Auditing Section Research Summary Database

A Database of Auditing Research - Building Bridges with Practice

This is a public Research  public

Posts

  • Jennifer M Mueller-Phillips
    A Big 4 Firm’s Use of Information Technology to Control t...
    research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.07 Interim Testing Procedures – Nature, Timing and Extent in Auditing Section Research Summaries Space public
    Title:
    A Big 4 Firm’s Use of Information Technology to Control the Audit Process: How an Audit Support System is Changing Auditor Behavior.
    Practical Implications:

    The findings have important implications for audit firms that use information technology to facilitate engagement monitoring. The system improves audit review effectiveness and increases the frequency and timeliness of auditor interaction. The design of an audit support system can impact reviewer effectiveness. When used as a process control, audit support systems can have unintended consequences for auditor behavior and audit team interaction.

    Citation:

    Dowling, C., & Leech, S. A. 2014. A Big 4 Firm's Use of Information Technology to Control the Audit Process: How an Audit Support System is Changing Auditor Behavior. Contemporary Accounting Research, 31 (1): 230-252. 

    Keywords:
    process control, information technology, performance support systems
    Purpose of the Study:

    When audit support systems are used as a process control, audit firms are faced with the challenge of designing a system that balances features that ensure compliance with features that enable auditor autonomy and reduce overreliance on the system. An electronic workpaper system is an information technology that is an important component of an audit firm’s risk management process. When used as a process control, the system promotes the effective and efficient delivery of audits.

    To be an effective process control, a system needs to actively restrict auditors’ independent behavior. This creates an operational risk because auditors could respond positively or negatively to a system. Auditors could respond negatively if they perceive the audit firm is using the system to coerce their effort and compliance with firm policies. Auditors who react negatively could disengage with their audit tasks because they perceive their tasks as routine or reject the system and work around it, thereby reducing the effectiveness of the system as a control. Conversely, auditors may respond positively to a structured system if they perceive that the structure clarifies their tasks and responsibilities. But, even if they respond positively, they may over rely on the system and not sufficiently assess the applicability of the system’s recommendations for a specific client. The authors use internal documents and interviews with auditors at a Big 4 firm to analyze auditors’ reactions to the firm’s new audit support system. 

    Design/Method/ Approach:

    The authors conducted 17 group interviews from three large Australian cities of the Big 4 firm. In total, the authors interviewed 51 auditors and one ex-regulator. The average audit experience of the participants was seven years (ranging from 2 to 37 years). Each group interview lasted approximately one hour (the range was from 50 to 90 minutes). The audit firm provided internal documents for analysis as well. The evidence was collected prior to the summer of 2014.

    Findings:

    Although many of the system’s features could have been used as a coercive control, this was not the case. Two primary factors explain their reaction:

    1. Management’s interventions during system deployment
    2. How the system’s design ensures compliance by providing audit teams with constrained choices in applying the system’s recommendations.

    These factors developed an auditor’s sense of empowerment by leveraging their skills and knowledge. Empowerment became stronger following management interventions that encouraged audit teams to challenge the system’s recommendations. 

    • The authors find that many of the system’s features that enable monitoring and force reviewer involvement also increase the frequency and timeliness of preparer and reviewer interaction.
    • System features that enable monitoring can inadvertently reduce preparer and reviewer independence, which may decrease the effectiveness of the audit review as an independent control mechanism.
    • The auditors viewed the system positively and reported that it enables the effective delivery of audit engagements.
    • Although the auditors reported that this was improving audit effectiveness and efficiency, they did not appear to have considered how this may reduce the independence of preparers’ judgments. Increased interaction between preparers and reviewers increases the risk that preparers stylize their workpapers or align their judgments with reviewers’ beliefs.
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Interim Testing Procedures – Nature - Timing & Extent
  • The Auditing Section
    A Comparison of Auditor and Client Initial Negotiation...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summaries Space public
    Title:
    A Comparison of Auditor and Client Initial Negotiation Positions and Tactics
    Practical Implications:

    This study provides a more complete examination of auditor-client pre-negotiation decisions and negotiation tactics when confronted with an ambiguous accounting issue.  Because auditors and clients approach conflict resolution and make negotiation decisions in very different ways, the results should be of interest to auditors. 

