Professional Documents
Culture Documents
Practices?*
1. Introduction
Analytical procedures (APs) are required at the planning and review phases
of an audit (SAS No. 56, AICPA 1988). APs are valuable, since they allow
the auditor to consider the reasonableness of nancial results based on
expectations and thus obtain a broader view (see the forest for the trees)
than that provided by detailed substantive tests. Further, prior research has
shown that APs detect misstatements that other procedures would not iden-
tify and do so in a cost-efcient manner (Wright and Ashton 1989; Hylas
and Ashton 1982). Despite their mandatory use and potential value to the
audit, little recent academic research has focused on the actual practice of
APs. Nelson and Tan (2005) call for additional work in this area: We
believe it is particularly important for researchers to consider how analytical
procedures are changing in response to recent changes in the audit setting
(45). An inuential prior study conducted by Hirst and Koonce (1996) over
a decade ago serves as a baseline to identify changes in the use of APs.
We address this issue by examining the practices of the Big 4 CPA rms
in conducting APs. We focus on how practices have changed in light of
recent changes in the audit environment. Our analysis is structured around
the concepts of drivers and enablers of change. As will be discussed
more fully in the following section, a driver is a factor that creates the need
for change, while an enabler facilitates change. A review of developments in
the audit environment suggests that two factors, nancial reporting scandals
and the ensuing Sarbanes-Oxley legislation (2002), are likely to have driven
change in the use of APs, and two additional factors, technological
advances and changes in rm audit approaches, have likely facilitated or
enabled change.
Contemporary Accounting Research Vol. 27 No. 2 (Summer 2010) pp. 669700 CAAA
doi:10.1111/j.1911-3846.2010.01021.x
670 Contemporary Accounting Research
2. Background
During the past decade a number of signicant developments have affected
the audit environment. We examine whether and how APs have changed
in response. As previously mentioned, we distinguish between drivers and
enablers of change.
Drivers of change
A review of the literature reveals two prominent drivers of change in the
conduct of APs: corporate nancial reporting failures, and the enactment of
the Sarbanes-Oxley Act (2002). First, several major corporate frauds and a
record number of earnings restatements (Palmrose and Scholz 2004; Agra-
wal and Chadha 2005) led to signicant concerns regarding the efcacy of
nancial statements audits. There were allegations that had auditors been
aware of the clients industry conditions and conducted appropriate analyti-
cal procedures many of these frauds would have been detected by the audi-
tor, e.g., Lincoln Savings & Loan (Erickson, Mayhew, and Felix 2000). As
a result, one would expect that auditing rms have altered their practices in
conducting APs to protect against the reoccurrence of a signicant nancial
reporting failure and the attendant exposure to litigation and loss of reputa-
tion.
Second, as a result of public outcry emanating from the Enron and
WorldCom frauds, Congress enacted the Sarbanes-Oxley Act (2002). That
Act called for a number of signicant measures affecting the auditing pro-
fession such as requiring assurance on internal controls and the formation
of the Public Companies Accounting Oversight Board (PCAOB) to oversee
Enablers of change
During the past decade there have also been two signicant enablers of
change in APs practices: technological advances, and changes in rm audit
approaches. First, the proliferation in recent years of nancial databases,
internet search capabilities, and analysts reports such as First Call make
nancial and nonnancial information about a client readily and easily
accessible to auditors. Such information is conceptually very valuable in
conducting APs to gain an understanding of the clients business, its indus-
try, and its strategies, and to form expectations (Bell, Peecher, and Solomon
2005). Thus, one might expect auditors to use such resources to arrive at
more informed expectations than the predominant use of simple this year
last year comparisons as reported in earlier research (Hirst and Koonce
1996).
Also, advances in technology have led auditing rms to increasingly use
computerization to improve audit efciency and effectiveness. For example,
rms routinely use electronic work papers and automate the audit process.
Computerization would make it easier to provide decision aids and check-
lists to conduct APs than in the past, such as identifying likely causes for
unexpected uctuations (Blocher and Willingham 1993).
