Distributions of Audit-Detected Errors Partitioned by Internal Control

Abstract

This research reports on the properties of audit-detected errors in accounting populations, including the relationship of those errors with levels of internal control, and whether the errors were booked or waived. As expected, the average number of errors was greater in weak internal control systems than in strong systems. In general, larger errors were discovered in accounts with larger balances and, as such, the size of the error was positively correlated with the size of the company. When the error was scaled by a company-specific deflator, the size of the relative error decreased with increased size of the company. This finding is consistent with the observation that larger companies tend to have stronger control systems. Comparison of the error distributions between weak and strong internal control systems exhibited significant differences. Further, the larger the relative error, the more likely it was booked. In general, the results provide preliminary empirical support for many of the previously unsupported assumptions on the relation of internal controls and accounting errors and irregularities.