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    Auditors’ Assessment and Incorporation of Expectation P...
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Auditors’ Assessment and Incorporation of Expectation Precision in Evidential Analytical Procedures
    Practical Implications:

    The results of this study suggest that auditors’ precision assessments may not be well calibrated for relevant precision factors. Thus, auditors may benefit from additional guidance indicating the factors that should be considered for assessing the precision of analytical
    procedures.  Furthermore, audit firms might want to consider integrating some of the findings of this study into future training sessions and/or decision aids that would assist auditors in improving their precision calibration. An insensitivity to important precision factors may lead to over-reliance on analytical procedures, negatively affecting audit effectiveness. Because the allowance for loan losses is an estimate, the results of this study provide insight into factors that could influence the potential effectiveness of audits of estimates. Understanding how auditors evaluate analytical procedure precision for estimates is particularly critical in that analytical procedures may be the only source of assurance for testing these accounts.


    McDaniel, L.S. and L.E. Simmons. 2007. Auditors’ assessment and incorporation of expectation precision in evidential analytical procedures. Auditing: A Journal of Practice & Theory 26(1): 1-18.

    Analytical procedures, precision, expectations, substantive test, audit evidence
    Purpose of the Study:

    The precision with which auditors form expectations during analytical procedures is important. The precision of an expectation is a measure of the closeness of the developed expectation to the actual amount and refers to the quality of the expectation, and thus, the quality of the analytical procedure. Professional standards clearly indicate that auditors should be able to form more precise expectations for accounts that are more predictable (income statement relationships generally are more predictable than balance sheet relationships) and when the information related to the account is more disaggregated (i.e., detailed). However, the Public Oversight Board’s (POB) Panel on Audit Effectiveness has found evidence that auditors rely on analytical procedures that do not provide the desired level of assurance, suggesting possible difficulty in assessing precision. To address this finding by the POB, this study investigates auditors’ abilities to assess expectation precision and incorporate their assessments into judgments related to substantive analytical procedures, as required by professional standards. A first step toward developing more effective guidance is obtaining a better understanding of why auditors sometimes fail to effectively apply analytical procedures. As such, the authors aim to answer the following two questions: 

    • To what extent do auditors’ precision assessments reflect the level of account predictability and the level of detail of the data used to form expectations? 
    • To what extent are auditors’ judgments consistent with their precision assessments? According to professional standards, the following judgments should be consistent with auditors’ precision assessments:

    (1)   The level of assurance expected by auditors to be provided by the analytical procedure.

    (2)   The range of the difference between the expected and recorded amount.

    (3)   The likelihood that the difference between the expected and recorded amount is due to misstatement versus nonmisstatement causes.

    Design/Method/ Approach:

    The authors gathered their data experimentally at a firm training event for audit seniors and above (the training event occurred sometime during or prior to 2005). The participants were asked to review workpapers which included analytical procedures for two different accounts – the allowance for loan losses (a less predictable account) and interest income (a more predictable account). The expectations for the analytical procedures documented in the workpapers were either based on more or less detailed information. After reviewing the analytical procedures, auditors were asked to assess the precision and the level of assurance provided, provide an expectation range for the account balance, and judge the amount of difference between the expected and recorded amount due to misstatement.

    • Overall, auditors assess precision higher when the data forming the expectation are disaggregated (i.e., more detailed) versus
      aggregated (i.e., less detailed). 
    • Auditors also assess precision higher for the more predictable account (interest income) versus the less predictable account (the allowance for loan losses). 
    • Auditors’ precision assessments for the allowance for loan losses are not significantly different between the disaggregated and aggregated analytical procedures. This finding suggests that in assessing the precision of analytical procedures for less predictable accounts, auditors do not consider the effects of data aggregation. 
    • The results also show that for both accounts auditors judge the level of assurance obtained from the analytical procedures consistent with their precision assessments (i.e., higher assessed precision corresponds with a higher level of assurance). 
    • Counter to the authors’ expectations, auditors’ precision assessments were not related to their judgments of the range of differences between the expected and recorded amounts or the likelihood of misstatement.
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Adequacy of Evidence
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