ACCTMIS 7510
Article Questions
Loebbecke, J.K and P.J. Steinbart. 1987. An investigation of the use of preliminary analytical review to provide substantive audit evidence. Auditing: A Journal of Practice & Theory 6(2) (Spring): 74-89.
Notes:
1. Don’t get lost in the details of the experiments. Concentrate on the main conclusions and on the general methods that the authors used to support the conclusions.
2. Preliminary Analytical Review Procedures (ARP) are the same thing as what we have been calling Analytical Procedures or Analytical Monitoring.
3. On p. 77 the authors discuss type 1 and type 2 errors. Type 1 errors occur when the auditor decides to investigate (i.e., gather more evidence about) an account that is not materially misstated. Type 2 errors occur when the auditor does not investigate an account that is materially misstated.
4. You may skim (do not read in detail) the sections on Experiments 3 and 4 (pp. 83-86).
Questions:
1. The authors cite several studies (not including their study) that indicate that ARP detect a rather high percentage of misstatements. These studies have caused some to believe that ARP are effective audit procedures. According to the authors, what is wrong with this evidence (i.e., that ARP detect a high percentage of misstatements) of ARP effectiveness? Does the authors’ study address the limitations of past studies?
2. In experiment 1 using the 10% rule on the sample of 38 firms, what percentage of the seeded errors in accounts receivable were detected by ARP?
3. The authors state that the 10% rule used in experiment 1 is often used by auditors, but the experiment suggests that rule is not very effective.
a. Comment on the authors’ measure of “effectiveness.”
b. Speculate why the 10% rule is not effective.
c. If the rule is not effective, why is it often used in practice?
4. Explain why ARP tended to be more effective for the Allowance for Doubtful Accounts account than for other accounts.