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Chapter 8 Confidence Interval Estimation

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-1

Learning Objectives

In this chapter, you will learn: To construct and interpret confidence interval estimates for the mean and the proportion How to determine the sample size necessary to develop a confidence interval for the mean or proportion How to use confidence interval estimates in auditing

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-2

Chapter Outline

Confidence Intervals for the Population Mean, μ when Population Standard Deviation σ is Known when Population Standard Deviation σ is Unknown 2. Confidence Intervals for the Population Proportion, π 3. Determining the Required Sample Size

1.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-3

Point Estimates

A point estimate is a single number. For the

population mean (and population standard deviation), a point estimate is the sample mean (and sample standard deviation). A confidence interval provides additional information about variability

Lower Confidence Limit

Point Estimate Width of confidence interval

Upper Confidence Limit

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-4

**Confidence Interval Estimates
**

A confidence interval gives a range estimate of

values:

Takes into consideration variation in sample

statistics from sample to sample Based on all the observations from 1 sample Gives information about closeness to unknown population parameters Stated in terms of level of confidence

Ex. 95% confidence, 99% confidence Can never be 100% confident

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-5

**Confidence Interval Estimates
**

The general formula for all

confidence intervals is: Point Estimate ± (Critical Value) (Standard Error)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-6

Confidence Level

Confidence Level

Confidence in which the interval will contain the

**unknown population parameter
**

A percentage (less than 100%)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-7

Confidence Level

Suppose confidence level = 95%

Also written (1 - ) = .95 A relative frequency interpretation:

In the long run, 95% of all the confidence

**intervals that can be constructed will contain the unknown true parameter
**

A specific interval either will contain or will

not contain the true parameter

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-8

**Confidence Interval for μ (σ Known)
**

Assumptions Population standard deviation σ is known Population is normally distributed If population is not normal, use large sample Confidence interval estimate:

σ XZ n

(where Z is the standardized normal distribution critical value for a probability of α/2 in each tail)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-9

**Finding the Critical Value, Z
**

Consider a 95% confidence interval:

1 .95

α .025 2

Z units: X units: Z= -1.96

Lower Confidence Limit

α .025 2

0

Point Estimate

Z= 1.96

Upper Confidence Limit

Chap 8-10

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**Finding the Critical Value, Z
**

Commonly used confidence levels are 90%, 95%, and 99%

Confidence Level 80% 90% 95% 98% 99% 99.8% 99.9% Confidence Coefficient .80 .90 .95 .98 .99 .998 .999 Z value 1.28 1.645 1.96 2.33 2.58 3.08 3.27

Chap 8-11

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**Intervals and Level of Confidence
**

Sampling Distribution of the Mean /2

1

μx μ

/2

**Intervals extend from
**

σ X Z n

to

x

x1

x2

σ X Z n

**(1-)x100% of intervals constructed contain μ; ()x100% do not.
**

Chap 8-12

Confidence Intervals

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**Confidence Interval for μ (σ Known) Example
**

A sample of 11 circuits from a large normal

population has a mean resistance of 2.20 ohms. We know from past testing that the population standard deviation is .35 ohms.

Determine a 95% confidence interval for the

true mean resistance of the population.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-13

**Confidence Interval for μ (σ Known) Example
**

σ X Z n 2.20 1.96 (.35/ 11) 2.20 .2068 (1.9932 , 2.4068)

We are 95% confident that the true mean resistance is between

**1.9932 and 2.4068 ohms
**

Although the true mean may or may not be in this interval, 95%

**of intervals formed in this manner will contain the true mean
**

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-14

**Confidence Interval for μ (σ Unknown)
**

If the population standard deviation σ is

unknown, we can substitute the sample standard deviation, S This introduces extra uncertainty, since S is variable from sample to sample So we use the t distribution instead of the normal distribution

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-15

**Confidence Interval for μ (σ Unknown)
**

Assumptions Population standard deviation is unknown Population is normally distributed If population is not normal, use large sample Use Student‟s t Distribution Confidence Interval Estimate: S

X t n-1

n

**(where t is the critical value of the t distribution with n-1 d.f. and an area of α/2 in each tail)
**

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-16

Student’s t Distribution

The t value depends on degrees of freedom (d.f.)

