Auditors perceive that their evaluations of clients' inherent risks and internal controls are useful in assessing the likelihood of errors. Past research has indicated descriptive power for inherent risk variables but has failed, to date, to demonstrate a systematic relation between internal controls and error rate. This study extends earlier work by using a field study to measure client attributes tied to inherent and control risks and then evaluates the effectiveness of these attributes in explaining variations in adjustment rates among 260 audit clients.
The data base has 1,506 adjustments, which are analyzed using a judgmentally selected regression model and a cost-beneficial analogy to an “all possible regressions” approach. Multiple variable relations provide statistically significant descriptive power with respect to audit adjustments.
The results suggest the plausibility of developing a model for use in audit planning that formulates a prediction of error rate based on client inherent risk and internal control attributes.
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