An auditor is using 'Probability-Proportional-to-Size' (PPS) sampling. Which of the following is a characteristic of this method?

Answer options:

It is most efficient for testing liabilities (understatement).

It assumes the audited amount is normally distributed.

Zero or negative balances require special handling.

It requires an estimate of the standard deviation.

How to approach this question

PPS = Dollar Unit Sampling. Bigger $ = Bigger chance. Zero $ = Zero chance.

Full Answer

C.Zero or negative balances require special handling.✓ Correct

PPS sampling automatically stratifies the population by dollar size (larger items have higher probability of selection). However, items with zero or negative balances have no probability of selection and must be tested separately.

Common mistakes

Thinking PPS is good for liabilities (it's best for Assets/Overstatement).

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