CPA (U)

PAPER 2
QUANTITATIVE
TECHNIQUES
 SYLLABUS
PART A: STATISTICAL DATA, PRESENTATION AND MEASURES
CHAPTER 1: Data Collection
CHAPTER 2: Sampling
CHAPTER 3: Classification and Presentation of data
CHAPTER 4: Measures of Location
CHAPTER 5: Measures of Dispersion
CHAPTER 6: Measures of Skewness

PART B: PROBABILITY AND DISTRIBUTION

CHAPTER 7: Probability.
CHAPTER 8: Discrete Distributions
CHAPTER 9: Expectation
CHAPTER 10: Continuous Distributions
CHAPTER 11: Binomial and Poisson Distributions.
CHAPTER 12: Normal Distribution

PART C: ESTIMATION AND TESTING

CHAPTER 13: Statistical Inference.
CHAPTER 14: Estimation Theory.
CHAPTER 15: Hypothesis Testing.
CHAPTER 16: Non- Parametric Tests (Chi-square Distribution).

PART D: REGRESSION AND CORRELATION

CHAPTER 17: Regression Analysis
CHAPTER 18: Correlation Analysis
(i) Product Moment Correlation Coefficient
(ii) Spearman's Rank Correlation
(iii) Significance Tests for Correlation Coefficients.
PART E: FORECASTNG TIME SERIES ANALYSIS
CHAPTER 19: Forecasting
(i) Forecasting Techniques
(ii) Time Series Models
(iii) Least squares method
(iv) Moving average method (v) Exponential smoothening
method (vi) Time series decomposition.

PART F: INDEX NUMBERS

CHAPTER 20: Index Numbers
(i) Types of Index Numbers
(ii) Classification of Index Numbers,
(iii) Unweighted index Numbers
(iv) Weighted Index Numbers
(v) Features of an Index Number
(vi) Importance / Practical Application of index Numbers
(vii) Limitations of Index Numbers
(viii) Published Index Numbers

PART G: NETWORK ANALYSIS

CHAPTER 21: Network Analysis
(i) Importance of Network Analysis
(ii) Key definitions
(iii) Rules of drawing Networks
(iv) Network Time Analysis
(v) Network Cost Analysis
(vi) Network Resource Analysis
PART H: LINEAR ALGEBRA AND CALCULUS
CHAPTER 22: Linear Algebra and Calculus
(i) Introduction
(ii) Differentiation
(iii) Rules of finding derivatives
(iv) Practical Applications of Differentiation
(v) Minimum Cost and Maximum Revenue

(vi) Partial Differentiation

PART I: DECISION THEORY

CHAPTER 23: Decision Theory
(i) Decision Making Concepts
(ii) Decision Making Process
(iii) Decision Making Environment (iv) Decision Making
Theorems
(v) Decision Trees
(vi) The Expected Value
(vii) Redundancy

PART J: LINEAR PROGRAMMING

CHAPTER 24: Linear Programming
(i) Graphical Linear Programming
(ii) The Simplex Method

PART K: STATISTICAL QUALITY CONTROL.

CHAPTER 25: Control Charts
PART A: STATISTICAL DATA, PRESENTATION AND
MEASURES
1.0 DATA COLLECTION
1.1 INTRODUCTION
Data may refer to information, statistics, facts, figures, numbers, or records.
Depending on the source of information, data is called primary if it is
collected afresh and for the first time (original in character) or secondary if it
has already been collected by someone else and has already been passed
through the statistical process. Primary data should be collected only if
secondary data is not available. The techniques described below describe the
different ways in which primary data can be collected.

1.2 DATA COLLECTION METHODS/TECHNIQUES

There are many methods of collecting primary data and the main methods
include:
(i) Observation
(ii) Interviews
(iii) Questionnaires
(iv) Case studies
( v ) Focus group interviews
(vi) Diaries
(vii) Critical incidents
(viii) Portfolios

(i) OBSERVATION

Here, data is collected through direct observation without asking

respondents anything. For example, the behaviour of buyers of a certain
commodity can be studied through observation.

