Ratio estimation is a classical variable sampling technique used by auditors to project misstatements in an account balance by applying the ratio of audited value to book value from a sample to the entire population. This method is particularly effective when the relationship between the book and audited values is proportional and consistent across the population.

In ratio estimation, the auditor calculates the ratio of total audited value to total book value in the sample. This ratio is then multiplied by the total book value of the population to estimate its true (audited) value. The difference between the population’s book value and its projected audited value represents the estimated total misstatement.

Practical Example:
An auditor reviews a sample of 500 accounts with a total book value of $580,000 and determines the audited value is $600,000. The population consists of 6,200 accounts with a total book value of $7,120,000.

This projected understatement of $244,440 indicates the population may be undervalued, guiding the auditor toward further analysis or adjustments. Ratio estimation offers a straightforward, effective way to estimate population misstatements when proportionality exists.