Analytical Procedures and Audit-Planning Decisions

This study examines auditors' decisions to revise preliminary audit plans after analytical procedures performed during interim testing reveal significant, unexpected fluctuations. We examine the effects of two variables on these decisions: (1) the presence or absence of an explicit incentive for management to misstate the financial statements, and (2) the degree to which management's explanation for the fluctuation is independently corroborated. We hypothesize that these two variables interact. Auditors will be more likely to increase their planned tests when there is minimal corroboration of management's explanation for the fluctuation and there is an explicit incentive for management to misrepresent the financial statements. The results of an experiment are consistent with this hypothesis. While our results suggest that auditors are more likely to revise audit plans in these conditions, we also find that a relatively high proportion of auditors do not revise their plans when faced with increased audit risk signaled by significant, unexpected fluctuations. Future research is needed to better understand auditors' reluctance to expand testing and whether this reluctance jeopardizes audit effectiveness.