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where ta>2 is the critical value corresponding to an upper-tail probability of a > 2 from the t distribution with n - 1 degrees of freedom (i.e., a cumulative area of 1 - a > 2).
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To demonstrate the application of the confidence interval estimate for the population total amount, return to the Ricknel Home Centers scenario on page 269. In addition to estimating the mean dollar amount in Section 8.2 on page 279, one of the auditing tasks is to estimate the total dollar amount of all sales invoices for the month. If there are 5,000 invoices for that month and X = + 110.27, then using Equation (8.6), NX = 15,00021 + 110.272 = + 551,350
Since n = 100 and S = + 28.95, then using Equation (8.7) with ta>2 = 1.9842 for 95% confidence and 99 degrees of freedom, NX { N1ta>22 N - n 28.95 5,000 - 100 = 551,350 { 15,000211.98422 A N 1 2n 2100 A 5,000 - 1 S + 522,914.28 Population total + 579,785.72 = 551,350 { 28,721.29510.990052 = 551,350 { 28,435.72
Therefore, with 95% confidence, you estimate that the total amount of sales invoices is between $522,914.28 and $579,785.72. Figure 8.15 shows a worksheet solution for construct ing this confidence interval estimate. Example 8.7 further illustrates the population total.
F I G ur E 8 . 1 5 Worksheet for the confidence interval estimate of the total amount of all invoices for the Saxon Home Improvement Company
EXAMpLE 8.7
Developing a Confidence Interval Estimate for the Population Total
An auditor is faced with a population of 1,000 vouchers and wants to estimate the total value of the population of vouchers. A sample of 50 vouchers is selected, with the following results: Mean voucher amount 1X2 = + 1,076.39 Standard deviation 1S2 = + 273.62
Construct a 95% confidence interval estimate of the total amount for the population of vouchers.
SOLutIOn Using Equation (8.6), the point estimate of the population total is
NX = 11,000211,076.392 = + 1,076,390
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From Equation (8.7), a 95% confidence interval estimate of the population total amount is 11,000211,076.392 { 11,000212.00962 273.62 1,000 - 50 250 A 1,000 - 1
+ 1,000,558 Population total + 1,152,222 Therefore, with 95% confidence, you estimate that the total amount of the vouchers is between $1,000,558 and $1,152,222.
Difference Estimation
An auditor uses difference estimation when he or she believes that errors exist in a set of items and he or she wants to estimate the magnitude of the errors based only on a sample. The following steps are used in difference estimation: 1. Determine the sample size required. 2. Calculate the differences between the values reached during the audit and the original values recorded. The difference in value i, denoted Di, is equal to 0 if the auditor finds that the original value is correct, is a positive value when the audited value is larger than the original value, and is negative when the audited value is smaller than the original value. 3. Compute the mean difference in the sample, D, by dividing the total difference by the sample size, as shown in Equation (8.8). MEAn DIffErEncE D =
i=1
a Di
n
(8.8)
where Di = Audited value - Original value 4. Compute the standard deviation of the differences, SD, as shown in Equation (8.9). Remember that any item that is not in error has a difference value of 0. StAndArd DEVIAtIOn Of tHE DIffErEncE
n i=1
SD =
2 a 1Di - D2
n - 1
(8.9)
5. Use Equation (8.10) to construct a confidence interval estimate of the total difference in the population. COnfIdEncE IntErVAL EStIMAtE fOr tHE TOtAL DIffErEncE ND { N1ta>22 N - n A 2n N - 1 SD (8.10)
where ta>2 is the critical value corresponding to an upper-tail probability of a > 2 from the t distribution with n - 1 degrees of freedom (i.e., a cumulative area of 1 - a > 2).
8-4
The auditing procedures for Ricknel Home Centers require a 95% confidence interval estimate of the difference between the audited dollar amounts on the sales invoices and the amounts originally entered into the integrated inventory and sales information system. The data are collected by taking a sample of 100 sales invoices. The results of the sample are organized and stored in the Plumblnv workbook. There are 12 invoices in which the audited dollar amount on the sales invoice and the amount originally entered into the integrated inventory management and sales information system are different. These 12 differences are + 9.03 + 7.47 + 17.32 + 8.30 + 5.21 + 10.80 + 6.22 + 5.63 + 4.97 + 7.43 + 2.99 + 4.63 The other 88 invoices are not in error. Each of their differences is 0. Thus, to analyze the data, you compute
i=1
a Di
n
In the numerator, there are 100 differences. Each of the last 88 is equal to 10 - 0.922.
