Error Projection and Uncertainty in the Evaluation of Aggregate Error
35 Pages Posted: 21 Jan 1998
Date Written: October 1997
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: Suggested Citation