During the planning of the audit of Strong Company, the partner in charge of the audit was discussing sampling plans with a manager and a senior. The discussion centered on the potential use of sampling in testing the clerical accuracy of the perpetual inventory records.

The senior maintained that a classical statistical sampling technique was the appropriate method. Experience has shown that the dollar amounts of misstatements in the inventory records are small, although the number of misstatements is often large.

The manager disagreed with the suggestion. He contended that increasing numbers of auditors are using PPS, which does not require stratification. If a few large dollar misstatements existed in the population and none was found in the sample, the results could be misleading.

The senior believed that the potential problem presented by the manager was overrated. Experience shows that perpetual inventory records contain small dollar misstatements.

At this point, the audit partner became a bit impatient. She suggested that the group confer with a newly promoted senior who had recently taken an up-to-date auditing course and had attended a professional development course in statistical sampling.

Required:

Assume that you are the newly promoted senior and have been asked to suggest a sampling plan for the inventory testing.

a. Summarize the merits and flaws in each argument.

b. Suggest the conditions under which either classical statistical sampling or PPS sampling might be appropriate.