An auditor is performing an audit of a nonissuer's accounts receivable. The auditor decides to use probability-proportional-to-size (PPS) sampling. Which of the following is a DISADVANTAGE of this method compared to classical variables sampling?

Answer options:

It requires an estimate of the standard deviation of the population.

Zero or negative balances require special design considerations.

It is not effective for detecting overstatements.

It generally results in a larger sample size than classical sampling.

How to approach this question

PPS = Dollar Unit Sampling. The bigger the dollar, the bigger the chance. What has no dollars? Zero balances. What has negative dollars? Credit balances. PPS ignores them.

Full Answer

B.Zero or negative balances require special design considerations.✓ Correct

PPS sampling selects items based on their monetary value. Therefore, items with zero balances or negative balances (credits) have no probability of selection and must be segregated and tested separately, which is a disadvantage compared to classical variables sampling.

Common mistakes

Thinking PPS is bad for overstatements. It's actually designed for overstatements.

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