Confidence Interval Estimation

Shair Muhammad Hazara

PhD Public Health (fellow), MSPH, MSBE, BSN, Ped. N
E_mail address: [email protected]

Chap 7-1
 Chapter Goals
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

Chap 7-2
 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

Chap 7-3
 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

Chap 7-4
 Point Estimates

We can estimate a with a Sample

Population Parameter … Statistic
(a Point Estimate)

Mean μ X
Proportion p ps

Chap 7-5
 Confidence Intervals

 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

Chap 7-6
 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

Chap 7-7
 Estimation Process

Random Sample I am 95%

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

Sample

Chap 7-8
 General Formula

 The general formula for all

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

Chap 7-9
 Confidence Level

 Confidence Level
 Confidence in which the interval
will contain the unknown
population parameter
 A percentage (less than 100%)

Chap 7-10
 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
 No probability involved in a specific interval

Chap 7-11
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

Chap 7-12
 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
XZ
n
(where Z is the normal distribution critical value for a probability of
α/2 in each tail)
Chap 7-13
 Finding the Critical Value, Z
Z  1.96
 Consider a 95% confidence interval:
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

Chap 7-14
 Common Levels of Confidence
 Commonly used confidence levels are 90%,
95%, and 99%
Confidence
Confidence
Coefficient, Z value
Level
1 
80% .80 1.28
90% .90 1.645
95% .95 1.96
98% .98 2.33
99% .99 2.57
99.8% .998 3.08
99.9% .999 3.27

Chap 7-15
 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
n of intervals
to constructed
σ contain μ;
XZ
n (α)x100% do
Confidence Intervals not.
Chap 7-16
 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.

Chap 7-17
 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)
Chap 7-18
 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

Chap 7-19
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

Chap 7-20
 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

Chap 7-21
 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
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)

Chap 7-22
 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

Chap 7-23
 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)
Chap 7-24
 Student’s t Distribution
Note: t Z as n increases

Standard
Normal
(t with df = )

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

0 t
Chap 7-25
 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
Chap 7-26
 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

Chap 7-27
 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 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)

Chap 7-28
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

Chap 7-29
 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 )

Chap 7-30
 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
Chap 7-31
 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
Chap 7-32
 Example

 A random sample of 100 people

shows that 25 are left-handed.
 Form a 95% confidence interval for
the true proportion of left-handers

Chap 7-33
 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)
Chap 7-34
 Interpretation

 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.

Chap 7-35
Determining Sample Size

Determining
Sample Size

For the For the

Mean Proportion

Chap 7-36
 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

Chap 7-37
 Determining Sample Size

Determining
Sample Size

For the
Mean Sampling error
(margin of error)
σ σ
XZ eZ
n n

Chap 7-38
 Determining Sample Size
(continued)

Determining
Sample Size

For the
Mean

σ 2
Z σ 2
eZ Now solve
for n to get n
n e 2

Chap 7-39
 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

Chap 7-40
 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)

Chap 7-41
 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

Chap 7-42
 Determining Sample Size

Determining
Sample Size

For the
Proportion

ps(1  ps ) p(1  p)
ps  Z eZ
n n
Sampling error
(margin of error)
Chap 7-43
 Determining Sample Size
(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

Chap 7-44
 Determining Sample Size
(continued)

 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)

Chap 7-45
 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)

Chap 7-46
 Required Sample Size Example
(continued)

Solution:
For 95% confidence, use Z = 1.96
e = .03
ps = .12, so use this to estimate p

Z p (1  p) (1.96) (.12)(1  .12)

2 2
n 2
 2
 450.74
e (.03)
So use n = 451

Chap 7-47
PHStat Interval Options

options

Chap 7-48
PHStat Sample Size Options

Chap 7-49
 Using PHStat
(for μ, σ unknown)
A random sample of n = 25 has X = 50 and
S = 8. Form a 95% confidence interval for μ

Chap 7-50
 Using PHStat
(sample size for proportion)
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)

Chap 7-51
 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

Chap 7-52
 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

Chap 7-53
 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)

Chap 7-54
 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.

Chap 7-55
 Example Solution
N  1000, n  80, X  87.6, S  22.3

S Nn
NX  N ( t n1 )
n 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

Chap 7-56
 Confidence Interval for
Total Difference
 Point estimate:
Total Difference  ND

 Where the average difference, D, is:

n

D i
D i1
n
where Di  audited value - original value

Chap 7-57
 Confidence Interval for
Total Difference
(continued)

 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

Chap 7-58
 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

Chap 7-59
 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

Chap 7-60
 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
Chap 7-61
 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

Chap 7-62