    Citation:

    Bame-Aldred, C. W. and T. Kida. 2007. A Comparison of Auditor and Client Initial Negotiation Positions and Tactics. Accounting, Organizations, and Society 32 (6): 497-511.

    Keywords:
    Auditor-client negotiation, revenue recognition, financial reporting.
    Purpose of the Study:

    Auditors must work with clients when forming their financial reporting decisions and the two parties may encounter situations where their reporting goals are different.  This conflict can compel the auditor and client to enter into formal or informal negotiations.  Various studies have previously examined auditor-client negotiation behavior, but none have directly compared the negotiation decisions of auditors and clients when faced with the same negotiation context. As such, the overall purpose of the study is to further examine the negotiation behavior of auditors and clients when facing an ambiguous revenue recognition issue.  Negotiation behavior will ultimately have an impact on the firm’s financial reporting decisions. Below are the objectives that the authors address in their study: 

    • Examine the degree of flexibility inherent in auditor and client initial negotiation positions.
    • Examine whether auditors and clients accurately perceive the other party’s initial positions.
    • Examine the types of negotiation tactics auditors and clients are likely to use. 
    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires mailed to auditors at national CPA firms and experienced financial managers at various companies during the Spring and Summer of 2002.  The auditor participants included partners, senior managers, and managers.  The financial managers included CFOs, controllers, accounting managers, and analysts from 38 different companies.  Participants read summary financial information, a description of the auditor-client relationship, and a scenario about the proper amount of revenue recognition in a specific conflict scenario.  Participants were asked questions about their initial negotiation positions, their range of acceptable amounts, their perceptions of the other party’s positions and limits, the importance of certain revenue recognition issues, and the likelihood of using specific types of negotiation tactics.

    Findings:
    • Auditors and clients differ in their desired recognition amounts, thus establishing the need for negotiation to resolve this conflict. 
    • Auditor solution sets (i.e., the revenue recognition amounts between their reporting goal and their limit) were about half as large as client solution sets, indicating considerably less flexibility by auditors during the negotiation process. 
    • Auditors’ and clients’ had overlapping solution sets, indicating that a negotiated settlement should still be quickly attainable for most auditor-client negotiations.
    • Clients’ perceptions were significantly more accurate than auditors’ perceptions about the other party’s goals and limits of recognition amounts.  Auditors appear to overestimate clients’ actual reporting goals and limits.
    • Auditors considered issues supporting higher revenue recognition (e.g., missing the analysts’ earnings estimates and management incentive bonus) as less important than clients.  Clients thought that consistency with existing revenue recognition methods and increased earnings variability were more important issues than did auditors.  However, auditors and clients considered issues supporting lower revenue recognition to be equally important.
    • Tactics:
      • The highest rated tactic by both auditors and clients was problem-solving (i.e., to provide substantial rationale for their solution to persuade the other party to change their mind). 
      • Both auditors and clients agreed they should try to get information about the other party’s preferences and that they would try to appear as if they would not back down from their initial position. 
      • The lowest rated tactic by both auditors and clients was to threaten to qualify the opinion (by auditors) or to threaten to terminate the relationship (by clients). 
      • Clients were more likely than auditors to use a tactic of bid high / concede later and a tactic of attempting to trade-off certain issues. 
      • Overall, auditors were less likely to use tactics that could be interpreted as appearing inconsistent with their professional responsibilities.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
    Home:
    home button
  • Jennifer M Mueller-Phillips
    A Contemporary Analysis of Accounting Professionals'...
    research summary posted April 18, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale in Auditing Section Research Summaries Space public
    Title:
    A Contemporary Analysis of Accounting Professionals' Work-Life Balance.
    Practical Implications:

    This study offers (1) insights into how different types of accountants perceive work-life balance and alternative work arrangements (which are supposed to fix the work-life imbalance) and (2) advice from accountants on how firms can make alternative work arrangements more effective. The findings of this study may be useful to public accounting firms (employers in industry) that wish to understand their employees’ perceptions of work-life balance and potentially implement changes to enhance their employees’ actual work-life balance.

    Citation:

    Buchheit, S., D.W. Dalton, N.L. Harp, and C.W. Hollingsworth. 2016. A Contemporary Analysis of Accounting Professionals' Work-Life Balance. Accounting Horizons 30 (1): 41-62.

