Optimal Timing of Account Audits in Internal Control

• Published in: Management science Vol. 32; no. 3; pp. 272 - 282
• Main Authors: Morey, Richard C, Dittman, David A
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.03.1986; Institute of Management Sciences; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Accounts receivable; Accuracy; Approximation; Auditing standards; Audits; Business audits; confidence; Cost analysis; Cost control; cost-effectiveness; Effectiveness; Error rates; Financial audits; frequency; Internal auditing; Internal auditors; Internal audits; Internal controls; Inventory; Management audits; Management science; Markov analysis; Mathematical analysis; Optimization; Standard deviation; tolerance
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.32.3.272

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.