X
Icon

The 21st Minute


Blog


Blog Image

Auditing the Material World

Apply the Pareto Principle (80/20 Rule) to Get Better Samples


Numbers in a population generally aren’t evenly distributed.  Just ask Vilfredo Pareto (1848-1923), the famed Italian economist whose observations have been named the Pareto Principle or the 80/20 Rule.  So why use evenly distributed stratum for stratified random sampling?  Probably because there isn’t time to puzzle out how the numbers are distributed.

But what if you could gain that understanding in three or four minutes?  And use that understanding to stratify your sample so that you could concentrate on the material areas?  You can do it in IDEA.  Here’s how.

For this example, we’ll use a small inventory file and assume that an auditor must physically test a sampling of the inventory.
 

STEP 1: FIELD STATISTICS

 
Use Field Statistics to first identify if the file has only positive or both positive and negative numbers. Open Field Statistics and click on the blue numbers in the Positive Value cell to quickly perform a direct extraction of records with positive values.  Click “Save,” and name the new file.

Screenshot of Field Statistics - Auditing the Material World Tech Tip
 

STEP 2: FIELD STATISTICS AGAIN

 
Open Field Statistics in the new file. Make note of these values:

  • Average Value
  • Maximum Value

Screenshot of Field Statistics with Focus on Average & Maximum Value - Auditing the Material World Tech Tip
 

STEP 3: DO THE MATH

 
Do a quick estimation of the midway point between the average value and the maximum value. Precision is not required here – you can do this in your head — so halfway between $800-ish and $50,000-ish is about $25,000-ish.
 

STEP 4: STRATIFY YOUR POPULATION INTO 2 BANDS

 
Using the values from Step 3, stratify your data into 2 bands:

  • Below-average – this band is between 0 and the average value.
  • Above-average – this band is between the average value and the midway point you calculated in your head.

Screenshot of Stratification Dialog Box & Options - Auditing the Material World Tech Tip

When you click OK, you will likely see your numbers distributed such that roughly 80% of the records are located in the below-average band and that the below-average band only accounts for roughly 20% of the monetary value in the population.

Screenshot of Results from Stratification - Auditing the Material World Tech Tip

In our example, 73.74% of the records are in the below-average band (Stratum #1), but those 17,000+ records only account for 17.51% of the money in this inventory file. The records in the above average band (Stratum #2) only account for about 6,000 records in the file, but cover over 80% of the monetary value. The four ISI’s are captured in IDEA’s upper limit exception band. With this understanding, a stratified random sample can be focused on areas that are more material.

If you have questions about this or other IDEA functions, please give our help desk a call at 888-641-2800 Option 4.
Or email us at [email protected]


CaseWare IDEA , Tech Tip



Posted By

By Sarah Palombo


Related Posts
Tech Tip: Duplicate Identification
Aug 28 Raw data is often incomplete, messy and inconsistent. One of the first steps in the data preparation process is the detection and removal of duplicate records. ...
Wayfair Woes One Year Later
Jul 24 The rise in online shopping has sharply impacted state sales tax revenue. Rather than increasing the tax rate, states are setting parameters to define nexus, wh...
Importing Date Fields
Jul 24 There are times when you import a date field and it just does not work out as expected. Here are ways to address the problem before or after the import.  ...
BROWSER NOT SUPPORTED

This website has been designed for modern browsers. Please update. Update my browser now

×