    Keywords:
    work-life balance, work-family conflict, burnout, alternative work arrangements
    Purpose of the Study:

    Work-life balance is not only the biggest driver of job satisfaction among accountants, but it also has important implications for audit quality and the supply of accountants. Despite its importance, little research has investigated how accountants, employed in various settings, perceive work-life balance (e.g., work-family conflict and job burnout) as well as support for and viability of the alternative work arrangements that are reputed to encourage better work-life balance. The authors address this gap by studying differences in such perceptions between accountants working in (1) Big 4 versus non-Big 4 firms, (2) audit versus tax, and (3) public accounting versus industry. This research not only provides a snapshot of how current accountants, employed in various settings, view work-life balance, but also provides a baseline against which the authors can compare future views of work-life balance.

    Design/Method/ Approach:

    The authors use data from two sources. First, the authors administer a survey to certified public accountants to obtain their perceptions of work-family conflict, job burnout, support for alternative work arrangements, and viability of alternative work arrangements. Second, the authors administer another open-ended survey to a different set of certified public accountants to obtain suggestions for how firms can improve employees’ work-life balance.

    Findings:
    • Support for alternative work arrangements lowers employee burnout, partly by decreasing work-family conflict.
    • Firm Size: Work-family conflict and employee burnout is higher among accountants at Big 4 (mid-sized) firms than their counterparts at mid-sized (local) firms. Big 4 accountants report lower viability of alternative work arrangements than their counterparts at mid-sized firms and local firms.
    • Gender: Work-family conflict is similar between male and female accountants. Male accountants report lower support for and lower viability of alternative work arrangements than female accountants.
      • More female than male accountants report previously utilizing alternative work arrangements. Accountants who report utilizing alternative work arrangements also report higher support for and viability of alternative work arrangements.
    • Rank: Accountants at higher ranks have lower employee burnout than their counterparts at lower ranks. Higher ranking accountants report higher support for and lower viability of alternative work arrangements than lower rankings accountants.
    • Role: Accountants working in audit, tax, and other roles experience similar levels of work-family conflict and employee burnout, as well as support for and viability of alternative work arrangements.  
    • Public vs. Private Sector: Work-family conflict is higher among public accountants than those working in industry. Meanwhile, accountants working at Big 4 firms have higher employee burnout than accountants in industry, accountants working at local firms or as sole practitioners have lower burnout than accountants in industry, and accountants working at mid-sized firms have the same levels of employee burnout as accountants in industry. Furthermore, accountants working in public accounting report higher support for alternative work arrangements than their counterparts working in industry. However, compared to accountants in industry, accountants working at mid-sized firms and local firms report higher viability of alternative work arrangements, but accountants working at Big 4 firms report lower viability of alternative work arrangements.
    • Accountants consider improving work-life balance the best way for firms to improve retention of high-quality employees. Accountants suggest that firms can make alternative work arrangements more effective by:
      • creating greater peer and supervisor support,
      • rating employees on productivity instead of visibility,
      • educating employees more about alternative work arrangements, 
      • keeping promises regarding alternative work arrangements,
      • providing balanced role models and mentors,
      • recognizing that younger employees value work-life balance,
      • offering mini-sabbaticals to employees, and
      • offering other programs to facilitate work-life balance.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    A Decade after Sarbanes-Oxley: The Need for Ongoing...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB in Auditing Section Research Summaries Space public
    Title:
    A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research.
    Practical Implications:

    This paper provides views on many areas within the auditing profession that would benefit from further research and analysis, as well as opportunities for research that could be useful to the PCAOB as it considers current and future regulatory priorities.

    Citation:

    Franzel, J. M. 2014. A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research. Accounting Horizons 28 (4): 917-930. 

    Keywords:
    auditing quality, audit research, PCAOB, Public Company Accounting Oversight Board, Sarbanes-Oxley Act
    Purpose of the Study:

    After more than a decade since passage of the Sarbanes-Oxley Act and the creation of the Public Company Accounting Oversight Board (PCAOB), it is appropriate and necessary to ask questions about the present state of audit quality and evaluate the impact and effectiveness of PCAOB’s oversight programs. Written from the viewpoint of a current PCAOB Board member and former Managing Director of the U.S. Government Accountability Office (GAO), this paper discusses the warning signs of serious auditing problems in the years preceding the Act, and the role that the GAO played in analyzing those risks and calling for greater oversight of the accounting profession’s auditing public companies.