D = and4
90 = 0.90 100
SD = =
i=1
19.03 - 0.922 + 17.47 - 0.922 + g + 10 - 0.922 A 100 - 1 SD = 2.752 Using Equation (8.10), you construct the 95% confidence interval estimate for the total difference in the population of 5,000 sales invoices, as follows: 15,000210.902 { 15,000211.98422 5,000 - 100 A 5,000 - 1 2100 2.752
2 a 1Di - D2 n
n - 1
Thus, the auditor estimates with 95% confidence that the total difference between the sales invoices, as determined during the audit, and the amount originally entered into the accounting system is between $1,797.09 and $7,202.91. Figure 8.16 shows the worksheet results for these data.
F I G ur E 8 . 1 6 Worksheet for the total difference between the invoice amounts found during audit and the amounts entered into the accounting system for the Saxon Home Improvement Company
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In the previous example, all 12 differences are positive because the audited amount on the sales invoice is more than the amount originally entered into the accounting system. In some circumstances, you could have negative errors. Example 8.8 illustrates such a situation.
EXAMpLE 8.8
Difference Estimation
Returning to Example 8.7, suppose that 14 vouchers in the sample of 50 vouchers contain errors. The values of the 14 errors are listed below and stored in DiffTest. Observe that two differences are negative: + 75.41 + 127.74 + 38.97 + 55.42 + 108.54 + 39.03 - + 37.18 + 29.41 + 62.75 + 47.99 + 118.32 + 28.73 - + 88.84 + 84.05
Construct a 95% confidence interval estimate for the total difference in the population of 1,000 vouchers.
D = and
2 a 1Di - D2 n
i=1
a Di
n
690.34 = 13.8068 50
SD = =
175.41 - 13.806822 + 138.97 - 13.806822 + g + 10 - 13.806822 A 50 - 1 = 37.427 Using Equation (8.10), construct the confidence interval estimate for the total difference in the population, as follows: 11,0002113.80682 { 11,000212.00962 1,000 - 50 A 1,000 - 1 250 = 13,806.8 { 10,372.4 + 3,434.40 Total difference + 24,179.20 37.427
i=1
n - 1
Therefore, with 95% confidence, you estimate that the total difference in the population of vouchers is between $3,434.40 and $24,179.20.
One-Sided Confidence Interval Estimation of the Rate of Noncompliance with Internal Controls
Organizations use internal control mechanisms to ensure that individuals act in accordance with company guidelines. For example, Ricknel Home Centers requires that an authorized warehouse-removal slip be completed before goods are removed from the warehouse. During the monthly audit of the company, the auditing team is charged with the task of estimating the proportion of times goods were removed without proper authorization. This is referred to as the rate of noncompliance with the internal control. To estimate the rate of noncompliance, auditors take a random sample of sales invoices and determine how often merchandise was shipped without an authorized warehouse-removal slip. The auditors then compare their results with a previously established tolerable exception rate, which is the maximum allowable proportion of items in the population not in compliance. When estimating the rate of noncompliance, it is commonplace to use a one-sided confidence interval. That is, the auditors estimate an upper bound on the rate of noncompliance. Equation (8.11) defines a one-sided confidence interval for a proportion.
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where Za = the value corresponding to a cumulative area of 11 - a2 from the standardized normal distribution (i.e., a right-tail probability of a).
If the tolerable exception rate is higher than the upper bound, the auditor concludes that the company is in compliance with the internal control. If the upper bound is higher than the tolerable exception rate, the auditor has failed to prove that the company is in compliance. The auditor may then request a larger sample. Suppose that in the monthly audit, you select 400 sales invoices from a population of 10,000 invoices. In the sample of 400 sales invoices, 20 are in violation of the internal control. If the tolerable exception rate for this internal control is 6%, what should you conclude? Use a 95% level of confidence. The one-sided confidence interval is computed using p = 20 > 400 = 0.05 and Za = 1.645. Using Equation (8.11),
Upper bound = p + Za A p11 - p2 N - n 0.0511 - 0.052 10,000 - 400 = 0.05 + 1.645 AN - 1 A A 10,000 - 1 n 400
Thus, you have 95% confidence that the rate of noncompliance is less than 6.76%. Because the tolerable exception rate is 6%, the rate of noncompliance may be too high for this internal control. In other words, it is possible that the noncompliance rate for the population is higher than the rate deemed tolerable. Therefore, you should request a larger sample. In many cases, the auditor is able to conclude that the rate of noncompliance with the companys internal controls is acceptable. Example 8.9 illustrates such an occurrence.
