The Utilization of the Census X-11 Model for Audit Planning Purposes

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.