    Design/Method/ Approach:

    This paper provides the perspective of the author, a current PCAOB Board member, on the major issues debated during the development and passage of the Sarbanes-Oxley Act, specifically related to the oversight of the auditing profession and the creation of the PCAOB.

    Findings:

    The interrelated nature of corporate governance, accounting and financial reporting, the auditing of financial statements, and oversight of the accounting profession call on all stakeholders to work vigilantly to ensure the integrity of each aspect of this system. All participants need to be alert to warning signs and red flags and respond appropriately to maintain integrity and the public trust. Failure in any of these areas places a strain on the entire system and could threaten the capital markets and greater economic well-being. The successful functioning of this system also relies on academic researchers. The academic community plays a key role in this system of vigilance by conducting research and analysis, monitoring the strengths and weaknesses of the system at any given time, evaluating performance, across the financial system, studying the impact of specific actions, and generating recommendations for change. In addition, success of the entire system relies on educators preparing future members of the profession to successfully assume and carry out their responsibilities in maintaining integrity and public trust, while protecting investors and the public interest.

    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    A Field Study on the Use of Process Mining of Event Logs as...
    research summary posted February 15, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures in Auditing Section Research Summaries Space public
    Title:
    A Field Study on the Use of Process Mining of Event Logs as an Analytical Procedure in Auditing
    Practical Implications:

    This paper is the first to demonstrate the value added that process mining of event logs can play in auditing. Using real data drawn from the purchasing process of a global bank we show that process mining can detect information that is of relevance to internal auditors that was missed when those same auditors examined the same data using traditional analytical procedures. These results can be attributed to two distinct differences/advantages of process mining over the standard audit procedures used by the internal auditors:

    1. The richness of the event log, which contains input and meta-data as well as a comprehensive set of attributes and its systematic arrangement by time and originator.
    2. The ability to analyze the entire population instead of being forced to use only a sample.

    The creation of event logs is a complex procedure that may require the use of consultants, but it is likely that ERP vendors will make this process more automated as process mining becomes a vital tool in operational management. Several large audit firms in Europe are beginning to offer process mining as consulting tool and are experimenting with it in external audit engagements.

    For more information on this study, please contact Michael Alles.

    Citation:

    Jans, M., M. Alles and M. Vasarhelyi. 2014. A Field Study on the Use of Process Mining of Event Logs as an Analytical Procedure in Auditing. The Accounting Review. 89 (5): 1751-1773.

    Keywords:
    process mining, analytical procedures, auditing, event logs.
    Purpose of the Study:

    In this paper, we demonstrate, using procurement data from a leading global bank, the value added in auditing of a new type of analytical procedure: process mining of event logs. Process mining is the systematic analysis of the data automatically recorded by a modern information technology system, such as the Enterprise Resource Planning systems (ERP) which form the IT infrastructure of most large and medium sized businesses today.

    Design/Method/ Approach:

    The field study location is a leading European bank which ranks among the top 25 in the world by asset size. It is also subject to provisions of the Sarbanes Oxley act because of its operations in the United States. We focus on the bank’s procurement process because it is a typical, standardized business process in most businesses around the world, and, hence, makes the field study more generalizable. Moreover, procurement represents a large expense item totaling some 1.4 billion Euros in the period covered in this field study. The transactions in the field study consist of all the invoices paid during the month of January 2007, which were then traced back to their accompanying purchase orders. This population data, which consisted of some 31,817 payments, were analyzed using a variety of data mining tools developed by process mining researchers to identify audit relevant information missed by the bank’s own internal auditors. 

