Auditing Section Research Summary Database

A Database of Auditing Research - Building Bridges with Practice

This is a public Research  public

Posts

  • The Auditing Section
    Discussion of “Internal Audit Sourcing Arrangement and the E...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 07.0 Internal Control, 07.01 Scope of Testing, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summaries Space public
    Title:
    Discussion of “Internal Audit Sourcing Arrangement and the External Auditor’s Reliance Decision”
    Practical Implications:

    The points noted below suggest some limitations in Glover, Prawitt & Wood (2008) article. However, Messier acknowledges that the article provides insight on some factors that might affect the external auditors’ reliance decisions under AS 5.

    Citation:

    Messier, W. F. 2008. Internal Audit Sourcing Arrangement and the External Auditor’s Reliance Decision. Contemporary Accounting Research 25 (1) 215-218.

    Purpose of the Study:

    This is a discussion of the Glover et al. article (2008). The comments are based on Messier’s comments provided during the 2006 Contemporary Accounting Research Conference.

    Findings:
    • Glover, Prawitt, & Wood (2008) used a first-year audit scenario for their experiment. Messier suggests that auditors are more conservative in first-year audits. This conservative nature may have caused the auditors (participants) to assess the internal audit work as relatively low in terms of reliability. 
    • Messier suggests that the evaluation of “task subjectivity” may be confounded with the auditors’ consideration of the type of work performed, in accordance with SAS No. 65. (The “objective task” was control testing; the “subjective task” was inventory valuation.) This may limit the implications for the findings related to task objectivity/subjectivity, noted above.
    Category:
    Internal Control, Governance
    Sub-category:
    Scope of Testing, Internal auditor role and involvement in controls and reporting
    Home:
    home button
  • The Auditing Section
    Discussion of: “The Importance of Account Relations when R...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness in Auditing Section Research Summaries Space public
    Title:
    Discussion of: “The Importance of Account Relations when Responding to Interim Audit Testing Results”
    Practical Implications:

    Bedard’s (2006) discussion of Vandervelde (2006) reinforces the fact that auditors do incorporate the relationships among accounts in their responses to increases in misstatement risk.  He also suggests that it is important to consider how this pattern maps to auditors’ risk assessments at the financial statement assertion level.  His discussion emphasizes that in response to fee pressure, auditors may shift planned audit hours between accounts (i.e., from low risk areas to high risk areas), rather than increasing overall planned audit hours.  Finally, despite Bedard’s (2006) caveat that this result could be due to auditor self-presentation concerns or a change in the mix of audit procedures that does not result in increased hours, it is important to note that auditors do not appear to reduce planned audit hours in response to fee pressure – and that this could reflect auditors’ cognizance of the heightened importance that investors and the market currently placed on the role of auditing.

    Citation:

    Bedard, J. 2006. Discussion of: “The Importance of Account Relations when Responding to Interim Audit Testing Results”. Contemporary Accounting Research. 23(3): 823 – 831.

    Keywords:
    Account relations, audit planning, interim evidence, profit pressure, auditing procedures - nature, timing, and extent
    Purpose of the Study:

    This study is a conference discussion of Vandervelde (2006).  The purpose of the discussion is to critically analyze the motivation, hypotheses, experimental design, results, and implications of Vandervelde (2006).  Please see the summary of Vandervelde (2006) for further details.  

    The discussant first reviews research on risk-based auditing. The discussant believes that Vandervelde (2006) is studying an important aspect of the audit by examining how auditors incorporate relationships between accounts in their audit testing. Regarding Vandervelde’s (2006) predictions, the discussant believes that Vandervelde’s (2006) hypotheses could more accurately reflect the mathematical model’s predictions. The following points illustrate the primary differences between the expectations in Vandervelde (2006) and Bedard (2006).

    • In response to Vandervelde’s (2006) prediction that the increase in planned audit hours as the severity of the problem increases is greater for related vs. unrelated accounts, the discussant observes auditors may compensate for increased hours in higher risk areas of the audit with decreased hours in lower risk areas of the audit, which explains why prior studies find that auditors do not always respond to risk.  
    • Contrary to Vandervelde (2006), the discussant suggests that the increase in planned audit hours for low-relatedness accounts is not mitigated by fee pressure; rather there is a decline in planned audit hours, which is heightened by fee pressure.
    Design/Method/ Approach:

    The discussant reviews and provides suggestions for Vandervelde’s (2006) motivation, hypotheses, experimental design, and results.  The discussant also integrates Vandervelde (2006) in the context of prior research and suggests avenues for future research.

