Strategic Considerations For Unaudited Account Values In An

Research suggests that auditors' account value estimates from analytical review are affected by knowledge of the unaudited account value (or book value). However, the exact nature of the consequences of using book value for analytical review has not been formally shown. This has produced a controversy centering on the appropriateness and subsequent effects of using book value as information (evidence) for estimation of account value in analytical review. A study was undertaken to formally identify the audit cost and risk consequences associated with the auditor's reliance on book value for analytical review. The analysis is framed within a Bayesian decision theoretic model and is conducted for a comprehensive set of audit and environmental conditions. The results include expressions for audit cost and risk when the auditor's analytical review is and is not conditioned on book value. The results indicate that the use of unaudited book values to estimate audit values is only effective when book value is within tolerable error.