Advantages
• If done accurately, subjective bias is eliminated
• Information on what is happening at the time of data collection is
observed and attained.
• It demands less active co-operation between the person collecting data
and respondents.
• It is suitable for respondents who have no verbal ability.

Disadvantages
• It is expensive
• It provides limited information
• Unforeseen factors may interfere with the observation task
• Some phenomena (fact or experience) are unobservable
(ii) INTERVIEW METHODS

These involve presentation of oral verbal stimuli (incentive, spur or

motivation) seeking oralverbal responses. There are four main types of
interviews namely;
a. Structured; - These involve use of structured questionnaires.

b. Semi-structured interviews;-These involve the use of checklist of terms

or topics to be discussed with respondents. As they respond to listed
items, more questions emerge and are asked besides the prepared
ones e.g. Focus group discussions (FGD).

c. Unstructured interviews; - This type of interview involves talking

casually with respondents, usually key informants, on particular issues
without prior appointment or telling them the purpose of the
observation.

d. Interview schedules; - These are interviews in which questionnaires are

used and filled in when interviewing respondents.

Advantages
❖ There is good response rate.
❖ The method is complete and immediate.
❖ Possible immediate questions.
❖ Interviewer is in control and can give help if there is a problem.
❖ One can investigate motives and feelings.
❖ The interviewer can use recording equipment.
❖ The characteristics of respondents can be assessed i.e. the tone of
voice, facial expression, hesitation e.t.c.
❖ The interviewer can use props.
❖ If one interviewer is used, there is uniformity of approach.
❖ The interview method is used to pilot other methods.

Disadvantages:
❖ Need to set up interviews.
❖ Time consuming.
❖ Geographic limitations.
❖ Can be expensive.
❖ Normally need a set of questions.
 ❖ Respondent bias - tendency to please or impress, create false personal
image, or end interview quickly.
❖ Embarrassment possible if personal questions are involved.
❖ Transcription and analysis can present problems - subjectivity.
❖ If many interviewers are to be used, then training may be required.
(iii) QUESTIONNAIRE FORMULATION
This method makes use of questionnaires which are distributed to
respondents. Questionnaires can have questions that are open ended, close
ended or tabular; whereby open ended questions invite free responses,
close-ended questions only allow respondents to choose from alternative
responses provided, and tabular questions are answered by filling in tables.

Reasons for using questionnaires

Questionnaires are a useful method to investigate: Patterns, frequency, ease
and success of use. user needs, expectations, perspectives, priorities and
preferences user satisfaction with collections and services shifts in user
attitudes and opinions relevance of collections and services to user needs
Trends (by repetition over time).

Advantages of questionnaires
The main advantages of questionnaires are:
❖ They are relatively easy to analyse.
❖ A large sample of the given population can be contacted at relatively
low cost;
❖ They are simple to administer;
❖ The format is familiar to most respondents;
♦ Information is collected in a standardized way.
❖ They are usually straightforward to analyse.
❖ They can be used for sensitive topics which users may feel
uncomfortable speaking to an interviewer about.
❖ Respondents have time to think about their answers; they are not
usually required to reply immediately.

Disadvantages of questionnaires
The main disadvantages of questionnaires are:
❖ If you forget to ask a question, you cannot usually go back to
respondents, especially if they are anonymous.
♦ It is sometimes difficult to obtain a sufficient number of responses,
especially from postal questionnaires.
 ❖ Those who have an interest in the subject may be more likely to
respond, skewing the sample.
❖ Respondents may ignore certain questions.
❖ Questionnaires may appear impersonal.
❖ Questions may be incorrectly completed.
❖ They are not suitable to investigate long, complex issues.
❖ Respondents may misunderstand questions because of poor design
and ambiguous language.
❖ Questionnaires are unsuitable for some kinds of respondents, e.g.
visually impaired persons.
❖ There is the danger of questionnaire fatigue if surveys are carried out
too frequently.
♦ They may require follow up research to investigate issues in greater
depth and identify ways to solve problems highlighted.

