Using automated equilibrium correction modelling in analytic review

Article

Omura, Teruyo and Willett, Roger. 2006. "Using automated equilibrium correction modelling in analytic review." Managerial Auditing Journal. 21 (2), pp. 207-223. https://doi.org/10.1108/02686900610639329
Article Title

Using automated equilibrium correction modelling in analytic review

ERA Journal ID19111
Article CategoryArticle
AuthorsOmura, Teruyo (Author) and Willett, Roger (Author)
Journal TitleManagerial Auditing Journal
Journal Citation21 (2), pp. 207-223
Number of Pages17
Year2006
Place of PublicationUnited Kingdom
ISSN0268-6902
1758-7735
Digital Object Identifier (DOI)https://doi.org/10.1108/02686900610639329
Web Address (URL)http://www.emeraldinsight.com/0268-6902.htm
Abstract

Purpose – The purpose of this paper is to show how dynamic regression models based on equilibrium correction principles can be used to form auditor expectations of account balances as part of the analytic review.

Design/methodology/approach – The design and method are empirical, using the automated econometric software of PcGets and annual data of the Toyota Company over the period 1950-2004 to generate forecasts of sales and earnings.
Findings – Automated equilibrium correction models (AECMs) are shown to possess stable parameters and provide reliable one year ahead forecasts of sales based on macro-economic data. AECMs are then used to generate indicative earnings forecasts conditional upon sales as an expectation generating tool for directing auditors' attention to possible sources of error in financial statements.

Research limitations/implications – Analysis is illustrative of a general method and does not
provide exhaustive treatment of the full range of potential application of AECMs.

Practical implications – Until recently, econometric problems have made the use of dynamic regression models in auditing difficult for non-specialists to implement. Developments in automated software packages such as PcGets now make the use of such procedures by audit practitioners possible.

Originality/value – Relatively little is known about dynamic regression models in the accounting and auditing literature. This paper introduces the basic concepts underpinning AECMs and demonstrates their potential to contribute to the analytic review toolkit of the auditor.

Keywordsauditing, equilibrium methods, time series analysis
ANZSRC Field of Research 2020350199. Accounting, auditing and accountability not elsewhere classified
Public Notes

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Byline AffiliationsGriffith University
Queensland University of Technology
Institution of OriginUniversity of Southern Queensland
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