    Findings:
    • The discussant observes that Vandervelde’s (2006) findings suggest that auditors do consider the relationship between accounts, as planned audit hours increase for accounts related to the account where the problem was discovered and do not materially change for nonrelated accounts. 
    • The discussant states that Vandervelde’s (2006) finding that profit pressure does not influence auditors’ response to increases in risk is consistent with the market scrutiny on audit quality spurring audit firms to decrease emphasis on profit pressure.  However the discussant also observes that this finding could have been an artifact of the experimental design of the study, as auditors may have been reluctant to show that they are affected by profit pressure.  Further, this result suggests that auditors may change the mix of audit procedures for an account to address increases in risk, rather than changing the planned hours for that account.   
    • The discussant suggests that it could be informative to examine how auditors react to risks at the assertion level, rather than the account level. He suggests that accounts can be classified as “derived” vs. “generating transactions”, which can assist in mapping to assertions.  In Vandervelde’s (2006) context, the purchases account would be classified as “generating transactions”, while accounts payable and inventory are classified as “derived” (from purchases on account/disbursements and purchases/sales, respectively).  Thus, loss of documents would suggest issues with the completeness assertion for purchases, accounts payable and inventory.  The loss of documents should prompt an auditor to adjust audit procedures related to completeness, but not other assertions.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Assessing Risk of Material Misstatement, Substantive Analytical Review – Effectiveness
    Home:
    home button
  • The Auditing Section
    Auditors’ Assessment and Incorporation of Expectation P...
    research summary last edited May 25, 2012 by James L Fuehrmeyer, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summaries Space public
    Title:
    Auditors’ Assessment and Incorporation of Expectation Precision in Evidential Analytical Procedures
    Practical Implications:

    The results of this study suggest that auditors’ precision assessments may not be well calibrated for relevant precision factors. Thus, auditors may benefit from additional guidance indicating the factors that should be considered for assessing the precision of analytical
    procedures.  Furthermore, audit firms might want to consider integrating some of the findings of this study into future training sessions and/or decision aids that would assist auditors in improving their precision calibration. An insensitivity to important precision factors may lead to over-reliance on analytical procedures, negatively affecting audit effectiveness. Because the allowance for loan losses is an estimate, the results of this study provide insight into factors that could influence the potential effectiveness of audits of estimates. Understanding how auditors evaluate analytical procedure precision for estimates is particularly critical in that analytical procedures may be the only source of assurance for testing these accounts.

    Citation:

    McDaniel, L.S. and L.E. Simmons. 2007. Auditors’ assessment and incorporation of expectation precision in evidential analytical
    procedures. Auditing: A Journal of Practice & Theory 26(1): 1-18.

    Keywords:
    Analytical procedures, precision, expectations, substantive test, audit evidence
    Purpose of the Study:

    The precision with which auditors form expectations during analytical procedures is important. The precision of an expectation is a measure of the closeness of the developed expectation to the actual amount and refers to the quality of the expectation, and thus, the quality of the analytical procedure. Professional standards clearly indicate that auditors should be able to form more precise expectations for accounts that are more predictable (income statement relationships generally are more predictable than balance sheet relationships) and when the information related to the account is more disaggregated (i.e., detailed). However, the Public Oversight Board’s (POB) Panel on Audit Effectiveness has found evidence that auditors rely on analytical procedures that do not provide the desired level of assurance, suggesting possible difficulty in assessing precision. To address this finding by the POB, this study investigates auditors’ abilities to assess expectation precision and incorporate their assessments into judgments related to substantive analytical procedures, as required by professional standards. A first step toward developing more effective guidance is obtaining a better understanding of why auditors sometimes fail to effectively apply analytical procedures. As such, the authors aim to answer the following two questions: 

    • To what extent do auditors’ precision assessments reflect the level of account predictability and the level of detail of the data used to form expectations? 
    • To what extent are auditors’ judgments consistent with their precision assessments? According to professional standards, the following judgments should be consistent with auditors’ precision assessments:

    (1)   The level of assurance expected by auditors to be provided by the analytical procedure.

    (2)   The range of the difference between the expected and recorded amount.

    (3)   The likelihood that the difference between the expected and recorded amount is due to misstatement versus non-isstatement causes.

    Design/Method/ Approach:

    The authors gathered their data experimentally at a firm training event for audit seniors and above (the training event occurred sometime during or prior to 2005). The participants were asked to review workpapers which included analytical procedures for two different accounts – the allowance for loan losses (a less predictable account) and interest income (a more predictable account). The expectations for the analytical procedures documented in the workpapers were either based on more or less detailed information. After reviewing the analytical procedures, auditors were asked to assess the precision and the level of assurance provided, provide an expectation range for the account balance, and judge the amount of difference between the expected and recorded amount due to misstatement.

    Findings:
    • Overall, auditors assess precision higher when the data forming the expectation are disaggregated (i.e., more detailed) versus aggregated (i.e., less detailed). 
    • Auditors also assess precision higher for the more predictable account (interest income) versus the less predictable account (the allowance for loan losses). 
    • Auditors’ precision assessments for the allowance for loan losses are not significantly different between the disaggregated and aggregated analytical procedures. This finding suggests that in assessing the precision of analytical procedures for less predictable accounts, auditors do not consider the effects of data aggregation. 
    • The results also show that for both accounts auditors judge the level of assurance obtained from the analytical procedures consistent with their precision assessments (i.e., higher assessed precision corresponds with a higher level of assurance).  
    • Counter to the authors’ expectations, auditors’ precision assessments were not related to their judgments of the range of differences between the expected and recorded amounts or the likelihood of misstatement.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence
    Home:
    home button
  • The Auditing Section
    A Comparison of Auditor and Client Initial Negotiation...
    research summary last edited May 14, 2012 by Judy Cothern, 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
  • Julie Smith David
    What would researchers say is the #1 impediment to auditors...
    discussion posted July 21, 2011 by Julie Smith David in 09.0 Auditor Judgment public
    discussion:
    What would researchers say is the #1 impediment to auditors having good judgment?
    details:

    We're looking at our training program and want to make sure that we are focused on the most important issues.  Any help would be appreciated!