(iv) CASE-STUDIES

The term case-study usually refers to a fairly intensive examination of a

single unit such as a person, a small group of people, or a single company.
Case-studies involve measuring what is there and how it got there. In this
sense, it is historical. It can enable the researcher to explore, unravel and
understand problems, issues and relationships. It cannot, however, allow the
researcher to generalize, that is, to argue that from one case-study the
results, findings or theory developed apply to other similar case-studies. The
case looked at may be unique and, therefore not representative of other
instances. It is, of course, possible to look at several case-studies to
represent certain features of management that we are interested in
studying. The case-study approach is often done to make practical
improvements. Contributions to general knowledge are incidental.

The case-study method has four steps:

❖ Determine the present situation.

❖ Gather background information about the past and key variables.
❖ Test hypotheses. The background information collected will have been
analysed for possible hypotheses. In this step, specific evidence about
each hypothesis can be gathered. This step aims to eliminate
possibilities which conflict with the evidence collected and to gain
confidence for the important hypotheses. The culmination of this step
might be the development of an experimental design to test out more
 rigorously the hypotheses developed, or it might be to take action to
remedy the problem.
❖ Take remedial action. The aim is to check that the hypotheses tested
actually work out in practice. Some action, correction or improvement
is made and a re-check carried out on the situation to see what effect
the change has brought about.

The case-study enables rich information to be gathered from which

potentially useful hypotheses can be generated. It can be a time-consuming
process. It is also inefficient in researching situations which are already well
structured and where the important variables have been identified. They lack
utility when attempting to reach rigorous conclusions or determining precise
relationships between variables.

(v) DIARIES

A diary is a way of gathering information about the way individuals spend

their time on professional activities. They are not about records of
engagements or personal journals of thought! Diaries can record either
quantitative or qualitative data, and in management research can provide
information about work patterns and activities.

Advantages:
• Useful for collecting information from employees.
• Different writers compared and contrasted simultaneously.
• Allows the person collecting data freedom to move from one
organisation to another.
• The person collecting data is not personally involved.
• Diaries can be used as a preliminary or basis for intensive interviewing.
• Used as an alternative to direct observation or where resources are
limited.

Disadvantages:
• Subjects need to be clear about what they are being asked to do, why
and what you plan to do with the data.
• Diarists need to be of a certain educational level.
• Some structure is necessary to give the diarist focus, for example, a
list of headings.
 • Encouragement and reassurance are needed as completing a diary is
time-consuming and can be irritating after a while.
• Progress needs checking from time-to-time.
• Confidentiality is required as content may be critical.
• Analyses problems, so you need to consider how responses will be
coded before the subjects start filling in diaries.

(vi) CRITICAL INCIDENTS

The critical incident technique is an attempt to identify the more 'noteworthy'

aspects of job behaviour and is based on the assumption that jobs are
composed of critical and non-critical tasks. For example, a critical task might
be defined as one that makes the difference between success and failure in
carrying out important parts of the job. The idea is to collect reports about
what people that do is particularly effective in contributing to good
performance. The incidents are scaled in order of difficulty, frequency and
importance to the job as a whole. The technique scores over the use of
diaries as it is centred on specific happenings and on what is judged as
effective behaviour. However, it is laborious and does not lend itself to
objective quantification. (vii) PORTFOLIOS
A measure of a manager's ability may be expressed in terms of the number
and duration of 'issues' or problems being tackled at any one time. The
compilation of problem portfolios is recording information about how each
problem arose, methods used to solve it, difficulties encountered, etc. This
analysis also raises questions about the person's use of time. What
proportion of time is occupied in checking; in handling problems given by
others; on selfgenerated problems; on 'top-priority' problems; on minor
issues, etc? The main problem with this method and the use of diaries is
getting people to agree to record everything in sufficient detail for you to
analyse. It is very time-consuming.

SOURCES OF DATA:
Sources of data are categorized into two types; namely

a. Primary data sources

Primary data is originated and collected specifically for the problem under
investigation. In research, primary data is the major source and is directly
collected from the study organisation using the above named tools.
 b. Secondary data sources
Secondary data usually compliments primary data. This type of data is
collected from other sources other than the primary source. The secondary
data material sources include newspapers, other research materials, the
internet and publications among others.

2.0 SAMPLING

2.1: DEFINITION

Sampling is the process of selecting a sufficient number of elements from the

population so that by studying the sample and understanding the properties
or characteristics of the sample subjects, it would be possible to generate the
properties or characteristics of the population elements.