Second, over the past decade auditing rms have increasingly adopted
a more holistic, business risk audit approach (e.g., PwC Winograd,
Gerson, and Berlin 2000; KPMG Bell, Marrs, Solomon, and Thomas
1997; Bell et al. 2005). This shift in eld (Hinings, Greenwood, Reay, and
Suddaby 2004) was facilitated by the AICPAs publication of the expecta-
tions gap standards in the late 1980s. In particular SAS No. 56 expanded
the use of APs, which had previously been used in the planning process to
direct the auditors attention towards areas that merited special attention
and in the nal review phase. However SAS No. 56 indicated that APs
could serve as substantive tests as well.
Subsequently, throughout the 1990s, some of the Big 6 rms developed
new audit methods that recognized the value of APs beyond simple plan-
ning tools. Development of such approaches as KPMGs Business Measure-
ment Process or Andersens Business Audit placed a new emphasis on the
use of APs. These approaches, while not fully adopted by all rms, result in
auditors gaining greater knowledge about a clients strategies, business pro-
cesses, and industry trends than previously, potentially resulting in greater
focus on APs and more sophisticated expectations. Further, auditors at all
levels are involved in gathering and assessing information regarding busi-
ness risks. Thus, staff at lower levels than in the past may be engaged in
conducting APs.
Prior research
Hirst and Koonce (1996) was the rst study to provide descriptive ndings
of audit practices related to the use of APs at the then Big 6 audit rms. As
such, it has served as an important benchmark for researchers, practitioners,
standard setters, and educators. Despite growing use of APs in practice and
the issuance of auditing standards (e.g., SAS No. 56, AICPA 1988), prior to
Hirst and Koonce there was only anecdotal evidence of how auditors con-
ducted APs at various stages of the audit.
In their study, Hirst and Koonce nd that auditors frequently rely on the
prior years account balances to form expectations rather than more sophisti-
cated approaches or decision aids. Reliance on prior balances is of concern,
since this approach considers only a narrow range of information and does
not take into account changes in the clients business risks and industry (Bell
et al. 2005; Bell et al. 1997; POB 2000, 43). For instance, clients engaged in
fraudulent nancial reporting may intentionally show a smooth earnings
trend from the prior year. Research ndings also suggest that auditors have
difculties considering patterns in nancial and nonnancial information and
in generating the correct cause, and also tend to focus on a (target) non-
error cause (e.g., Bedard and Biggs 1991; Asare et al. 2000).
Hirst and Koonce (1996) report that management is the most common
source consulted in searching for explanations for unexpected uctuations
in the planning and testing phases. Of course, reliance on management is
of concern due to the potential for bias in responses. As a result, one of
the recommendations of the Panel on Audit Effectiveness (POB 2000) was
for standard setters to Develop more guidance on when it is appropriate
(and when it is inappropriate) for the auditor to rely on managements
explanations . . . and on obtaining additional evidence to corroborate
those explanations (43). Finally, Anderson and Koonce (1998) nd that
quantifying expectations enhances the ability to discern the correct
cause(s) of a uctuation than when only considering the plausibility of a
client explanation.
Our review indicates that prior research on AP practices is limited and
conducted in the mid-1990s prior to the signicant changes, drivers, and
enablers affecting the auditing profession as identied previously. The next
section describes the method employed in the current study to examine how
these developments have impacted the use of APs.
3. Method
Instrument development and content
We developed a series of questions addressing the use of, and reliance on,
APs as well as changes in recent years in the performance of APs. Given
the interview nature of the study, the focus was on each participants expe-
riences in conducting analytical procedures. Since Hirst and Koonce (1996)
provide baseline data, our starting point in developing questions was the
survey instrument used in their study.1 We included questions from the ori-
ginal instrument that, in our judgment, reected ndings that provide signif-
icant insights and are noted frequently by subsequent researchers. (For
instance, Hirst and Koonce reported that, when confronted with a material
unexpected uctuation, auditors went to the client to identify the cause(s)
for the uctuation. We wanted to assess the extent to which that practice
still continues today.) Relevant interview questions are presented in Appen-
dix 1 and referenced to the discussion of the ndings by number (e.g., Q1).
