Financial Statement Errors and Internal Control Judgments.

This study investigates the empirical relationship between actual financial statement errors detected by external auditors for accounts receivable and inventory and internal control effectiveness judgments. Also considered are the effects of relatively large vs. small firms, and alternative degrees of reliance on the applicable controls. The data reported here indicate no empirical association between errors detected by the audit process and judgments of internal control effectiveness. The results hold when relatively small and large firms, and alternative degrees of reliance on controls, are considered.