2.2: OTHER KEY DEFINITIONS

(i) SAMPLE
It is the subset of a population. It comprises some members selected from
the population e.g. if 200 members are drawn from a population of 1000,
these 200 form the sample of the study. By studying the sample, one would
be able to draw conclusions that are general to the entire population.
 (ii) POPULATION
This refers to the entire group of people, events or things of interest that one
wishes to investigate.

(iii) AN ELEMENT
An element is a single member of the population e.g. if 500 pieces of
machinery are to be approved after inspection, we would say there are 500
elements in the machinery population.

(iv) CENSUS
This is a count of all elements in the population.

(v) POPULATION FRAME / SURVEY POPULATION

It is a listing of all elements in a population from which the sample is drawn.
E.g. the payroll of an organisation would serve as a population frame if its
members are to be studied. Since the population frame is a list, it has to be
updated regularly.

(vi) SUBJECT
It's a single member of a sample just like an element is a single member of
the population.

(vii) PARAMETERS
Parameters of the population are the characteristics that are general to the
entire population and these include; the population mean, u, the population
standard deviation, a, and the population variance, a2,

2.3 REASONS FOR SAMPLING

(i) Resources in particular time and money are often not adequate to cover
the entire population. Sampling saves time and money.

(ii) Sampling is also justified in situations where the results of the inquiry are
required immediately. Time saved enables one to;
• Carry out more checks and counter checks in the interest of accuracy.
• Collect more elaborate information
• Give more time to analysis and interpretation of results.

(iii) Sometimes it's not possible to inquire from the entire population e.g.
when data collected is in regard to safety of a product.
(iv) Sampling achieves better response rates than an attempt at complete
coverage.

(v) The use of sampling permits employment of highly qualified personnel

which translates into greater degree of accuracy.

(vi) A well designed scientifically drawn sample coupled with a well conducted
survey will produce results significantly close to the population
characteristics with no statistical significant difference.

2.4 SAMPLING METHODS /TECHNIQUES DESIGNS Considerations

when selecting a method of sampling
There are two overriding considerations when selecting a method for
selecting a sample.
• Avoiding bias in the selection of a sample.
• Achieving maximum precision in the results for a given cost outlay.

Bias is introduced in a sample under the following circumstances;

• If a non-random method is used in selecting methods of the sample.
• If the sampling frame used is incomplete or inadequate.
• If members selected into the sample decline to be interviewed or
cannot be traced.

There are 2 broad types of sampling designs or methods:

a) Probability sampling
b) Non-probability sampling

2.4.1 Probability sampling.

This is used when the elements in the population have some known chance
or probability of being selected as sample subjects. Probability sampling can
either be unrestricted (simple random sampling) or restricted (complex
probability sampling) in nature. The choice of these depends on the nature of
research problem, the availability of good sampling frame, money, time,
desired level of accuracy in the sample and data collection methods. Each
has its merits and demerits.

Probability sampling techniques therefore includes;

 (i) Simple random sampling techniques (Unrestricted)

Under this technique, each person has some chance as any other of being
selected into the sample and forms a standard against which other methods
are evaluated. This technique is suitable where the population is relatively
small and where the sampling frame is complete and up-to date. It may be
done with or without replacement whereby:

• Random sampling with replacement; Is a situation where population

members once selected into the sample are put back into the pool such
that there is chance that they may be reselected.

• Random sampling without replacement; Is a situation whereby once

members have been selected they cannot be selected again.
There are two basic procedures that are used to select a random sample.
Procedure of sampling
• Obtain a complete sampling frame.
• Assign different numbers to members of the population ranging from 1 - N
then put these members in a container, mix them thoroughly and pick n
items for the sample; where N is the population size and n is the sample
size.

Point to note
Unrestricted (Simple Random) sampling has the least bias and offers the
maximum accuracy of choosing members of the sample from the population.

However this sampling technique may be cumbersome and expensive.

Besides, the entity on which sampling is being carried out must have an
updated listing of its population.

