Question

Collette, an external auditor, is planning to perform analytical procedures for Garfield Corporation. Which of the following information would make Collette conclude that there is less predictability in the data Collette is analyzing?

Answer 1

The information that would make Collette conclude there is less predictability in the data is:

1. The related transactions which Collette is analyzing are subject to management discretion.

Here's why:

• Management discretion implies the ability to manipulate data, making it less predictable. Examples include accounting estimates, accruals, and classifications, where management judgment plays a significant role. This introduces uncertainty and makes it harder for Collette to rely on past trends or relationships to predict future outcomes.
• Income statement accounts, while often volatile, have established relationships with other financial statement elements and industry benchmarks. These relationships can still provide some basis for predictability.
• Large volumes of similar transactions can mask underlying patterns and trends, but the sheer volume itself doesn't necessarily imply unpredictability. Collette can employ statistical sampling techniques to analyze a representative sample and draw conclusions about the population.
• Garfield Corporation's industry stability and longevity suggest consistent patterns and established relationships, making the data more predictable. Collette can leverage historical data and industry benchmarks for comparison.

Therefore, management discretion poses the most significant threat to the predictability of the data Collette is analyzing, as it introduces an element of human judgment and potential manipulation, making it difficult to rely solely on historical trends or relationships.

Complete question

Collette, an external auditor, is planning to perform analytical procedures for Garfield Corporation. Which of the following information would make Collette conclude that there is less predictability in the data Collette is analyzing?

1. The related transactions which Collette is analyzing are subject to management discretion.
2. The relationships being analyzed involve income statement accounts.
3. There are large volumes of similar transactions.
4. Garfield Corporation has been in the industry for more than 50 years, and is not subject to rapid changes.