All publicly traded companies are required to have their financial statements audited
by an independent firm of Certified Public Accountants. When planning for the
year’s end, the director of audit, is concerned about two things; the cost of the audit
(in shillings) and the length of time the audit will take. The Board of directors

negotiates the audit contract. The director of audit however, might be able to take
steps to reduce the audit time and therefore the disruption of normal activities.
An organization of 30 auditors has pooled data to measure the effects of three
variables on the amount of time needed (hours) to complete the audit. The first
variable is sales – the larger the company’s sales the more time an audit is likely to
require. The second is the number of hours spent on internal audit – a function
carried out within the company by the company’s own employees. The feeling is that
the more the work is done by the company’s own employees, the less time an
independent auditor will need to spend. The third is the strength of internal controls
– how tightly the accounting process in the company is controlled on a day-to-day
basis. For this study, controls were categorized as either strong (=1) or weak (= 0).
Required:
(a) Discuss the analytical approach you would use to address the above problems.
In your discussion, you should explain the justification and the assumptions of
the approach you have utilized. (8
marks)
(b) Explain step by step how you would go about analyzing the data from this
problem.
(12 marks)