Geometric stratification of accounting data

Abstract

WE SUGGEST A NEW PROCEDURE FOR DEFINING THE BOUNDARIES OF THE STRATA IN HIGHLY SKEWED POPULATIONS, USUAL IN AUDITING, WHICH IS MUCH EASIER TO USE THAN THE COMMONLY USED CUMULATIVE ROOT FREQUENCY METHOD OF DALENIUS AND HODGES (1957, 1959). WE IMPLEMENT IT ON TWO AUDIT POPULATIONS, ONE A POPULATION OF DEBTORS IN AN IRISH FIRM, AND THE OTHER A POPULATION OF SALES AND USE TAX LIABILITIES IN THE US. OUR RESULTS SHOW THAT THE NEW METHOD COMPARES FAVOURABLY WITH THE CUMULATIVE ROOT FREQUENCY METHOD IN TERMS OF THE ACCURACY OF THE ESTIMATES.