On a Bayesian sample size determination problem with applications to auditing
On a Bayesian sample size determination problem with applications to auditing
The problem motivating this article is the determination of sample size at the substantive testing stage of a financial audit. An error in an audit account is said to occur when there is a non-zero difference between its book value and true value. A typical financial auditing task involves several stages and usually a large number of potential items are available for testing at each stage. The sample size determination problem is to find an optimum fixed number of items which must be tested so that the quantitative risk of a wrong decision is bounded by a pre-specified quantity. Senior auditors often have strong subjective opinions regarding the state of the accounts being audited which naturally leads to the choice of Bayesian methods. Solutions are proposed under various model assumptions. A combination of analytical and simulation based techniques is proposed and some theoretical results are obtained. The methods developed, however, are quite general and can be applied to other sample size determination (SSD) problems. A number of numerical illustrations are given.
Southampton Statistical Sciences Research Institute, University of Southampton
Sahu, Sujit K.
33f1386d-6d73-4b60-a796-d626721f72bf
Smith, T. M. Fred
61602253-c2d6-43a1-862b-291379e75318
2004
Sahu, Sujit K.
33f1386d-6d73-4b60-a796-d626721f72bf
Smith, T. M. Fred
61602253-c2d6-43a1-862b-291379e75318
Sahu, Sujit K. and Smith, T. M. Fred
(2004)
On a Bayesian sample size determination problem with applications to auditing
(S3RI Methodology Working Papers, M04/04)
Southampton, UK.
Southampton Statistical Sciences Research Institute, University of Southampton
27pp.
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Monograph
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Abstract
The problem motivating this article is the determination of sample size at the substantive testing stage of a financial audit. An error in an audit account is said to occur when there is a non-zero difference between its book value and true value. A typical financial auditing task involves several stages and usually a large number of potential items are available for testing at each stage. The sample size determination problem is to find an optimum fixed number of items which must be tested so that the quantitative risk of a wrong decision is bounded by a pre-specified quantity. Senior auditors often have strong subjective opinions regarding the state of the accounts being audited which naturally leads to the choice of Bayesian methods. Solutions are proposed under various model assumptions. A combination of analytical and simulation based techniques is proposed and some theoretical results are obtained. The methods developed, however, are quite general and can be applied to other sample size determination (SSD) problems. A number of numerical illustrations are given.
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Published date: 2004
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Local EPrints ID: 8177
URI: http://eprints.soton.ac.uk/id/eprint/8177
PURE UUID: f4abe1ef-1bf1-4ee2-a93b-14abd8fa5003
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Date deposited: 11 Jul 2004
Last modified: 16 Mar 2024 03:15
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Author:
T. M. Fred Smith
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