We also included questions to address changes in the environment since
the early- to mid-1990s. For example we provided a list of six auditing tech-
niques that are commonly used in the conduct of APs.2 Participants were
asked to compare the frequency of the use of these techniques today to the
frequency of their use in the past. In designing the structure of the instru-
ment, we began each topic with Likert scale responses and then followed up
with more qualitative, open-ended questions.
Sample
We conducted interviews with 36 practicing auditors. Our sample was cho-
sen on an availability basis with the assistance of key rm personnel. To
obtain perspectives of auditors at different staff levels, we sought and
obtained the participation of approximately equal numbers of partners,
managers and seniors from each of the Big 4 rms (see Table 1). The sam-
ple size is the same as that used by Hirst and Koonce 1996; however, the
experience levels of the current sample are evenly balanced (with the excep-
tion of one more manager than seniors), whereas Hirst and Koonce
reported interviews with 17 seniors, 14 managers and only ve partners.
While participants in our study had experiences in several ofces across the
country, all were, at the time of interview, working in large ofces in the
northeastern United States. Initial interviews with three participants resulted
in minor modications to the interview instrument.
Descriptive statistics on the sample composition and interview length
are presented in Table 1. Interviews were conducted between late 2003 and
mid-2005. The duration of interviews ranged from 42 to 90 minutes with a
mean time for partners of 76 minutes (range 62 to 90 minutes) compared to
53 minutes for seniors (range 42 to 60 minutes). The longer duration of
partners interviews is indicative of their greater depth of knowledge.
Procedure
The interviews consisted primarily of structured questions which were
supplemented with open-ended (semi-structured) questions to further explore
1. We would like to thank Lisa Koonce for providing a copy of the interview template used
in the Hirst and Koonce 1996 paper.
2. These techniques include: account balance comparisons, ratio analysis, regression analy-
sis, analysis of nonnancial information, analysis of client budgets or forecasts, and
analysis of interim data.
TABLE 1
Sample composition and interview statistics
Panel A
Average length of Number of years
Rank N interview (in minutes) in public accounting
Partner 12 76 20.1
Manager 13* 62 6.9
Senior associate 11* 53 3.8
Notes:
* Each rm was requested to provide three partners, three managers and three
senior associates for interviews. However, one of the individuals who had
been a senior associate at the time the interview was arranged had been
promoted to manager by the date of the interview.
Panel B
Industry Frequency
Government 1
Financial services 9
Manufacturing 13
Non-prot 2
Technology 7
Retail 3
Healthcare 1
Total 36
4. Findings
As discussed, this study examines how the use of APs has changed in recent
years in response to signicant drivers and enablers in the audit environ-
ment. Factors that have impacted the use of APs in practice are considered
rst. Then the ndings are presented in the sequential stages of conducting
APs (Koonce 1993): developing expectations and identifying material uctu-
ations, and nding (hypothesis generation) and testing explanations. A sum-
mary of the implications of the ndings for future research is provided in
Table 2. These implications are explicitly linked to the discussion of the
results by reference to the numbered research issue (RI).
I would say the frauds and the corporate scandals have . . .made people
renew their focus on doing some good old-fashioned audit work, again
including good detailed analytics as part of a good, robust audit. (partner)
While this quote suggests that the scandals refocused the profession on
APs, the partner continues and provides a more in-depth description of how
the scandals affected the entire audit process including more rened APs:
I personally think that the profession as a whole got a little bit off track
maybe in the mid to late nineties in doing a little bit more top level audit-
ing. Not doing quite as much detailed auditing. And now I think theres a
renewed focus and I think rightly so of doing more detailed audit work
and that would include more detailed substantive analytics. (partner)
3. To test the reliability of coding, twelve of the transcripts (one-third) were recoded by a
second graduate accounting student and the results were compared to the initial coding.