EXAMpLE 8.9
Estimating the Rate of Noncompliance
A large electronics firm writes 1 million checks a year. An internal control policy for the company is that the authorization to sign each check is granted only after an invoice has been initialed by an accounts payable supervisor. The companys tolerable exception rate for this control is 4%. If control deviations are found in 8 of the 400 invoices sampled, what should the auditor do? To solve this, use a 95% level of confidence.
SOLutIOnThe auditor constructs a 95% one-sided confidence interval for the proportion of invoices in noncompliance and compares this to the tolerable exception rate. Using Equation (8.11), p = 8 > 400 = 0.02, and Za = 1.645 for 95% confidence,
Upper bound = p + Za = 0.02 + 1.64510.007210.99982 = 0.02 + 0.0115 = 0.0315 A p11 - p2 N - n 0.0211 - 0.022 1,000,000 - 400 = 0.02 + 1.645 AN - 1 A A 1,000,000 - 1 n 400
The auditor concludes with 95% confidence that the rate of noncompliance is less than 3.15%. Because this is less than the tolerable exception rate, the auditor concludes that the internal control compliance is adequate. In other words, the auditor is more than 95% confident that the rate of noncompliance is less than 4%.
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AppLYInG tHE COncEpts 8.73 A stationery store wants to estimate the total retail value of the 1,000 greeting cards it has in its inventory. Construct a 95% confidence interval estimate for the population total value of all greeting cards that are in inventory if a random sample of 100 greeting cards indicates a mean value of $2.55 and a standard deviation of $0.44.
8.74 The personnel department of a large corporation employing 3,000 workers wants to estimate the family dental expenses of its employees to determine the feasibility of providing a dental insurance plan. A random sample of 10 employees (stored in the file Dental) reveals the following family dental expenses (in dollars) for the preceding year:
SELF Test
Sample Historical Audited Sample Historical Audited Number Cost ($) Value ($) Number Cost ($) Value ($) 5 9 17 18 28 35 43 51 261 87 201 121 315 411 249 216 240 105 276 110 298 356 211 305 60 73 86 95 96 107 119 21 140 129 340 341 135 228 210 152 112 216 402 97 220
110 362 246 85 510 208 173 425 316 179 Construct a 90% confidence interval estimate for the total family dental expenses for all employees in the preceding year. 8.75 A branch of a chain of large electronics stores is conducting an end-of-month inventory of the merchandise in stock. There were 1,546 items in inventory at that time. A sample of 50 items was randomly selected and an audit was conducted with the following results: Value of Merchandise X = + 252.28 S = + 93.67 Construct a 95% confidence interval estimate for the total value of the merchandise in inventory at the end of the month. Construct a 95% confidence interval estimate for the t otal population difference in the historical cost and audited value. 8.78 Tom and Brents Alpine Outfitters conducts an annual audit of its financial records. An internal control policy for the company is that a check can be issued only after the accounts payable manager initials the invoice. The tolerable exception rate for this internal control is 0.04. During an audit, a sample of 300 invoices is examined from a population of 10,000 invoices, and 11 invoices are found to violate the internal control. a. Calculate the upper bound for a 95% one-sided confidence interval estimate for the rate of noncompliance. b. Based on (a), what should the auditor conclude?
8-8
8.79 An internal control policy for Rhondas Online Fashion Accessories requires a quality assurance check before a shipment is made. The tolerable exception rate for this internal control is 0.05. During an audit, 500 shipping records were sampled from a population of 5,000 ship-
ping records, and 12 were found that violated the internal control. a. Calculate the upper bound for a 95% one-sided confidence interval estimate for the rate of noncompliance. b. Based on (a), what should the auditor conclude?
(8.12)
To illustrate the finite population correction factor, refer to the confidence interval stimate for the mean developed for Ricknel Home Centers in Section 8.2. Suppose that in e this month there are 5,000 sales invoices. Using X = + 110.27, S = + 28.95, N = 5,000, n = 100, df = n - 1 = 99, and with 95% confidence, ta>2 = 1.9842. From Equation (8.12), 110.27 { 11.98422 = 110.27 { 5.74410.992 = 110.27 { 5.69 + 104.58 m + 115.96 5,000 - 100 2100 A 5,000 - 1 28.95
In this case, because only 2% of the population was sampled, the finite population correction has a minimal effect on the width of the confidence interval. To examine the effect of the correction factor when the sample size is more than 5% of the population size, see Example 8.10.
EXAMpLE 8.10
Estimating the Mean Force for Insulators
In Example 8.3 on page 280, a sample of 27 approved policies was selected. Suppose the company had a population of 200 approved policies. Construct a 95% confidence interval estimate of the population mean.
