sample may require special considerations.
• The selection of zero balances or balances of a different sign (e.g. credit balances for asset accounts) requires special consideration.
• PPS evaluation may overstate the Allowance for Sampling Risk (ASR) when misstatements are found in the sample. As a result, the auditor may be more likely to reject an acceptable book value for the population.
• As the expected number of misstatements increases, the appropriate sample size increases. Thus, a larger sample size may result than under classical variables sampling.
• PPS is good for testing for overstatement.

For example when using PPS sampling, all you need to know is book value of account receivables, which should be in the client’s records. PPS automatically stratifies the results.When control risk Is low, it normally means a lower sample size.PPS should include only the audit value greater than zero, so a credit balance or a zero balance in AR would have to be investigated with another sampling method.

A disadvantage is when control risk is high, and the auditor expects misstatements, then larger sample sizes would be needed than when using other techniques.