Confidence Interval

Estimation
 Agenda of the Day

 Discuss Confidence Interval for population

mean and proportion
 Kahoot Practice
 Discuss two sample distribution
 Class Activity
 Discuss Assignment 1
 Chapter outline
After completing this chapter, you should be able
to:
 Distinguish between a point estimate and a confidence
interval estimate
 Construct and interpret a confidence interval estimate for a
single population mean using both the Z and t distributions
 Form and interpret a confidence interval estimate for a
single population proportion
 Determine the required sample size to estimate a mean or
proportion within a specified margin of error
 Confidence Intervals
Content of this chapter
 Confidence Intervals for the Population Mean,
μ
 when Population Standard Deviation σ is Known
 when Population Standard Deviation σ is Unknown

 Confidence Intervals for the Population

Proportion, p
 Determining the Required Sample Size
 Point and Interval Estimates
 A point estimate is a single number,

 a confidence interval provides additional

information about variability

Lower Upper
Confidence Confidence
Point Estimate Limit
Limit
Width of
confidence interval
 Point Estimates

We can estimate a with a Sample

Population Parameter … Statistic
(a Point Estimate)

Mean μ X
Proportion p ps
 Confidence Intervals
(continued)

 How much uncertainty is associated with a

point estimate of a population parameter?
 An interval estimate provides more
information about a population characteristic
than does a point estimate
 Such interval estimates are called confidence
intervals
 Confidence Interval Estimate
 An interval gives a range of values:
 Takes into consideration variation in sample
statistics from sample to sample
 Based on observation from 1 sample
 Gives information about closeness to
unknown population parameters
 Stated in terms of level of confidence
 Can never be 100% confident
 Estimation Process

Random Sample I am 95%

confident that
μ is between
Population Mean 40 & 60.
(mean, μ, is X = 50
unknown)

Sample
 General Formula

 The general formula for all

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

 Confidence Level
 Confidence in which the interval
will contain the unknown
population parameter
 A percentage (less than 100%)
 Confidence Level, (1-)
(continued)
 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
Confidence Intervals(continued)

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown
 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
(where Z is the normal distribution X Z
critical value for a probability of α/2 in each tail) n
 Finding the Critical Value, Z

 Consider a 95% confidence interval: Z (α=0.025)

= ±1.96
1   .95

α α
.025 .025
2 2

Z units: Z= -1.96 0 Z= 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
Limit Limit
 Intervals and Level of Confidence
Sampling Distribution of the Mean

/2 1  /2
x
Intervals μx μ
extend from x1
σ x2 (1-α)x100%
XZ of intervals
n
to constructed
σ contain μ;
X Z
n (α)x100% do
not.
Confidence Intervals
 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.
 Example (continued)

 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.
σ
 Solution: X Z
n
2.20 1.96 (.35/ 11)
2.20 .2068
(1.9932 , 2.4068)
 Interpretation
 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
 Practical Example
 Unoccupied seats on flights cause airlines to lose revenue.
Suppose a large airline wants to estimate its average number of
unoccupied seats per flight over the past year. To accomplish this,
the records of 225 flights are randomly selected, and the number of
unoccupied seats is noted for each of the sampled flights.
Descriptive statistics for the data are displayed in the MINITAB
printout below.
 Estimate µ, the mean number of unoccupied seats per flight during
the past year, using a 90% confidence interval.
 Solution
 The form of a large-sample 90% confidence interval for a population
mean (based on the z-statistic is:

 ẋ = 11.6. Since we do not know the value of s (the standard deviation

of the number of unoccupied seats per flight for all flights of the year),
we use our best approximation—the sample standard deviation, s =
4.1, shown on the MINITAB printout. Then the 90% confidence
interval is approximately or from 11.15 to 12.05. That is, at the 90%
confidence level, we estimate the mean number of unoccupied seats
per flight to be between 11.15 and 12.05 during the sampled year.
 Confidence Intervals-continued

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown
 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 Z
 Confidence Interval for μ
(σ Unknown)-continued
 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
(where t is the critical value of the t n
distribution with n-1 d.f. and an area of α/2 in each tail)
 Student’s t Distribution

 The t is a family of distributions

 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
 Degrees of Freedom (df)
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 If the mean of these three

Let X2 = 8 values is 8.0,
What is X3? 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)
 Student’s t Distribution
(continued)
Note: t Z as n increases

Standard
Normal
(t with df = 50)

t (df = 13)
t-distributions are bell-
shaped and symmetric, but
have ‘fatter’ tails than the t (df = 5)
normal