    Findings:

    The bank’s internal auditors did not find any significant ICFR weaknesses with the procurement process, and judged that its SAP™ controls were appropriately set to ensure a strong control environment. By contrast, the process mining analysis identified numerous instances of audit relevant information that warranted follow-up manual investigation by the internal auditors under SAS 56:

    1. Purchase control procedures require Sign and Release for each purchase order, but the process mining analysis detected three PO’s which lacked these activities.
    2. SOD control procedures require Goods Receipt and Release not to be undertaken by the same employee, but the process mining analysis detected 175 violations of this control.
    3. The Process mining analysis detected 265 payments which lacked a matching invoice.
    4. The Process mining analysis detected three PO’s which lacked a Goods Receipt entry in the system, although the Goods Receipt indicator was flagged.
    5. Purchase control procedures require a Sign activity in all cases except when certain exceptional circumstances occur, but the process mining analysis detected 742 occurrences where a Sign activity was lacking even though the conditions for this exception were not met. 
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    A Field Survey of Contemporary Brainstorming Practices
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.07 SAS No. 99 Brainstorming – process, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 10.0 Engagement Management, 10.03 Interaction among Team Members in Auditing Section Research Summaries Space public
    Title:
    A Field Survey of Contemporary Brainstorming Practices
    Practical Implications:

    Understanding that auditors allocate greater resources to fraud brainstorming when engagement risk is significant fosters brainstorming of a superior caliber corresponds to stronger regulatory compliance.  Auditors report that engagement teams are holding fraud brainstorming sessions earlier in the audit, document more detailed risk assessments, plan more specific procedures, and retain more documentation.  These characteristics contribute to adequately addressing increased PCAOB regulatory scrutiny.  Additionally, brainstorming sessions are highly regarded when they occur in a face-to-face fashion and are attended by multiple levels of firm personnel—whether that is “core” or “non-core” professionals.  Fraud brainstorming sessions are executed less mechanically (as determined by PCAOB inspectors) by using fewer checklists and increase the amount of time auditors prepare for brainstorming sessions.  

    Citation:

    Dennis, S. A., and K. M. Johnstone. 2016. A Field Survey of Contemporary Brainstorming Practices. Accounting Horizons 30 (4): 449–472. 

    Keywords:
    audit planning; engagement risk; field survey; fraud brainstorming; professional skepticism
    Purpose of the Study:

    The purpose of this study is to further understand current fraud brainstorming practices minding regulatory climate and its impression of brainstorming practices.  The authors seek to understand the auditing profession’s existing framework to effectively brainstorm by evaluating audit team characteristics; attendance and communication; structure, timing, effort; and brainstorming quality.  Fraud brainstorming environment is considered with respect to client characteristics; particularly, inherent, fraud, and engagement risks, and if the client is publicly traded or privately held.  The authors refer to the characteristics as “partitions”.  The partitions allow the study to better examine how each characteristic effects the deployment of resources in response to risk levels and trading status. 

                The study poses further exploration into the implementation of Statement of Auditing Standards No. 99 and its effect on fraud brainstorming practices.  Particularly addressing the Public Company Accounting Oversight Board’s report suggesting auditing professionals were “mechanically” addressing fraud-related auditing standards.  SAS 99 sought to blend experienced audit professionals—those with greater client experience—with less-seasoned auditors to brainstorm how a fraud could occur specific to the client.  As part of the brainstorming framework, the study seeks to understand if senior-level auditors (partners and managers) and seniors and staff members, along with “non-core” professionals, cultivate meaningful brainstorming sessions. 

    Design/Method/ Approach:

    The authors collected field data from audits conducted between March 2013 and January 2014, per a survey of 77 audit engagements.  Information pertaining to the client, audit team, and brainstorming sessions were called upon in the survey.  The majority (93 percent) of observations were obtained by two Big 4 firms—7 percent from one non-Big 4 global firm.  Each engagement’s partner received instructions for the distribution of the survey to lead managers and lead seniors on the respective engagement while the partner withheld that the survey was for research purposes.  A total of 75 managers and 73 seniors participated.  

