REGRESSION ANALYSIS Regression analysis has the same objective as trend, ratio analysis, and reasonableness testing: to...

 

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REGRESSION ANALYSIS Regression analysis has the same objective as trend, ratio analysis, and reasonableness testing: to identify the potential for misstatement. The advantage of regression over the other methods is that regression: (a) provides an explicit, mathematically objective, and precise method for forming an expectation; (b) allows the inclusion of a larger number of relevant independent variables; and (c) provides direct and quantitative measures of the precision of the expectation. The auditor's specific objective in using regression for On the Go Stores is to determine which stores should be targeted for investigation for potential misstatement in sales. The regression determines which stores have total sales that are most out of line in comparison with the others. This type of analysis is called cross-sectional regression. In predicting sales, the cross-section usually includes relevant predictors, such as the size of the store (as used in the testing above), and other features that might affect store sales volume. Question 9 For each store, we have data on the level of inventory, number of employees, whether it is new, whether it sells gas, and its size. List three additional factors you believe might be potential predictors of sales for On the Go stores. All three must something that is measurable independent of the client. (For example, average price per item sold would be obtained from the client using actual current year revenue; as such, it cannot be one of your listed factors.) (6 points) REGRESSION ANALYSIS Regression analysis has the same objective as trend, ratio analysis, and reasonableness testing: to identify the potential for misstatement. The advantage of regression over the other methods is that regression: (a) provides an explicit, mathematically objective, and precise method for forming an expectation; (b) allows the inclusion of a larger number of relevant independent variables; and (c) provides direct and quantitative measures of the precision of the expectation. The auditor's specific objective in using regression for On the Go Stores is to determine which stores should be targeted for investigation for potential misstatement in sales. The regression determines which stores have total sales that are most out of line in comparison with the others. This type of analysis is called cross-sectional regression. In predicting sales, the cross-section usually includes relevant predictors, such as the size of the store (as used in the testing above), and other features that might affect store sales volume. Question 9 For each store, we have data on the level of inventory, number of employees, whether it is new, whether it sells gas, and its size. List three additional factors you believe might be potential predictors of sales for On the Go stores. All three must something that is measurable independent of the client. (For example, average price per item sold would be obtained from the client using actual current year revenue; as such, it cannot be one of your listed factors.) (6 points)