Auditor Reviews Research Articles

Forecasts, Auditor Review, and Bank Loan Decisions

Since the 1970s, policymakers' have struggled with the issue of management disclosures of forecast information. The basic question is whether public reporting policy should prohibit forecast disclosures, allow them on a voluntary basis, or make them mandatory. Advocates of disclosure have argued that the availability of inside information and expertise places management in a position to provide useful information relevant to valuing securities. Opponents consider forecasts to be costly, noisy, and unreliable signals which invite manipulation. Largely in reaction to the forecast reliability issue, the American Institute of Certified Public Accountants (AICPA) recently developed standards which allow auditors to review forecasted financial statements (AICPA [1980]). However, little evidence exists on the various effects (if any) of this type of auditor association with forecasts. The purpose of this paper is to report the results of a field study which investigated whether auditor associations with forecasts affected the judgments of CPAs and bank loan officers. Our results indicate that CPAs' judgments were relatively more affected than those of loan officers. In the next section we review the pertinent research which supports the notion that forecasts provide information to investors and credit grantors. We then review the limited research on whether auditor involvement with forecasts has a beneficial effect on their information

An Integration of Internal Control System and Account Balance Evidence

An auditor usually finds it necessary to evaluate several different types of evidence in forming an assessment of the validity of stated account balances, including a preliminary examination of a client's information system, the formal review and testing of the client's internal control systems (i.c.ss.), and the substantive samples of account strata. While the diversity of these techniques may increase the effectiveness of the auditor's review process, they also increase the complexity of the auditor's final evaluation. The auditor must aggregate individual assessments and sample evidence drawn from a variety of i.c.ss. and accounts into a final opinion about account balances. Further levels of aggregation of this evidence may then be necessary when the auditor wishes to develop judgments about aggregate values such as total current assets or net income. Analytical methods are developed in this paper for mathematically integrating many of these diverse sources of audit evidence. A logical linkage is developed between this evidence and its implications for account balances. Using these methods an auditor can develop an evidential integration model of his uncertainty about a set of account balances. To be more specific, I provide the following five extensions to the

The external auditor's review of computer controls

The Foreign Corrupt Practices Act of 1977, coupled with growing demands for corporate accountability, have forced both auditors and computer administrators to evaluate computer based controls. Computer administrators can benefit from both a knowledge of an auditor's approaches to evaluating controls and his/her recommendations for control improvements. Here, a survey of the control evaluation practices and desirable control features identified by computer auditors is presented, along with recommendations to ease the burden of the auditor's review. The authors' suggestions should ease the tasks of internal control analysis and of preparation for possible public reports on an organization's system of internal control.