    Findings:
    • Surveyed auditors rarely interacted with engagements where fraud in financial reporting was identified.
    • When fraud risk and inherent risk are both elevated for a particular engagement, perceived professional skepticism is also elevated.
    • Risk-based resource deployment is consistent when considering high- versus low-risk clients—particularly, when inherent risk is elevated, audit team size is also greater.
    • Public clients cultivate larger audit teams where managers and seniors have more client experience.
    • With respect to contributions made at brainstorming sessions, the audit partner and manager make the greatest contributions along with forensic specialists and audit seniors.  Interestingly, when fraud brainstorming is more important with respect to the engagement, seniors make lower relative contributions. 
    • Media richness theory is robustly at work with respect to attendance patterns at brainstorming sessions.  Specifically, when engagement risk is elevated, staff and seniors are more likely to attend face-to-face. 
    • Fraud brainstorming sessions are most commonly open-discussion (86 percent) where the session is held during the planning stage of the engagement (87 percent).
    • Results propose that audit partners are open-minded to suggestions made during fraud brainstorming.
    • Fraud risk assessments appear to be independent from brainstorming tactics; however, when inherent risk is elevated and if the client is public versus private, audit teams exert more effort.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management, Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Changes in Audit Standards, Fraud Risk Assessment, Interaction among Team Members, SAS No. 99 Brainstorming – process
  • The Auditing Section
    A Field-Based Analysis of Audit Workpaper Review
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summaries Space public
    Title:
    A Field-Based Analysis of Audit Workpaper Review
    Practical Implications:

    The results of this study are important for audit firms to consider when determining documentation review processes and standards.  The results provide perspective on how auditors approach the review process, and they also provide opportunities for firms to potentially improve processes.  The determination that auditors prepare workpapers to meet reviewer preferences, and that this practice can affect both the content and presentation of the workpapers, is relevant for reviewers.  This knowledge may allow firms and reviewers to consider if any adjustments should be made to their existing review process.   Additionally, it provides evidence on the unique roles of managers and senior associates within the review process.

    Citation:

    Fargher, N. L., Mayorga, D. and K. T. Trotman. 2005. A Field-Based Analysis of Audit Workpaper Review. Auditing: A Journal of
    Practice & Theory
    24 (2): 85-110

    Keywords:
    Workpaper review, reviewer styles, stylization, review methods
    Purpose of the Study:

    The audit review process is considered to be a key quality control mechanism for the audit process.  The review process allows the team to assess whether a sufficient and appropriate amount of evidence has been obtained and to determine that proper conclusions have been made about the accuracy of the client’s financial statements.  Because of the importance of the review process, previous accounting research has considered audit managers’ behaviors during the audit review process.  The primary aspects of the research are the following: 

    • Extent of review:  primarily refers to the amount of time that the reviewer spends on the review, but also includes the focus of the review (e.g., identifying errors in the documentation or errors related to the ultimate conclusions reached by the auditor).
    • Level of stylization:  the preparer of the audit documentation will either tailor the audit procedures or the method of documentation to the reviewer’s preferences.
    • Review styles: the manner in which the review comments are communicated.  This is generally done in either face to face meetings or via written review comments. 

    The authors extend the previous research by considering a few additional aspects of the review process.  Since the initial research focused only on audit managers, the authors consider if there are differences in the review process between managers and senior associates.  Additionally, the authors utilize a sample of public sector auditors (i.e. those who audit government or not for profit organizations) to determine if there are different conclusions reached by studying another subset of auditors.  Finally, they consider what factors affect the style of the review, whether the reviewers are sensitive to the stylization attempts of the auditor preparing the documentation, how auditors learn about the reviewers’ preferred style, and also the factors that affect the reviewer’s choice of review style.

    Design/Method/ Approach:

    The research evidence was collected prior to October 2003 from a group of audit managers and seniors from an Australian public sector audit firm.  Data was collected through the use of surveys that were previously developed to study the audit review process, and the surveys were distributed by a representative of the organization.  The participants were instructed to select two engagements on which they recently completed working paper reviews.  They were free to select the first case without restrictions, and then they were asked to select a case that had either significantly more or significantly less review time than the first case.  At the completion of the surveys, the participants mailed the completed questionnaires back to the researchers.