Inter-rater agreement was 89.9 percent (Cohens Kappa Coefcient = .70 ; p = .001).
Differences were reconciled through discussion between the coders. Any remaining
disagreements were examined and coded by one of the authors.
TABLE 2
Future research issues (RI)
TABLE 2 (Continued)
Quantitative results also conrm the greater use of APs (Q1). Sixty-one
percent (22) of the interviewees indicate APs are currently used more than
they have been in the past. When asked to identify factors accounting for
this increase, nearly 40 percent (14) participants cite the recent accounting
scandals.
Regarding the time allocated to APs (Q2), an analysis of data across
time periods reveals small increases in the number of budget hours allocated
to APs in each stage (planning, substantive testing, and overall review) of
the audit engagement. Interviewees estimated that, in the current period,
over 25 percent of the total audit budget was allocated to APs. By compari-
son, it was estimated that less than 21 percent of the budget was allocated
to APs during the period between two and seven years prior to our data
collection.4 This upward general trend is consistent with the ndings of
Ameen and Strawser (1994) who reported that, in the early 1990s, approxi-
mately 15 percent of the budget was allocated to APs.
4. Only partners and senior managers (less than half of the sample, n = 15) had sufcient
experience to respond to this part of the interview.
Participants were asked (Q2 and Q3) to assess the extent to which they
focus on APs at various stages of the audit (i.e., planning, substantive test-
ing, and overall review) and at various levels of aggregation (i.e., corporate,
division, and product level line of business, and for the review of the 10-Q).
In general, interviewees indicated that they focused moderate levels of atten-
tion on APs at various stages of the audit and at various levels of aggrega-
tion. However, responses also suggest that individuals with more experience
(partners and senior level managers) consistently focus more attention on
APs at the lowest level of aggregation (e.g., product line LOB) for all stages
of the audit. Given the nding that a greater focus on disaggregated data
allow APs to provide more accurate and precise results than would be
obtained by using aggregate models (Allen, Beasley, and Branson 1999), this
suggests that it may be benecial to place greater emphasis on the power of
analysis of disaggregated data in university studies or training classes for
lower level staff (see Table 2, RI 1).
Along with corporate scandals, the ensuing Sarbanes-Oxley Act is also
viewed as a driver of change in the use of APs. When questioned speci-
cally about it (Q3), 33 percent of the participants (12) indicate that
changes in the use of APs has been directly related to this law. However,
participants were equivocal in their assessments of whether SOX led to an
increase or decrease in the use of APs. The following two quotes from
partners suggest that APs will decrease, at least in the short run, as a
result of SOX:
When you say Sarbanes-Oxley I assume you mean section 404 . . . . But
testing the internal controls, at least in this rst year of implementation,
is at such a detailed level around processes that were testing on such a
minute level of detail, you dont really need the analytics. An analytic is
to give you some sense of something from an overall perspective. If you
look at every single line item whats the point of doing the overall
perspective? (partner)
Yet the general belief is that, in the long run, enhanced internal controls
resulting from Section 404 audits will lead to enhanced ability to rely on
the results of analytical procedures. Ultimately, there is hope that more
in-depth reviews of internal controls will pave the way for a truly inte-
grated audit that can enhance the auditors efciency without sacricing the
effectiveness of the assurance function. The relation between controls and
the value of APs is addressed in the following quotes:
Now that its year two of 404 for an integrated audit, were going to try
to step away from substantive procedures and really get an idea of what
a truly integrated audit is. So relying on controls and maybe using
more analytical procedures to get more comfortable with account
balances and whatnot . . . . The ideal 404 integrated audit is going to be
relying on the controls within an effective environment and then saying,
okay, what can we do to relieve the substantive audit work because we
can rely on the controls they have on hand? And I can rely on APs.
(senior)
The above quote provides insight into the use of APs and suggests that in
higher risk cases they may be most effective when combined with additional
tests of details. The following quote also addresses risk and the sometimes-
limited level of assurance that APs provide, by suggesting that it would be
unlikely that adjusting entries would be made based solely on the results
of APs.
