The Working Paper Review Process: A Theoretical Model and Simulations

This study presents a theoretical model of the working paper review process within the financial statement audit. The model is based on the concepts of reliability engineering with auditors functioning as the main control components. Characteristics of the model are investigated using simulation and differential analysis. Our simulation results show that the performance of a combined review team is more effective than an individual review; the review performance of a team consisting of an audit senior and an audit manager is better than that of the team consisting of two seniors; and the performance of an encompassing review differs from the performance of an error specialized review in a sequential working paper review process. The simulation results also show that a team review may not be an optimal choice when the expected litigation cost is of the same order as the expected operating cost of each review. The fact that managers are expected to detect more conceptual errors and irregularities leads to lower expected litigation cost. Consequently, assurance firms may be better off by choosing a seniormanager review even if the overall expected reliability from a senior-senior review is identical to the review from a senior-manager review. The differential analysis indicates that the parameters representing the motivation and the effort level of two reviewers are not of the same importance in the working paper review process and that the increase in the quality of working paper input will not automatically increase the reliability of the output.