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This article has been withdrawn as it was published elsewhere and accidentally duplicated. The original article can be seen here: 10.1108/00251749710173760. When citing the article, please cite: Minwoo Lee, Janet L. Colbert, (1997), “Analytical procedures: management tools for monitoring controls”, Management Decision, Vol. 35 Iss 5 pp. 392 - 397.

Business risk and inherent risk both bear on the audit; the audit risk model; and the nature, timing, and extent of work performed. Inherent risk and business risk bear an inverse relationship to detec‐tion risk and have a direct effect on the level of work performed. Neither risk can be eliminated totally and neither is controllable by the auditor. Business risk relates to the financial statements and affects overall audit risk; inherent risk applies to an individual audit area. Inherent risk is explicitly included in the professional standards and the audit‐risk model while business risk is not and has only an indirect bearing on the model. Management can take steps to affect the level of inherent risk, but the perceptions of users of the financial statements bear on business risk.

Personnel selection and professional satisfaction can be affected by the “goodness of fit” between individual certified public accountants and the size of division in which they work. A US survey of: individual personal characteristics; perceived work environment; and interaction between individual and organisation is reviewed.

Auditors are now concerned with environmental issues as some transactions may lead to loss contingencies which must be disclosed in financial statements. Reviews accounting principles concerning such contingencies and discusses auditing standards with regard to illegal acts, environmental specialists and reportable conditions. Refers to statements on auditing standards (SAS) concerning the client representation letter, lawyer's letter, going concern, audit report and communication with audit committee.

Internal auditors should consider the risks pertinent to an auditee when planning the work. Internal auditors may select a procedures‐driven approach or a risk‐driven approach. In a procedures‐driven approach, the audit procedures are chosen without full consideration of the risks present. Rather, the internal auditor may use procedures because they are commonly employed or because they were used on the last examination of the auditee. In a risk‐driven approach, specific procedures are planned only after consideration of the risks. A risk‐driven approach is generally more effective and efficient than a procedures‐driven approach because the internal auditor′s efforts are focused on areas with relatively more risk.

Analytical procedures entail estimating an expected value for an account and comparing the estimation to the book value. External auditors make extensive use of analytical procedures. By applying analytical procedures before the external audit is performed, the management accountant can locate and correct misstatements before they become problematic. Examines the three categories of analytical procedures and their utility to the management accountant. The three categories are: reasonableness tests, trend analysis, and ratio analysis. Explains each category and discusses the methods within each category. Also, provides examples to aid the accountant in applying the procedures.

As investors and companies become more accustomed to crossing national borders to invest or raise capital, interest in comparing international and national accounting and auditing standards is growing. Compares two concepts crucial to planning and performing the audit work: audit risk and materiality. Differences between international and US guidance would imply that the two sets of standards require different levels of audit work; this situation would be a concern to investors and auditors. Similarities in the international and US standards would suggest consensus regarding the levels of work. Shows that the comparison of ISA 6 to SASs 47 and 55/78 indicates many similarities and few differences between international and US guidance.

Internal Control – Integrated Framework (COSO Report, 1992) defines internal control, suggests a framework for internal control, and presents criteria to use in evaluating controls. The document also provides guidance to management developing a report on controls for use by external parties. SSAE 2, “Reporting on an Entity′s Internal Control Structure over Financial Reporting” (1993) offers assistance to the practitioner reporting on management′s assertion regarding internal control over financial reporting. Discusses and provides an example of management′s report on internal control prepared according to COSO. Also discusses the accountant′s examination under SSAE guidance of management′s assertions and subsequent report and provides an example of the accountant′s report. Concludes by discussing the new business opportunities for the accountant which may result from external reporting on internal controls over financial reporting.

Discusses whether management, as a part of its duties, designs and maintains a system of internal control. Shows that the COSO report (“Internal Control ‐ Integrated Framework”, 1992) emphasizes that management is responsible for the design and operation of internal control; as part of its responsibilities for controlling, management monitors the system of internal control. States that analytical procedures are tools which management can use to monitor controls. The methods highlight which operating or financial data might contain errors. Notes that the presence of errors indicates that controls are not effective. Explores analytical procedures which management might use in monitoring controls. Says that some analytical procedures are straightforward, requiring few calculations and relatively few historical data. Posits that other techniques are more complex, using statistical models and more historical information. Provides practical guidance on applying analytical procedures.

Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those with clients interested in cross‐border securities markets, should comprehend the similarities and differences in the requirements found in the Standards in these significant audit areas. A comparison of the international Standard for error and fraud to the two US Standards for these topics discloses numerous similarities and a few differences. The findings are reassuring to auditors serving clients with cross‐border interests. Whether the auditor is utilizing the international or the US guidance, comparable audit work in searching for misstatements arising from errors and fraud is being performed.