Number of observations that are free to vary after

sample mean has been calculated

d.f. = n - 1

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-17

Degrees of Freedom

Idea: Number of observations that are free to vary after sample mean has been calculated Example: Suppose the mean of 3 numbers is 8.0

Let X1 = 7

Let X2 = 8

What is X3?

If the mean of these three values is 8.0, then X3 must be 9 (i.e., X3 is not free to vary)

Here, n = 3, so degrees of freedom = n – 1 = 3 – 1 = 2 (2 values can be any numbers, but the third is not free to vary for a given mean)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-18

Student’s t Distribution

Note: t

Standard Normal (t with df = ∞) t (df = 13) t-distributions are bell-shaped and symmetric, but have „fatter‟ tails than the normal t (df = 5)

Z as n increases

0

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

t

Chap 8-19

Student’s t Table

Upper Tail Area df .25 .10

Let: n = 3 df = n - 1 = 2 = .10 /2 =.05

.05

1 1.000 3.078 6.314

**2 0.817 1.886 2.920
**

3 0.765 1.638 2.353

The body of the table contains t values, not probabilities

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

/2 = .05

0 t

Chap 8-20

2.920

**Confidence Interval for μ (σ Unknown) Example
**

A random sample of n = 25 has X = 50 and S = 8. Form a 95% confidence interval for μ d.f. = n – 1 = 24, so The confidence interval is

X t/2, n -1

S 8 50 (2.0639) n 25

(46.698 , 53.302)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-21

**Confidence Intervals for the Population Proportion, π
**

An interval estimate for the population

proportion ( π ) can be calculated by adding an allowance for uncertainty to the sample proportion ( p )

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-22

**Confidence Intervals for the Population Proportion, π
**

Recall that the distribution of the sample proportion is approximately normal if the sample size is large, with standard deviation

σp

(1 )

n

We will estimate this with sample data:

p(1 p) n

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-23

**Confidence Intervals for the Population Proportion, π
**

Upper and lower confidence limits for the population proportion are calculated with the formula

p(1 p) pZ n

where Z is the standardized normal value for the level of confidence desired p is the sample proportion n is the sample size

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-24

**Confidence Intervals for the Population Proportion, Example
**

A random sample of 100 people shows that 25 have opened IRA‟s this year. Form a 95% confidence interval for the true proportion of the population who have opened IRA‟s.

p Z p(1 p)/n 25/100 1.96 .25(.75)/100

.25 1.96 (.0433) (0.1651 , 0.3349)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-25

**Confidence Intervals for the Population Proportion, Example
**

We are 95% confident that the true

percentage of left-handers in the population is between 16.51% and 33.49%. Although the interval from .1651 to .3349 may or may not contain the true proportion, 95% of intervals formed from samples of size 100 in this manner will contain the true proportion.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-26

**Determining Sample Size
**

The required sample size can be found to

reach a desired margin of error (e) with a specified level of confidence (1 - ) The margin of error is also called sampling error

the amount of imprecision in the estimate of

the population parameter the amount added and subtracted to the point estimate to form the confidence interval

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-27

**Determining Sample Size
**

To determine the required sample size for the

**mean, you must know:
**

The desired level of confidence (1 - ), which

determines the critical Z value The acceptable sampling error (margin of error), e The standard deviation, σ

σ eZ n

Now solve for n to get

Z σ n 2 e

2

2

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-28

**Determining Sample Size
**

If = 45, what sample size is needed to estimate the mean within ± 5 with 90% confidence?

**Z2 σ 2 (1.645)2 (45)2 n 219.19 2 2 e 5
**

So the required sample size is n = 220

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-29

**Determining Sample Size
**

If unknown, σ can be estimated when using

**the required sample size formula
**

Use a value for σ that is expected to be at least

as large as the true σ Select a pilot sample and estimate σ with the sample standard deviation, S

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-30

**Determining Sample Size
**

To determine the required sample size for the proportion, you must know: The desired level of confidence (1 - ), which determines the critical Z value

The acceptable sampling error (margin of error), e The true proportion of “successes”, π

