Chapter 7, Problem 14P

A study investigated the relationship between audit delay (the length of time from a company’s fiscal year-end to the date of the auditor’s report) and variables that describe the client and the auditor. Some of the independent variables that were included in this study follow:

Industry A dummy variable coded 1 if the firm was an industrial company or 0 if the firm was a bank, savings and loan, or insurance company.

Public A dummy variable coded 1 if the company was traded on an organized exchange or over the counter: otherwise coded 0.

Quality A measure of overall quality of internal controls, as judged by the auditor, on a 5-point scale ranging from “virtually none” (1) to “excellent” (5).

Finished A measure ranging from 1 to 4, as judged by the auditor, where 1 indicates “all work performed subsequent to year-end” and 4 indicates “most work performed prior to year-end.”

A sample of 40 companies provided the following data:

1. a. Develop the estimated regression equation using all of the independent variables included in the data.
2. b. How much of the variation in the sample values of delay does this estimated regression equation explain? What other independent variables could you include in this regression model to improve the fit?
3. c. Test the relationship between each independent variable and the dependent variable at the 0.05 level of significance, and interpret the relationship between each of the independent variables and the dependent variable.
4. d. On the basis of your observations about the relationships between the dependent variable Delay and the independent variables Quality and Finished, suggest an alternative model for the regression equation developed in part (a) to explain as much of the variability in Delay as possible.