The Auditor's application of Analytical procedures, the extent of their use and the effectiveness of such procedurese

Abstract

The audit profession is under great pressure to provide a service at the lowest price consistent with their professional standards. Burton and Fairford (1982) observed: Pressures on prices should lead to greater audit efficiency as firms strive to reduce costs to remain competitive. Thus audit efficiency will likely occur primarily at the level of hours committed to an engagement. These are hours that can be best replaced by the increased use of analytical techniques (now known as Analytical Procedures) and modern computer technology. This prediction has now been proved correct. Analytical Procedures (APs) are now widely used; for example, the time devoted to them is claimed to be at least 33% of an audit engagement.

Auditors regard the procedures as very powerful and, since 1982, have consistently claimed that over 40% of all errors are initially identified by the application of an AP. Thus APs are now a key methodology used by auditors. Some academics have raised doubts about the effectiveness of APs. For example: our findings appear to support Blocher and Willingham and others that analytical review may be good at spotting the presence of errors but does not reliably indicate the absence of errors (Loebbecke and Steinbart (1987)).

This thesis examines the environment in which APs are used. It considers surveys about the application of APs, including the extent of use of such procedures and explores whether APs are reliable, effective and efficient, taking linear regression as one example. An AP is defined as effective if both false-positive and false-negative indications of material error have low probabilities.

It is shown that APs are an important audit tool at all stages of the audit process, including as substantive procedures. APs are used extensively and simple techniques are the most common. Auditors perceive that APs are effective and have categorised APs as cost effective. Our investigations imply that they may be low cost but, in certain circumstances, they are ineffective, rather than cost effective.

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