JSM 2004 - Toronto

Abstract #301401

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Activity Number: 159
Type: Contributed
Date/Time: Monday, August 9, 2004 : 2:00 PM to 3:50 PM
Sponsor: Business and Economics Statistics Section
Abstract - #301401
Title: Combined PPS and Stratified Sampling in Modern Tax Audits
Author(s): Wendy Rotz*+ and Stephen J. Miller and Eric Falk and Ryan Petska
Companies: Ernst & Young LLP and Ernst & Young LLP and Ernst & Young LLP and Ernst & Young LLP
Address: 1225 Connecticut Ave. NW, Washington, DC, 20036,
Keywords: pps ; stratified sampling ; rare events
Abstract:

Theory tells us that in audit situations, probability proportionate to size (pps) sampling can be advantageous over stratified random sampling when sampling in settings with rarely occurring errors. However, federal and state regulators, as well as the big four accounting firms, often use stratified approaches in many tax audit settings, even in the face of low error rates. The simulation study of Rotz et al. concluded that there was no overwhelming evidence to convert from a purely stratified to a purely pps approach. This paper extends the work of Rotz et al. (2002) by exploring the advantages of a combined stratified and pps approach over standard stratified and pps designs.

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