Affiliations: [a] Culverhouse School of Accountancy, The University of
Alabama, Box 870220, Tuscaloosa, AL 35487-0220, USA | [b] School of Accountancy, College of Business, Arizona
State University, Tempe, AZ 85287, USA | [c] School of Accountancy, College of Business, Auburn
University, Auburn, AL 36849-3501, USA
Abstract: The X-11 Model has been suggested as a potential analytical procedure for
auditing theory and practice. The Model statistically decomposes a time series
of data into three components (trend-cycle, seasonal, and irregular), each of
which possesses an underlying economic interpretation. This paper applies the
X-11 Model to actual monthly financial data for ten firms in an audit planning
context and analyzes the output obtained from the Model using the firm and
ledger effects' methodologies. Expected econometric behaviors for the firm and
ledger effects are hypothesized, and the results of the econometric analysis are
compared with those expected behaviors. The analysis of the firm effect indicates that the substantial components are:
the seasonal component for utilities, the trend-cycle component for financial
institutions, the irregular component for the extractive industry, and both the
seasonal and irregular components for manufacturing and retail companies. In
addition, the analysis of the ledger effect reveals that an increasing
volatility of the irregular component for specific income statement accounts is
most prevalent for the sample firms.
