Optimal Timing of Account Audits in Internal Control

Abstract

This paper calculates the minimum required frequency between audits of a given type to meet prespecified accuracy goals for a given type of account. Both "100 percent," as well as sampling type audits are addressed. The effectiveness of a given audit type includes the mean and standard deviation of any residual error that may remain in the account after the audit has been performed and after account balances have been adjusted. The accuracy goals consist of the maximum accumulated error that is considered by management to be tolerable between audits, and the prescribed likelihood that this tolerance level will not be exceeded. The model assumes that certain parameters of the error process have been estimated, but no distributional information is required. Closed form, easy to use, lot-size type formulae are derived which calculate the required frequency (or upper bounds) between audits. The model also provides insights as to the relative cost-effectiveness of various types of audits.frequency, accuracy, cost-effectiveness, confidence, tolerance

Determining expected behaviour of fraudsters for a continuous audit system

“…Previous studies in the area of audit timing (Boritz & Broca, 1986;Hughes, 1977;Morey & Dittman, 1986;Rossi, Tarim, Hnich, Prestwich, & Karacaer, 2010;Wilson & Ranson, 1971) have been concerned with fixing the time interval for internal audits. All these papers assume that in the absence of audit, errors in the accounting system will occur and that the number of such errors will accumulate with time until the audit detects and corrects them.…”

“…All these papers assume that in the absence of audit, errors in the accounting system will occur and that the number of such errors will accumulate with time until the audit detects and corrects them. The errors are modelled as increasing linearly with time (Hughes, 1977;Wilson & Ranson, 1971) or based on the auditor's subjective judgment (Boritz & Broca, 1986) or occurring randomly (Morey & Dittman, 1986). Some researchers (Dodin & Elimam, 1997;Dodin, Elimam, & Rolland, 1998) do not consider errors at all.…”

Analysis of simple inventory control systems with execution errors: Economic impact under correction opportunities

“…Iglehart and Morey (1972) considered a reorder point policy, and found the optimal combination of additional safety stock and frequency of cycle counts that minimizes the sum of holding and inspection costs. Morey (1985) and Morey and Dittman (1986) consider similar issues in the determination of an effective frequency of inventory audits and safety stocks. Fleisch and Tellkamp (2005) simulate a three-echelon retail supply chain to study the effect of inventory inaccuracies arising due to low process quality, theft and items becoming unsaleable, and show that elimination of inventory inaccuracy can reduce the supply chain costs.…”

“…The third category, integration, involves the use of inventory management strategies that explicitly consider the existence of inventory record inaccuracies and incorporate this into the decision making process. These approaches include the use of appropriate auditing cycles (e.g., Iglehart and Morey, 1972;Morey, 1985;Morey and Dittman, 1986;Kok and Shang, 2007), compensation methods that take stochastic behavior of stock loss into account (e.g., Kang and Gershwin, 2005), modified replenishment policies (e.g., Lee and Ö zer, 2007;Atalı et al, 2009), and policies based on the Bayesian inventory record for replenishment and audit triggering (DeHoratius et al, 2008).…”

Investment in improved inventory accuracy in a decentralized supply chain

“…There are other articles studying counting frequencies and counting techniques to eliminate inventory inaccuracy: e.g. Buck and Sadowski (1983), Martin and Goodrich (1987), and Morey and Dittman (1996).…”