    Findings:
    •  The authors verify that findings from prior studies are relevant for public sector auditors: reviewers spend more time reviewing workpapers when the client is large, and when there is greater time pressure.  They make a unique contribution by finding that review time is greater when the reviewer anticipates the next level of review will be pedantic (i.e., overly concerned with minute details). 
    • The authors find several differences based on rank:
      • Managers spend more time reviewing workpapers than senior associates.
      • Senior associates tend to spend more time focusing on detecting documentation errors while managers tend to spend more time focusing on conclusion errors.
      • Senior associates are more likely to modify their documentation style based on their perceptions of the next reviewer’s preferences.
      • Seniors devote more time in the review process to training staff than managers do.
    • Preparers consider reviewer preferences when creating workpaper documentation.  This can affect both the content and presentation of the workpapers.
    • The reviewer’s documentation style preferences are often learned from previous experience with the reviewer or from conversations with the reviewer during the planning stages of the audit.
    • Reviewers are more likely to communicate review comments in written communication than face to face conversations, and the primary focus of the review is documentation or conclusion related.  Individual reviewers typically use a consistent style across engagements. 
    • The review process serves several important functions: assessing documentation, opinion formation, and training of preparers/staff.  Lesser amounts of time were spent on training when preparer quality was deemed high, when time pressure was high, and for high-risk engagements.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Management/Staff Interaction, Working Paper Review – Conduct - Biases & Predispositions
    Home:
    home button
  • Jennifer M Mueller-Phillips
    A Former PCAOB Board Member Looks to the Past...and to the...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB in Auditing Section Research Summaries Space public
    Title:
    A Former PCAOB Board Member Looks to the Past...and to the Future.
    Practical Implications:

    Bill Gradison believes that an appropriate and effective way to protect the investor would be to share its wealth of data with protections of confidentiality with outside group, especially of those in academia, to foster research that might shed light on the importance of investor protection and how best to protect investors in the future.

    Citation:

    Gradison, B. 2014. A Former PCAOB Board Member Looks to the Past...and to the Future. Accounting Horizons 28 (4): 931-935.

    Keywords:
    auditing standards, Public Company Accounting Oversight Board
    Purpose of the Study:

    The Public Company Accounting Oversight Board (PCAOB) is still a relatively new entity, compared with most government agencies. The author of this paper, Bill Gradison, was a Founding Member of the PCAOB with many insights on the workings and challenges of the Board. The world has changed since 2002 when Sarbanes-Oxley became law with almost unanimous Congressional support. It would be most unlikely to be passed into law today. Thus, the Board not only has the challenge and the responsibility to carry out its Congressional mandate but also to champion the cause of investor.

    Design/Method/ Approach:

    Bill Gradison, a Founding Member of the Board, shares his perspectives on the work of the PCAOB during its early years.

    Findings:

    The five major challenges facing the Board as of January 2011.

    1. Current inability to conduct inspections in the EU, Switzerland, and China;
    2. Major changes in accounting standards;
    3. New authority to inspect and if necessary discipline auditors of broker-dealers;
    4. Ongoing recruiting challenges; and
    5. Fee pressures being experienced by public company auditors.
    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    A Framework for Research on Corporate Accountability...
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters in Auditing Section Research Summaries Space public
    Title:
    A Framework for Research on Corporate Accountability Reporting.
    Practical Implications:

    The author shows how the successive incidence of these properties in observed corporate accountability reports can be used to determine whether and how those reports create or destroy value for shareholders and other constituencies. He shows how the hypotheses developed in the skeptical appraisal of corporate accountability reporting section can be used to distinguish across these explanations in observed corporate accountability reports.

    Citation:

    Ramanna, K. 2013. A Framework for Research on Corporate Accountability Reporting. Accounting Horizons 27 (2): 409-432.

    Keywords:
    corporate accountability reporting, social responsibility in business, financial statements
    Purpose of the Study:

    This paper provides an accounting-based conceptual framing of the phenomenon of corporate accountability reporting. In the paper, the author leverages the positive accounting literature’s current understanding of the role of financial reporting in a market economy and its understanding of the properties of financial reports, to develop some basic hypotheses on corporate accountability reporting. Further refinement and tests of these hypotheses are likely to help us better understand some of the fundamental questions in corporate accountability reporting outlined in the Harvard Business School (HBS) conference’s call for papers. 

    Corporate accountability reporting is defined to be broader than corporate accounting in that accountability reporting, unlike accounting, can be used to hold corporations to account for actions with externalities that are not entirely captured in revenues and expenses currently defined. The externalities can be positive (e.g., local community-building initiatives) or negative (e.g., environmental pollution, regulatory capture) relative to the state of the world, where the corporation does not engage in the action, and the internalization of externalities into firm decisions may or may not create value for extant shareholders. In this paper, the author develops a framework to study corporate accountability reporting. In developing the framework, the author explicitly approaches corporate accountability as an observed phenomenon, and avoids speculating on whether companies ought to be held to account to customers, employees, and society, outside of shareholder maximization.