The risk is too high. So in those instances we dont do that much analyti-
cal review. Its just: Substantively audit and thats that. I mean at the
end you would do an overall analytical review compared to last year but
thats it. You wouldnt analytically change account balances. (manager)
I would say were using them [APs] more because the information avail-
able is more robust, more timely, so therefore you can use more com-
parisons with competitors or just other companies in the marketplace so
you can get more out of analytics and theyre more available, so Id say
were using them more. (partner)
While all participants discussed how APs had been affected by the
expanded use of more powerful technology, mention of the effects of our
second hypothesized enabler more holistic audit approaches was not
universal. While two of the Big 4 rms appear to have fully adopted such
approaches, the other rms have not. This contrast is highlighted in the fol-
lowing quotes. The rst two quotes reect the views of professionals at
rms that appear to have more fully endorsed a holistic audit approach,
while the last quote reects the views of a professional at a rm that
appears to have less fully endorsed such an approach.
Well Im not sure if youre familiar with [my rms] audit methodology,
but the rst thing we do is we go in and test controls. That may be in
conjunction with the year end audit, we might go in a little earlier just
from a timing perspective, but well document the process. First we
identify the key process, we document the process, identify the key
controls and then test controls. You select a subset of those control
activities for testing, and if your control testing, if it goes well, if you
dont encounter any problems with control testing, your reliance
on analytical procedures is much higher than test of details. Whereas if
I go into a company that doesnt really have a good control environ-
ment, Im going to rely more heavily on test of details and kind of
ignore analytical procedures from a substantive testing standpoint.
(manager)
While various rms may be more or less willing to rely on APs as suf-
cient, competent audit evidence, all rms appear to rely on more powerful,
technology-driven APs to identify risk. This was noted by interviewees from
all rms and was often attributed to advances in technology as noted in the
following quote:
. . . your experience with the client. How many years that youve been
there maybe. Whereas now Ive got some new clients . . . . Im a little
more hesitant to rely on analytical procedures than I would on the test
of details just because I dont really know enough about the client. I
guess I just dont have that comfort level yet being that its a rst-year
certain cases, APs may not only be more efcient, but more effective as
well.
Well I would say analytics are pretty much always more efcient. I
mean [sometimes] you can just do an analytic thats going to save you a
ton of time than if youre testing the actual details . . . . I think you
look at relationships between different accounts more which I think
gives you a better insight into the numbers than if you just recalculate
something. I mean thats not very good audit evidence. (manager)
While there are situations where analytics may be both more efcient
and more effective, this may not be the typical case. More often there is a
tradeoff as highlighted in the following quote:
The tradeoff is precision versus scope. You have a nite amount of time
to get something done, not in theory but in practice. And if youre try-
ing to understand revenue you may be only able to test a certain num-
ber of transactions then youd know whether those transactions were
correct or not but that may only give you 20 percent coverage. Whereas
you do analytics, you do analytics on the total balance by stratifying it
and doing some analytics on different geographies or different product
lines, different business units, so you can get product coverage but not
the precision. So you have to consider inherent risk and stability and
then you can make your tradeoffs. (partner)
Its only efcient to the extent that its completed the job. So you can
certainly analyze the balance but if you dont have enough condence
that the numbers right, then you need to go back and do more work.
So I think its really a combination of what are your various procedures
and wheres the risk inherently viewed. (partner)
Thats why analytics are so good; its probably . . . the easiest way to
nd out something that you didnt already know. Its more of a step
back and just, Wow this really did change, why? What are the assump-
tions that might have changed underlying that? (senior)
If you adhere to the [rms audit] approach and the plan, and the
parameters, and you come up with what your expectations are, . . . and
your results are meeting your expectations, that should result in less
audit hours. (partner)
5. Under the condition of strong internal control, Cohen and Kida (1989) found that 25
percent of their sample of audit seniors and managers would reduce the hours allotted in
the initial audit budget, when APs indicated no likely errors. However, the remaining 75
percent would either increase hours or make no adjustments to the budget. In total,
under these conditions (i.e., strong internal control and no likely errors), the mean adjust-
ment from the initial budget was not signicantly different from zero.