(ii) Restricted (Complex) Probability Sampling

This offers various and sometimes more efficient alternatives to the

unrestricted design. These techniques include;

a) Systematic random sampling techniques

b) Stratified random sampling
c) Random route sampling techniques
 d) Multi-stage cluster sampling

(a) Systematic random sampling techniques

This is similar to simple random sampling, but instead of selecting random

numbers from tables, you move through a list (sample frame) picking every
nth name. To choose the nth name, one must work out the appropriate
sampling fraction, by dividing the population size with the required sample
size.

Example 1
Consider a population of 600 employees and a required sample of 120, the
sampling fraction will be given as;
R = 120 = 1
600 5

This implies that the person choosing the sample from the population must
build up his or her sample size by selecting one person out of every five in
the population. The sample fraction, R, is important in this case since it helps
in determining the starting point when choosing a sample out of the
population.

Disadvantage

The effect of periodicity may eventually lead to bias when selecting the
sample size.

(b) Stratified random sampling

In this method, all people in the sampling frame are divided into groups or
categories known as "strata". Within each stratum, a simple random sample
or systematic sample is selected.

Example;
Consider a group of 50 employees comprising of 22 males and 28 females.
Assuming a sample of 5 employees is required from the sample, compute the
number of males and females that will be included in the sample ensuring an
equitable selection of each.
Solution
Using stratified sampling,
Number of males in the sample x 22 = 2.2 employees Number of

males in the sample x 28 =2.8 employees

Since we can't interview 0.2 and 0.8 of a person, we shall round off one
figure upwards and the other downwards;

Thus;
Number of males in the sample = 2 employees
Number of females in the sample = 3 employees

The 2 and 3 will then be selected by simple random sampling.

(c) Random route sampling techniques

This is a technique used in market research surveys used for sampling

households, shops and other premises in rural and urban areas. In this
method, an address is selected at random from a sampling frame usually an
electoral register as a starting point. Then given instructions, the person
collecting data identifies more addresses by taking alternate left and right
turns at road junctions and calling at every n th address (i.e. shop or premise)

Advantages;
(i) May be time saving
(ii) Bias is reduced since the person collecting data has to call at clearly
defined addresses.

Disadvantage
(i) Characteristics of particular areas (e.g. rich / poor) may mean that the
sample is not representative.

(ii) Open to abuse by the person collecting data because it is difficult to check
that instructions have been fully carried out.

(d) Multi-stage cluster sampling

This involves drawing several samples known as sample areas. The sample
areas are progressively reduced into smaller areas by choosing smaller
sample areas from the larger sample areas. Eventually smaller areas end up
into sample households and by using an appropriate method such as
systematic or simple random sampling, individuals are selected from the
households.
2.4.2 Non- Probability sampling

These are techniques applied when it becomes impossible to undertake a

probability method of sampling; this may be due to reasons such as;
• Unavailability of a complete sampling frame for a certain population.
• The probability sampling method adopted has failed to produce good
response rates thereby failing to give a good representation of the
population being examined.

Non probability sampling methods include;

a. Purposive sampling
b. Quota sampling
c. Convenience sampling
d. Snow ball sampling
e. Self-selection

These are described as

below; a). Purposive
sampling

A purposive sample is one which is selected subjectively.

The person collecting data in this case obtains a sample that appears to be
representative of the population and will usually try to ensure that a range
from one extreme to the other is included.

b). Quota sampling

This is often used in market survey research where the person collecting
data is required to find cases with particular characteristics. The person
collecting data is given a quota of particular types of people to select from
and the quota is organised so that the final sample should be representative
of the population.

c). Convenience sampling

In this method, the sample comprises subjects who are simply available in a
convenient way to the person collecting data. There is no randomness and
the likelihood of bias is high. One cannot draw meaningful conclusions from
the results you obtain. However, this method is often the only feasible one,
particularly in situations where time and resources are constrained.

d). Snow ball sampling

With this approach, you initially contact a few potential respondents and then
ask whether they know of anybody with the same characteristics that you
are looking for in your study.

e). Self-selection
In this approach, respondents themselves decide that they would like to take
part in your study.

Advantages of non-probability
methods (i) They are cheaper.
(ii) Used when sampling frame is not available.
(iii) Useful when the population is widely dispersed that cluster sampling
would not be efficient, (iv) Often used in explorer studies e.g. for
hypothesis generation.

