Abstract This paper presents results of a case study of attention-directing analytical review procedures applied to selected ratios. Monthly balances of an actual firm for a 48-month period are seeded with individually material accounting errors of particular types. Three investigation rules are used: (a) a traditional simple percentage change rule, (b) a statistical, standardized change rule, and (c) a pattern analysis of cross-sectional changes in several ratios. Results show the importance of the relative size of accounting error. Even error that is material to the year-end financial statements does not lead to a large change relative to the natural variation in three of four monthly ratios tested. The relative size of the accounting error problem implies a need for disaggregated base data and a need for care in defining unexpected relationships. The potential usefulness of joint consideration of deviations in several ratios also is considered. A comparison of the pattern of observed changes in several ratios to changes that would be expected given a particular type of error often identifies the type of error seeded.
William R. Kinney (Sun,) studied this question.