Finally, some respondents suggested that they would not rely on the
results of APs to reduce overall audit hours, but would rely on them to
enhance the effectiveness of the audit by reducing hours in a specic area
and reallocate them to an area of higher risk:
I think in this day and age I think we are as auditors more responsive
to risks that we see at our clients . . . . And I think a big change in cor-
porate America is that not many CFOs and not many audit committees
want to be in a position to tell us to do less work. (partner)
Of course the extent to which this attitude will continue into the
future is uncertain as boards and business groups call for easing (or in
some cases the outright repeal) of certain SOX regulations and the SEC
and PCAOB attempts to balance audit quality and investor protection
against the costs of monitoring and disclosure that the registrant must
bear to satisfy the requirements of SOX (Burns 2007; Reilly 2006; Scannell
2007).
APs (Q8), participants provided several answers. Fifty percent (18) state
that they considered prior years procedures, and 50 percent state that they
incorporate knowledge of changes and trends in the economy and at the cli-
ent. In addition, 44 percent (16) indicate that they consider the nature of
the business, and 31 percent (11) note that availability of data is an impor-
tant factor.
Estimates suggest that seniors and managers design (Q8) approxi-
mately 80 percent of the AP tests (means = 36 percent and 44 percent
respectively), with partners and staff doing considerably less (13 percent
and 6 percent respectively). In contrast, APs are performed (Q9) primarily
by the staff and seniors (48 percent and 35 percent respectively) with
less of this work being done by managers (12 percent) and partners (5
percent). With respect to the nature of the work being done (Q10), one
interviewee states:
Okay planning and substantive would typically be done by the staff and
the senior. Thats kind of getting down into the details. The overall
review I would say its more senior manager because I would say the
managers like to understand [so] that they can communicate effectively
all the changes in accounts to the partner. So theyre going to spend
more time reviewing it and in certain circumstances, actually doing it to
make sure they fully understand the changes between accounts from the
overall completion review stage of the audit. (manager)
Yeah, I think [the rm] over the last two years . . . theyve really put a
focus on train the staff to do more effective and efcient analytical
procedures to get more bang for the buck. (manager)
But I think thats usually pushed down to our staff level and I think
that our seniors review it and they say, Thats a lousy expectation,
because they [the staff] are just kind of picking the path of least resis-
tance. And so our seniors push back on that. And then I think where
the managers and the partners come in is really doing more push back
and saying, You guys are still youre missing the boat. You didnt
factor in the fact that they opened a new building, in whatever loca-
tion. And you didnt factor that into your occupancy cost. Why is
that? So that push down is whats [important]. (partner)
The only thing I would say changed is the use of client budgets or fore-
casts. There wasnt really much of a focus on looking at client budgets
and forecasts, in my experience anyway. (manager)
Even if I didnt think they knew the answer or I was concerned they
werent going to give me a straight answer I would ask them just to
check it. Put them on record. (partner)
And often times you can nd out . . . by sitting down, looking them in
the eye, and asking them a question. If you get a blank stare that prob-
ably tells you youve got a control problem because theyre not even
aware if it . . . . [In such cases,] Ive really got to do a lot more work
because you dont have the right level of review and supervision in clos-
ing the books. So I always start with the client inquiry, no matter what,
because you can just corroborate your own expectations. (partner)
[I] go talk to the client . . . show them what Ive got, and say Why
do you think this has happened? to try to get some explanation that
makes sense to me. And that may lead me to do deeper analytics or
it may lead me to do more detail testing. But I think my rst reac-
tion is . . . go talk to the client and decide what we do from there.