0 t
 Student’s t Table

Upper Tail Area

Let: n = 3
df .25 .10 .05 df = n - 1 = 2
α= .10
1 1.000 3.078 6.314 α/2 =.05

2 0.817 1.886 2.920

3 0.765 1.638 2.353 α/2 = .05

The body of the table

contains t values, not 0 2.920 t
probabilities
 t distribution values
With comparison to the Z value

Confidence t t t Z
Level (10 d.f.) (20 d.f.) (30 d.f.) ____

.80 1.372 1.325 1.310 1.28

.90 1.812 1.725 1.697 1.64
.95 2.228 2.086 2.042 1.96
.99 3.169 2.845 2.750 2.57

Note: t Z as n increases
 Example- t distribution
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 t /2 , n 1 t.025,24 2.0639

The confidence interval is

S 8
X t /2, n-1  50 (2.0639)
n 25
(46.698 , 53.302)
T-table
 Confidence Intervals for
proportions

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown
 Confidence Intervals for the
Population Proportion, p

 An interval estimate for the population

proportion ( p ) can be calculated by
adding an allowance for uncertainty to
the sample proportion ( ps )
 Confidence Intervals for the
Population Proportion, p(continued)
 Recall that the distribution of the sample
proportion is approximately normal if the
sample size is large, with standard deviation

p(1  p)
σp 
n
 We will estimate this with sample data:

ps(1 ps )
n
 Confidence Interval Endpoints
 Upper and lower confidence limits for the
population proportion are calculated with the
formula

ps(1  ps )
ps Z
n
 where
 Z is the standard normal value for the level of confidence desired
 ps is the sample proportion
 n is the sample size
 Example-Proportions

 A random sample of 100 people

shows that 25 are left-handed.
 Form a 95% confidence interval for
the true proportion of left-handers
 Example-(continued)
 A random sample of 100 people shows
that 25 are left-handed. Form a 95%
confidence interval for the true proportion
of left-handers.

ps Z ps(1  ps )/n

25/100 1.96 .25(.75)/1 00

.25 1.96 (.0433)

(0.1651 , 0.3349)
 Interpretation the result

 We are 95% confident that the true

percentage of left-handers in the population
is between
16.51% and 33.49%.

 Although this range 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.
Determining Sample Size

Determining
Sample Size

For the For the

Mean Proportion
 Sampling Error
 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
Determining Sample Size for
Mean
Determining
Sample Size

For the
Mean Sampling error
(margin of error)
σ σ
X Z e Z
n n
 Determining Sample Size for
mean(continued)
Determining
Sample Size

For the
Mean

σ 2
Z σ 2
e Z Now solve
for n to get n 2
n e
 Determining Sample
Size(continued)

 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
 Required Sample Size Example

If  = 45, what sample size is needed to

estimate the mean within ± 5 with 90%
confidence?

2 2 2 2
Z σ (1.645) (45)
n 2  2
219.19
e 5

So the required sample size is n = 220

(Always round up)
 If σ is unknown

 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
 Determining Sample Size for
proportions

Determining
Sample Size

For the
Proportion

ps(1  ps ) p(1  p)
ps Z e Z
n n
Sampling error
(margin of error)
 proportions(continued)

Determining
Sample Size

For the
Proportion

p(1  p) Now solve Z 2 p (1  p)

e Z for n to get n 2
n e
 How to 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”, p
 p can be estimated with a pilot sample, if
necessary (or conservatively use p = .50)
 Required Sample Size-Example

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 ps = .12)
 Required Sample Size Example
(continued)
Solution:
For 95% confidence, use Z = 1.96
e = .03
ps = .12, so use this to estimate p

2 2
Z p (1  p) (1.96) (.12)(1  .12)
n 2
 2
450.74
e (.03)
So use n = 451
 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
 Applications in Auditing
(continued)
 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
 Confidence Interval for
Population Total Amount
 Point estimate:
Population total NX

 Confidence interval estimate:

S N n
NX  N ( t n  1 )
n N 1
(This is sampling without replacement, so use the finite population
correction in the confidence interval formula)
 Confidence Interval for
Population Total: Example

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.
 Confidence Interval for
Total Difference
 Confidence interval estimate:

SD N n
ND  N ( t n 1 )
n N 1
where n

 i
(D  D ) 2

SD  i1
n 1
 One Sided Confidence Intervals
 Application: find the upper bound for the
proportion of items that do not conform with
internal controls

ps(1  ps ) N  n
Upper bound ps  Z
n N 1
 where
 Z is the standard normal value for the level of confidence desired
 ps is the sample proportion of items that do not conform
 n is the sample size
 N is the population size
 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
 Chapter Summary
 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
 Determined required sample size for mean and
proportion settings
 Chapter Summary(continued)
 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