2.5 THE ROLE OF SAMPLING IN AUDITING

The main role of an external auditor is to ensure that the accounts of a
company are fair and comply with the law. In the early development of
auditing it was not unusual for the auditor to make full examination of all of
the financial dealings that many of the larger companies are involved with.
Usually, this problem is overcome by checking only small portions of the
accounts and then using this information to make a generalized statement
concerning the entire population of accounts. This, of course, is sampling.

Unlike other areas where sampling has been employed, the use of judgment
sampling is widespread in accountancy for reasons ranging from little
research being carried out in the field of finance and lack of statistical / poor
statistical background of the older accountants.

Statistical sampling on top of other advantages enables an optimum sample

size to be calculated from the precision required, or, alternatively, for a given
sample size it enables the degree of accuracy to be known. This of course is
important when an accountancy firm may be liable to prosecution if it is
found to be negligent or if it carried out an inadequate audit. If the firm
shows that its audit was carried out with a method which has a recognized
scientific basis it is on a safer ground than if the method was one that was
purely subjective, no matter how experienced the auditor.

Applications of statistical sampling methods of auditing include;

(a) Estimation sampling of variables;- This involves estimating the total

value of a population of accounts based on a sample of items using the
formula;

Estimate of value of population x value of sample

Typical examples of Estimation sampling of variables in finance include

estimation of;

• The value of stock

• The value of assets
• The value of errors
• The value of liabilities

(b) Estimation sampling of attributes;- This involves estimation of the

number or proportion, of the population having a certain quality (or
attribute). In auditing, its usual application is in the estimation of the
number of errors within a set of accounts. However other applications
may include;
• Estimating the proportion of debts that are currently six months
overdue.
• Estimating the number of employees receiving overtime
payments in a certain period.

Such estimates can be computed as;

Estimate of number in population with attribute x value of

sample
(c) Discovery sampling;- This involves the examination of a population for
a single case of serious error such as misappropriation of money The type
of situation that come under such heading include;
• Misappropriation of money
• Fraud
• Breakdown of internal controls
If such an error is found sampling is immediately stopped and the error
reported.

(d) Acceptance sampling

An internal auditor is employed by a company to monitor its accounting

system and to check that it is functioning as it should. To aid him in this role
he may take samples of items at regular intervals to check that the error rate
does not rise above a specified level. This is acceptance sampling and is
merely an application of quality control to accounting. In acceptance
sampling, we are only concerned with errors that are not as serious as fraud
or deception, from example;
• Wrong date
• Incorrect additions
• Not rubber-stamped
• Not signed by recommended person
In general, acceptance sampling is not of use to the external auditor who is
only concerned with the taking of one sample.
(e) Monetary unit sampling

This is a recent method of sampling which is useful for estimating the value
of error in the population from a sample of items. By using the result;

Estimate of total value of errors in population

x Total value of errors in sample

It-can be noted that a more accurate estimate of the total error value is
obtained if the sample value are large rather than small. We could obtain this
by stratifying according to some criterion of value and then selecting a high
proportion of large sample values. Detailed computations and illustrations
have been integrated in later topics within this text.

EXERCISE 1
1.1 Differentiate
between (i) Sample and
Population.
(ii) Element and Subject.
(iii) Population frame and Population parameter.

1.2
(i) Outline any four methods that can be employed in the collection of
primary data.
(ii) Explain any three demerits and merits of each technique.

1.3
(i) Differentiate between primary and secondary data.
(ii) Outline four sources of each type of data

1.4
(i) Give two considerations that one must look at before selecting a
method of sampling.
(ii) Why should one prefer to employ sampling than make an attempt on
the entire population while collecting data?

1.5
(a) Define probability random sampling.
(b) Differentiate between;
(i) Stratified and systematic random sampling
(ii) Purposive and convenience sampling
(ii) Unrestricted and restricted sampling techniques
(iv) Explain four advantages of probability sampling techniques.
1.6
Briefly describe the following ways of selecting a sample;
(i) Quota
(ii) Block (Cluster) (iii) Area sampling
methods.