Establishing Investigation Thresholds for Preliminary Analytical Procedures

Abstract

Statement on Auditing Standards No. 56, "Analytical Procedures," requires the auditor to use preliminary analytical procedures (APs) in the planning stage of the audit examination. One weakness of using APs in this manner is that their use may provide incorrect signals to the auditor about the accuracy of the recorded account balances. Of particular concern to the auditor is the decision to accept a recorded account balance that is materially misstated without performing additional testing procedures (audit effectiveness error). This paper illustrates the use of bivariate statistical distributions to establish investigation thresholds for use with preliminary APs. By establishing investigation thresholds in the suggested manner, the auditor can effectively utilize preliminary APs in the planning stage of the audit examination while controlling exposure to audit effectiveness error. In addition, the paper identifies the consequences which may result from ignoring the bivariate relation between the deviation of a recorded (unaudited) account balance from both its predicted AP balance and the audited account balance.