π can be estimated with a pilot sample, if necessary (or

conservatively use π = .50)

eZ

(1 )

n

Now solve for n to get

Z (1 ) n e2

2

Chap 8-31

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**Determining Sample Size
**

How large a sample would be necessary to

estimate the true proportion defective in a large population within ±3%, with 95% confidence? (Assume a pilot sample yields p = .12)

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-32

**Determining Sample Size
**

Solution: For 95% confidence, use Z = 1.96 e = .03

**p = .12, so use this to estimate π
**

Z 2 (1 ) (1.96) 2 (.12)(1 .12) n 450.74 2 2 e (.03)

So use n = 451

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-33

Applications in Auditing

Six advantages of statistical sampling in

auditing

Sample result is objective and defensible

Based on demonstrable statistical principles

Provides sample size estimation in advance on

an objective basis Provides an estimate of the sampling error

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-34

Applications in Auditing

Can provide more accurate conclusions on the

population

Examination of the population can be time

**consuming and subject to more nonsampling error
**

Samples can be combined and evaluated by

different auditors

Samples are based on scientific approach Samples can be treated as if they have been done

**by a single auditor
**

Objective evaluation of the results is possible Based on known sampling error

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-35

**Population Total Amount
**

Point estimate:

Population total NX

Confidence interval estimate:

S NX N( t n1 ) n

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Nn N 1

Chap 8-36

(This is sampling without replacement, so use the finite population correction in the confidence interval formula)

**Population Total Amount
**

A firm has a population of 1000 accounts and wishes

**to estimate the total population value.
**

A sample of 80 accounts is selected with average

**balance of $87.6 and standard deviation of $22.3.
**

Find the 95% confidence interval estimate of the

total balance.

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

Chap 8-37

**Population Total Amount
**

N 1000, n 80, X 87.6, S 22.3

S N X N (t n 1 ) n Nn N 1

22.3 1000 80 (1000)(87.6) (1000)(1.9905) 80 1000 1 87,600 4,762.48

**The 95% confidence interval for the population total balance is $82,837.52 to $92,362.48
**

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-38

**Confidence Interval for Total Difference
**

Point estimate:

Total Difference ND

Where the mean difference,

D , is:

D

D

i 1

n

i

**n where Di audited value - original value
**

Chap 8-39

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**Confidence Interval for Total Difference
**

Confidence interval estimate:

SD ND N( t n1 ) n

where

SD

n

Nn N 1

(Di D)2

i1

n 1

Chap 8-40

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc.

**One Sided Confidence Intervals
**

Application: find the upper bound for the proportion of items that do not conform with internal controls

p(1 p) N n Upper bound p Z n N 1

where Z is the standardized normal value for the level of confidence desired p is the sample proportion of items that do not conform n is the sample size N is the population size

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-41

Ethical Issues

A confidence interval (reflecting sampling

error) should always be reported along with a point estimate The level of confidence should always be reported The sample size should be reported An interpretation of the confidence interval estimate should also be provided

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-42

Chapter Summary

In this chapter, we have

Introduced the concept of confidence intervals Discussed point estimates Developed confidence interval estimates

Created confidence interval estimates for the mean

(σ known) Determined confidence interval estimates for the mean (σ unknown) Created confidence interval estimates for the proportion

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-43

Chapter Summary

In this chapter, we have

Determined required sample size for mean and

proportion settings Developed applications of confidence interval estimation in auditing Confidence interval estimation for population total Confidence interval estimation for total difference in the population One sided confidence intervals Addressed confidence interval estimation and ethical issues

Statistics for Managers Using Microsoft Excel, 5e © 2008 Pearson Prentice-Hall, Inc. Chap 8-44

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Levine, D. M., Stephan, D. F., Krehbiel, T. C. & Berenson, M. L. (2008). Statistics for Managers Using Mic...

Materi ini merupakan bahan ajar sebagai pelengkap e-materi mata kuliah statistika bisnis.

Levine, D. M., Stephan, D. F., Krehbiel, T. C. & Berenson, M. L. (2008). Statistics for Managers Using Microsoft Excel. Pearson.

Levine, D. M., Stephan, D. F., Krehbiel, T. C. & Berenson, M. L. (2008). Statistics for Managers Using Microsoft Excel. Pearson.

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