An Analysis of Simple and Rigorous Decision Models as Analytical Procedures

An audit strategy consists of three stages: 1. internal control evaluations; 2. analytical procedures; and 3. substantive testing. The more reliance that can be placed on one phase of the audit, the less reliance is required by the other phases in order to obtain the overall desired precision. This study evaluates the use of simple comparison-based decision models with more rigorous models using data acquired from a large CPA firm. Regression-based analytical procedures had been applied to this particular data in the field by the firm. The auditor should be aware of the available procedures and their relative capabilities in providing expected amounts that lead to auditor decisions on whether to signal an account for additional audit attention. This study suggests that the use of more rigorous decision models may provide more precise expected amounts and more efficient auditor decisions.