Peer Based Approach for Analytical Procedures

Posted: 28 Dec 2006

See all articles by Rani Hoitash

Rani Hoitash

Bentley University - Department of Accountancy

Alex Kogan

Rutgers University

Miklos A. Vasarhelyi

Rutgers Business School

Abstract

This study extends the existing research in analytical procedures by allowing for learning from contemporaneous information transfers among peer companies. We introduce an approach for selecting peers for each client and perform tests to examine the contribution of peers' information to the performance of analytical procedures. We find that peer data are imperfect substitutions for contemporaneous firm specific variables when such variables are not in error. However, we observe that contemporaneous peer specific data are especially beneficial when coordinated errors exist in multiple accounts. We demonstrate that when errors are seeded into two contemporaneous accounts, peer models perform better at detecting errors. We also find that fast changing companies experience inferior prediction and error detection accuracy, and that larger companies experience more accurate prediction, lower Type II errors and higher Type I errors. Additionally, we observe that significant improvements in the performance of analytical procedures are associated with larger clients indicating that auditors of larger companies can potentially benefit more from the use of peer data.

Keywords: analytical procedures, data management, information sharing

JEL Classification: M49, C19

Suggested Citation

Hoitash, Rani and Kogan, Alex and Vasarhelyi, Miklos A., Peer Based Approach for Analytical Procedures. Auditing: A Journal of Practice & Theory, Vol. 25, pp. 53-84, November 2006. Available at SSRN: https://ssrn.com/abstract=953849

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Alex Kogan

Rutgers University ( email )

1 Washington Park
Newark, NJ 07102
United States

Miklos A. Vasarhelyi

Rutgers Business School ( email )

180 University Avenue
Ackerson Hall, Room 315
Newark, NJ 07102
United States
973-353-5002 (Phone)
973-353-1283 (Fax)

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