Error Projection and Uncertainty in the Evaluation of Aggregate Error

35 Pages Posted: 21 Jan 1998

See all articles by David Burgstahler

David Burgstahler

University of Washington

Steven M. Glover

Brigham Young University

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business

Date Written: October 1997

Abstract

At the end of the audit process, auditors evaluate the risk that aggregate financial statement error exceeds materiality. This evaluation is complex in that it requires a consideration of known error, projected error and sampling risk related to various segments of the audit. If the risk of material aggregate error is unacceptably high, the auditor can require the client to make adjustments for known and/or projected errors to reduce audit risk to an acceptable level. Results of an experiment indicate that auditors tend to underestimate the effect of both projected error and uncertainty when evaluating aggregate error. Auditors were provided information about known errors in four accounts and the results of sampling applied to two additional accounts for a hypothetical audit case. They were then asked to indicate the adjustments to the financial statements which would be required before issuing a "clean" audit opinion. Comparisons of auditors' required adjustments with and without explicit error projections and error bounds suggest that auditors do not adequately consider projected error and sampling uncertainty in the absence of explicit projections and error bounds. Further, even after explicit error projections and error bounds were provided, many auditors failed to require adjustments which would have reduced audit risk to acceptable levels.

JEL Classification: M49, C91

Suggested Citation

Burgstahler, David C. and Glover, Steven M. and Jiambalvo, James J., Error Projection and Uncertainty in the Evaluation of Aggregate Error (October 1997). Available at SSRN: https://ssrn.com/abstract=53901 or http://dx.doi.org/10.2139/ssrn.53901

David C. Burgstahler (Contact Author)

University of Washington ( email )

555 Paccar Hall, Box 353226
Seattle, WA 98195-3226
United States
206-543-6316 (Phone)
206-685-9392 (Fax)

Steven M. Glover

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-6080 (Phone)
801-422-0621 (Fax)

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-9132 (Phone)
206-685-9392 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
374
Abstract Views
3,279
rank
101,953
PlumX Metrics