(manager)
Start right in with the discussion with client? Actually no. We would
check to make sure that our analytic made sense and we didnt miss
anything. Then we would have the conversation with the client about
the difference. Then you start to move down, is there more we have to
do here? Do we need to start to understand these balances that may
have shifted the ratio? An example in real estate is a bad storm that
wasnt anticipated. Should we be taking a look at that and vouch that?
To look at that invoice for repairs to see if there is something funky.
Make sure what we are doing is right, then go to the client and start a
discussion, and then validate what they were saying. If it doesnt make
sense, then we go and test some balances. (partner)
I think that a lot of people would argue that were moving more in that
direction [i.e., gathering corroborating evidence, and in particular, evi-
dence that attempts to refute managements explanation] now under the
PCAOB because theres a feeling that the PCAOB wants auditors to
have a higher level of professional skepticism and one way that you do
that is instead of trying to support what somebodys telling you, you try
to disprove what somebodys telling you. And I think clearly you see
traces of that in SAS 99 in the fraud standards . .. it doesnt say this
[directly], but therefore I think people would come to the conclusion
that you dont accept whats being told to you at face value. You try to
go out not to support it but to try and disprove it . . ., being very
cautious about not getting on a witch-hunt. (partner)
are rarely used. The rst result raises concerns about whether auditors
over-rely on client representations with an attendant conrmatory bias.
Thus, auditing rms need to consider ways to mitigate this risk, such as
requiring self-generation of expectations and explanations prior to client
consultation.
We nd, however, that there have been a number of changes in AP
practice since the Hirst and Koonce study. For instance, auditors appear
to consult nonnancial client personnel more than in the earlier study.
This development seems promising, since such personnel are more likely
to be objective and have a broader business focus than accounting staff,
potentially providing valuable information in setting expectations and eval-
uating explanations. This is likely due to the signicant shift in the audit
approach of major rms towards a broad business, strategic focus (e.g.,
Bell et al. 1997; Winograd et al. 2000). As such, auditors are likely to be
more knowledgeable about business processes and, thus more comfortable
talking with nonnancial staff than previously. Further study is needed
regarding when such personnel are approached and how the information
gathered is used.
Auditors appear to develop more precise, quantitative expectations
than found in Hirst and Koonce 1996. Participant responses suggest that
this is because of the wide availability of industry and client information
from databases. Thus, technology is playing a major enabling role in pro-
viding auditors with access to a broad array of information in developing
expectations and also in evaluating potential explanations for unexpected
uctuations. An important issue for further study is how auditors use such
information.
While interviewees suggest that they are more likely to develop quan-
titative expectations, there is little evidence that they formally develop a
priori account balance expectations in the absence of knowledge of unau-
dited account balances. While it is likely more efcient to audit an
account with prior knowledge of the clients pre-audit balance, it may not
be as effective. Future research might examine this efciency-effectiveness
trade-off.
While auditors tend to use simple APs, the current study also suggests,
as noted, that they gather and consider a broader array of industry and
company information than in the past, particularly nonnancial information
that is widely available through the internet and databases. An important
issue for future research is to examine how auditors integrate such informa-
tion (e.g., in an informal, unstructured manner) and whether structured
tools can provide assistance.
Auditors also report relying on APs to decrease testing more often
than in prior studies. They note this is because of a greater focus on
audit planning and initial risk analysis, allowing the rm to capitalize
more on APs in enhancing audit efciency. Additionally, less experienced
staff appear to be conducting (but not designing) a greater portion of the
APs. Future research is needed to determine the reason(s) for this change,
for example, more rapid development of staff under recent audit
approaches, or a move for greater efciency. This nding also raises con-
cerns about whether staff auditors have sufcient knowledge and training
to prociently perform APs, potentially negatively impacting audit effec-
tiveness. This also suggests that rms establish training on the perfor-
mance of APs to include case examples and techniques of nancial
statement analysis.
Finally, auditors report that SOX has been an inuential driver in lead-
ing to broader consideration and knowledge of internal controls, which is
seen as the most important factor in driving the use of and reliance on APs.