SOLutIOn Using the finite population correction factor, with, X = 43.89, S = 25.28, N = 200, n = 27, df = n - 1 = 26, and ta>2 = 2.0555 (for 95% confidence):
N - n A 2n N - 1 25.28 200 - 27 = 43.89 { 12.05552 27 A 200 - 1 = 43.89 { 9.33 34.56 m 53.21 X { ta>2 S
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Because more than 10% of the population was sampled the finite population correction factor has a moderate effect on the confidence interval estimate.
To illustrate the use of the finite population correction factor when developing a confidence interval estimate of the population proportion, consider again the estimate developed for Ricknel Home Centers in Section 8.3. For these data, N = 5,000, n = 100, p = 10 > 100 = 0.10, and, with 95% confidence, Za>2 = 1.96. Using Equation (8.13), p11 - p2 N - n AN - 1 n 10.10210.902 5,000 - 100 = 0.10 { 11.962 A A 5,000 - 1 100 p { Z A = 0.10 { 11.96210.03210.992 = 0.10 { 0.0582 0.0418 p 0.1582
In this case, because only 2% of the population was sampled, the finite population correction factor has virtually no effect on the confidence interval estimate.
where n0 is the sample size, without considering the finite population correction factor. Applying the finite population correction factor results in the actual sample size, n, computed as in Equation (8.14).
To determine the sample size in estimating the mean or the proportion from Equations (8.4) and (8.5), Z 2p11 - p2 Z 2s2 n0 = and n = 0 e2 e2
p1 1 - p2 N - n AN - 1 n
8-10
(8.14)
In determining the sample size for Saxon Home Improvement Company, a sample size of 97 was needed (rounded up from 96.04) for the mean and a sample of 100 (rounded up from 99.96) was needed for the proportion. Using the finite population correction factor in Equation (8.14) for the mean, with N = 5,000, e = + 5, S = + 25, and Za>2 = 1.96 (for 95% confidence), leads to n = 196.04215,0002 = 94.24 96.04 + 15,000 - 12
Thus, n = 95. Using the finite population correction factor in Equation (8.14) for the proportion, with N = 5,000, e = 0.07, p = 0.15, and Za>2 = 1.96 (for 95% confidence), n = Thus, n = 99. To satisfy both requirements simultaneously with one sample, the larger sample size of 99 is needed. 199.96215,0002 = 98.02 99.96 + 15,000 - 12
AppLYInG tHE COncEpts 8.82 The quality control manager at a light bulb factory needs to estimate the mean life of a shipment of 2,000 light bulbs. Assume that the standard deviation is 100 hours and that sampling is done without replacement. a. Construct a 95% confidence interval estimate of the population mean life of light bulbs in this shipment if a random sample of 50 light bulbs selected from the shipment indicates a sample mean life of 350 hours. b. Determine the sample size needed to estimate the population mean life to within { 20 hours with 95% confidence. c. What are your answers to (a) and (b) if the shipment contains 1,000 light bulbs?
8-11
of owners is 4,000. A random sample of 200 customers elected without replacement from the automobile dealers s records indicate that 82 still own cars that were purchased five years earlier. a. Construct a 95% confidence interval estimate of the population proportion of all customers who still own their cars five years after they were purchased. b. What sample size is necessary to estimate the population proportion to within { 0.025 with 95% confidence? c. What are your answers to (a) and (b) if the population consists of 6,000 owners? 8.86 The inspection division of the Lee County Weights and Measures Department is interested in estimating the mean amount of soft drink that is placed in 2-liter bottles at the local bottling plant of a large nationally known softdrink company. The population consists of 2,000 bottles. The bottling plant has informed the inspection division that the standard deviation for 2-liter bottles is 0.05 liter.
a. Construct a 95% confidence interval estimate of the population mean amount of soft drink per bottle if a random sample of 100 2-liter bottles selected without replacement indicates a sample mean of 1.99 liters. b. Determine the sample size necessary to estimate the population mean amount to within { 0.01 liter with 95% confidence. c. What are your answers to (a) and (b) if the population consists of 1,000 bottles? 8.87 A stationery store wants to estimate the mean retail value of the 300 greeting cards that it has in its inventory. a. Construct a 95% confidence interval estimate of the population mean value of all greeting cards that are in its inventory if a random sample of 20 greeting cards selected without replacement indicates a mean of $2.55 and a standard deviation of $0.44. b. What is your answer to (a) if the store has 500 greeting cards in its inventory?