    Design/Method/ Approach:

    The author analyzes the phenomenon of corporate accountability reporting and provides an accounting-based conceptual framing.

    Findings:
    • The author argues that delegation necessitates accountability and that such accountability then involves reporting.
    • The author argues that an accountability reporting system is likely to be more useful to a delegator if it: (1) mitigates information advantages across delegates and delegators, (2) reports both stocks and flows in the measures of account, and (3) has a mutually agreeable due process to match across periods the actions of delegates and the outcomes of those actions.
    • The author provides a skeptical appraisal of corporate accountability reporting. He offers three explanations for observed corporate accountability reports. These are: (1) in Milton Friedman’s words, “window dressing,” i.e., a superficial exercise that does not internalize externalities into firm decisions, (2) an attempt at internalizing negative externalities, as identified by one or more firm constituencies, into firm decisions, and (3) an attempt at internalizing positive externalities, as identified by one or more firm constituencies, into firm decisions.
    Category:
    Corporate Matters
  • Jennifer M Mueller-Phillips
    A Framework for Understanding and Researching Audit Quality
    research summary posted February 17, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control in Auditing Section Research Summaries Space public
    Title:
    A Framework for Understanding and Researching Audit Quality
    Practical Implications:

    This study identifies the gap between audit research and audit practice. It recognizes key elements of audit quality and suggests additional research to be performed that could potentially bridge that gap. The research suggested in this study aims to help to comprehensively understand the drivers of audit quality by starting with an analysis of the macro-level inputs of audit quality, and then studying how they influence and shape the micro-level inputs. Further, several reasons are proposed to explain why the use of auditing research is not generally deemed important by audit practitioners, but that cooperation between practitioners, regulators, and scholars would improve overall audit quality.

    For more information on this study, please contact Jere R. Francis. 

    Citation:

    Francis, J.R. A Framework for Understanding and Researching Audit Quality. Auditing, A Journal of Practice and Theory. 30 (2): 125- 152.

    Keywords:
    audit quality, research
    Purpose of the Study:

    This article serves to provide a guide for future research in the study of audit quality. 

    Design/Method/ Approach:

    The author developed a framework for studying audit quality at various levels of analysis. The levels identified are: Audit Inputs, Audit Processes, Accounting Firms, Audit Industry and Audit Markets, Institutions, and Economic Consequences of Audit Outcomes. 

    Findings:
    • Audit Inputs- 1) The people who do the audits and 2) the audit tests that are performed. The quality of the audit is increased by the more competent people are and the higher the quality of evidence generated from the audit tests is. The author suggests that more research should exist to develop comprehensive models of audit testing.
    • Audit Process- The implementation of the audit inputs. These are the decisions and judgments made by auditors in order to meet the requirements of audit standards.
    • Accounting Firms- 1) Engagement teams, 2) Hiring, training, compensations, and development of audit guidance 3) Audit reports with the firm’s name. The author suggests that the audit quality metrics listed in IOSCO provide little information about audit quality, and rather an investigation of measures that have been shown to systematically affect audit quality, paired with a greater transparency of audit firms reporting of their operations, would be a more useful indicator of both overall accounting firm quality and engagement specific audit quality.
    • Audit Industry and Audit Markets- 1) Accounting firms constitute an industry and 2) Industry structure affects markets and economic behavior. The author suggests that more research is needed to understand the effect of industry structure with regards to audit quality as the Big 4 firms continue to dominate the market and create an oligopoly.
    • Institutions- Institutions, like the SEC, affect auditing and provide incentives for quality. Research that analyzes the role of auditing standards and research that identifies which is the main institutional driver of audit quality is necessary to properly determine the role of regulating institutions in audit quality.
    • Economic Consequence of Audit Outcome- An economic analysis demonstrates that an audit has value and can result in material economic consequences; additionally, market responses to an audit provide evidence of the effects of differential audit quality. The author suggests that more research should be done on the effects of audit quality on economic outcomes and the economic consequences of an audit. 
    Category:
    Audit Quality & Quality Control