A signicant practice issue is whether auditors are taking advantage of this
enhanced knowledge in the design and use of APs.
Going forward another important issue is the long term effects of SOX
on auditors reliance on APs. Our ndings suggest four possibilities:
The enhanced knowledge of the controls will enable auditors to more
truly integrate the SOX 404 audit and the nancial statement audit, and
place even greater reliance on APs.
Auditors will rely more on detail tests and less on APs in response to
greater perceived legal liability posed by the Act and the belief that detail
tests are easier to justify in a court of law or for PCAOB inspections to
substantiate conclusions than APs.
Auditors may increasingly rely on APs for substantive tests in low-risk
areas, but use them as attention-directing procedures and rely on tests of
details in higher-risk areas.
The Act will result in greater focus on both APs and substantive tests due
to the combined effects of enhanced knowledge and legal risks.
Thus, research is needed to explore this issue and consider promising
ways of capturing the potential of the knowledge gained by auditors as a
result of extended control evaluation and testing to fully capitalize on APs
in enhancing audit efciency and effectiveness. Finally, an important
research issue is how auditors might best leverage the enhanced knowledge
of business risks, strategies, and processes obtained through the use of
more holistic audit approaches in conducting APs (Trotman and Wright
2006).
This research is a descriptive study of AP practices and how they have
changed in response to the audit environment. The interviews that were
conducted were primarily structured in nature. Future research using other
methods (e.g., unstructured interviews, eld studies, experiments) is needed
to corroborate and extend the ndings. Further, a study grounded in a
larger theoretical framework would be valuable and extend our under-
standing of the use of APs. For example, we nd that while auditors are
unwilling to rely on APs for areas of high risk, they are more likely to
rely on APs to reduce audit hours than has been reported in prior
research. However, auditors are still more hesitant to reduce hours than
to increase hours based on the results of APs. Perhaps future research
could rely on psychological theories of risk, such as expected utility theory
(e.g., Ellsberg 1961); prospect theory (e.g., Kahneman and Tversky 1979);
and or security potential aspiration theory (e.g., Lopes and Oden 1999),
to examine why this is so. Could it be the case that more precise, and
defensible, expectations could result in more efcient and effective APs
that, in turn, would result in greater reliance on the part of auditors (RI
16)?
Further, with respect to social theory of change, Cullinan and Sutton
(2002) suggest that the AICPA approved a series of Statements on Auditing
Standards in 1988 to better meet expectations of users of nancial state-
ments. Included in these standards was the acceptance of APs as substantive
tests. Although this was a source of concern for the Chief Accountant of
the SEC (Turner 1998, 10), it set the stage for the development of the top-
down, risk-based audit approaches that we argue may be enablers of
change. The claim that the AICPA adopted standards to better meet users
expectations seems at odds with the Chief Accountants concern that the
profession had sacriced effectiveness for efciency. This inconsistency
raises questions about how such changes came to be viewed as acceptable.
Perhaps future research could take advantage of models such as the neo-
institutional model of change offered by Hinings et al. 2004 to examine
how such changes become possible and then accepted by an entire eld such
as the accounting profession (RI 17).
Appendix
Relevant interview questions
Q1. Are you using analytical procedures (APs) more, less, or the same as in
the past?
If there is a change, what has driven it?
Q2. About what percentage of audit time is typically spent performing and
reviewing APs (by the entire audit team)? Please explain.
Planning
Substantive testing
Overall review
Has this changed over the course of your career? Was this true ten years ago? Since
Sarbanes-Oxley?
Q4. Have you ever discovered anything with APs that otherwise would not have
been detected? Examples?
h Yes
h No
Q5. Do you ever reduce audit hours based on your AP ndings during planning?
h Yes
h No
Increase them?
Has this changed in recent years?
Q6. How do you decide whether APs provide more assurance than tests of details?
Q7. How do you decide whether APs would be more efcient than a test of details?
Q8. Who designs the APs?
h Staff _________
h Senior _________
h Manager _________
h Partner _________
100%
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