Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    Auditor Reporting under Section 404: The Association between...
    research summary posted July 29, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 07.05 Impact of 404 on Fees and Financial Reporting Quality, 12.0 Accountants’ Reports and Reporting, 12.06 Consequences of Adverse 404 Opinions 
    Title:
    Auditor Reporting under Section 404: The Association between the Internal Control and Going Concern Audit Opinions.
    Practical Implications:

    The uncertainties surrounding material weaknesses, the difficulty of auditing around some types of weaknesses, and the fact that the auditor must explain why it issued a clean report on the financial statements when it had issued a MWO, may cause the auditor to become conservative in its GCO decision, which is fairly ambiguous to start with. The study has particular relevance for policy makers and a need for a broader evaluation of the effects of SOX 404.

    Citation:

    Goh, B. W., Krishnan, J., & Li, D. 2013. Auditor Reporting under Section 404: The Association between the Internal Control and Going Concern Audit Opinions. Contemporary Accounting Research 30 (3): 970-995.

  • Jennifer M Mueller-Phillips
    Auditors’ Internal Controls over Financial Reporting D...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 07.0 Internal Control, 07.01 Scope of Testing 
    Title:
    Auditors’ Internal Controls over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions
    Practical Implications:

    In the planning phase, the PCAOB and key stakeholders should consider developing an ICOFR audit risk model to serve as a conceptual planning and evaluative model. Audit firms should pay attention to aligning auditors’ skill sets to their task assignments and employ other mechanisms that encourage consultations.

    Scoping decisions remain underexplored. Nevertheless, anecdotal evidence suggests that auditors may be cognitively wired to scope some types of ELCs but not others. Firms may consider the interactions between auditors and client personnel that explain the tendency for auditors to evaluate only the ELCs scoped by the client.

    Audit firms should pay special attention to how audit teams design testing plans to test ELCs that are not easily tested by attribute sampling methods (e.g., management philosophy and operating style). This is necessary to address concerns by PCAOB inspections that some auditors identified ELCs that appeared to be designed to operate with a high degree of precision, but failed to obtain sufficient audit evidence of their operating effectiveness.

    In the evaluation phase, firms should consider mechanisms that can help auditors “imagine what could go wrong where nothing wrong has happened.” Examples of such mechanisms include restructuring the task (e.g., documentation, decomposition of the task, or requirements to list what could go wrong). In the reporting phase, firms should consider having a requirement to specifically require auditors to consider the needs of a prudent official. This requirement may be a countervailing check on their detection and disclosure incentives.

    For more information on this study, please contact Stephen K. Asare.

    Citation:

    Asare, S. A., B. C. Fitzgerald, L. E. Graham, J. R. Joe, E. M. Negangard, and C. J. Wolfe. 2013. Auditors’ Internal Controls over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions. Auditing: A Journal of Practice and Theory 32 (sp1): 131-166.

  • Jennifer M Mueller-Phillips
    Changes in Corporate Governance Associated with the...
    research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses, 13.0 Governance, 13.01 Board/Audit Committee Composition 
    Title:
    Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation
    Practical Implications:

    The results of this study support the audit committee regulations under SOX and the board independence regulations of the listing exchanges. These results are important to regulators as they show that improvements in audit committee influence, competence, and incentives are each positively associated with ICMW remediation. In addition, the results reveal that improvements in these audit committee characteristics are most strongly associated with the remediation of ICMWs relating to control activities and monitoring, but not to ICMWs across the other COSO categories. Lastly, the results are important to management as they highlight the importance of hands-on day-to-day leadership by management in addressing situations involving the revelation and remediation of material negative events.

    For more information on this study, please contact Karla Johnstone.
     

    Citation:

    Johnstone, K., C. Li, and K. H. Rupley. 2011. Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation.  Contemporary Accounting Research 28 (1):  331-383. 

  • Jennifer M Mueller-Phillips
    Detection and Severity Classifications of Sarbanes-Oxley...
    research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.04 Assessing Remediation of Weaknesses 
    Title:
    Detection and Severity Classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies
    Practical Implications:

    The results of this study support the value of auditor involvement at two stages of the ICFR assessment process (detection and classification), and contribute to understanding of factors associated with client and auditor performance in both stages. The study also provides direct evidence on the “yield” of detection methods used by auditors. This issue is at the heart of the debate on the value of auditor involvement in assessing and testing internal controls. Lastly, the findings of this study imply that the recent exemption of Section 404(b) for smaller U.S. public companies could result in failure to fully realize potential improvements in financial reporting quality in that sector of the market.

    For more information on this study, please contact Jean Bedard.
     

    Citation:

    Bedard, J. C. and L. Graham. 2011. Detection and Severity Classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies.  The Accounting Review 86 (3):  825-855. 

  • Jennifer M Mueller-Phillips
    Determinants of the Persistence of Internal Control...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 07.0 Internal Control, 07.04 Assessing Remediation of Weaknesses 
    Title:
    Determinants of the Persistence of Internal Control Weaknesses
    Practical Implications:

    Effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. While credit agencies examine entity-level deficiencies as a possible indicator for downgrading a firm’s rating, account-level deficiencies are associated with long-term effects on internal control as well.

    Consideration of the types of MWs and the specific underlying deficiencies should be important to interested stakeholders: auditors, as they assess and evaluate risk and controls; rating agencies, as they evaluate credit worthiness; investors and analysts, as they evaluate the value of the firm; and management and audit committees, as they consider investments in controls.

    For more information on this study, please contact Marcia Weidenmier Watson.
     

    Citation:

    Klamm, B. K., K. W. Kobelsky, and M. W. Watson. Determinants of the Persistence of Internal Control Weaknesses. Accounting Horizons 26 (2): 307-333.

  • The Auditing Section
    Discussion of “Internal Audit Sourcing Arrangement and the E...
    research summary posted May 7, 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 
    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.

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  • Jennifer M Mueller-Phillips
    Do SOX 404 Control Audits and Management Assessments Improve...
    research summary posted September 13, 2016 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    Title:
    Do SOX 404 Control Audits and Management Assessments Improve Overall Internal Control System Quality?
    Practical Implications:

     The authors’ findings are important because they indicate that AS5 may be less effective at improving ICQ than AS2 and provides some evidence that declining material weakness rates under AS5 do not indicate improving ICQ. The findings also suggest that SOX 404(a) management assessments are not an acceptable substitute to ICFR audits for improving ICQ. The results suggest that more rigorous SOX 404(b) audits under Auditing Standard No. 2 had real benefits in terms of improved overall internal control system quality and unaudited accruals quality; however, attempts to reduce ICFR audit costs via reduced requirements of Auditing Standard No. 5 may have resulted in lower material weakness disclosure rates and lower overall internal control system quality.

    Citation:

    Schroeder, J. H. and M. L. Shepardson. 2016. Do Sox 404 Control Audits and Management Assessments Improve Overall Control System Quality? The Accounting Review 91 (5): 1513-1541.

  • Jennifer M Mueller-Phillips
    Does Ineffective Internal Control over Financial Reporting...
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    Title:
    Does Ineffective Internal Control over Financial Reporting affect a Firm's Operations? Evidence from Firms' Inventory Management.
    Practical Implications:

    This is first paper to examine the broad effect of ineffective ICFR on firm operations, and to establish a more direct link between MWIC over inventory and managers’ inventory management decisions. These results provide strong evidence that despite being largely unremarked upon as a potential benefit by managers or regulators, maintaining effective ICFR can provide an economically meaningful benefit to their firms’ operations. To the extent that there is a disconnect between actual and perceived benefits to maintaining effective ICFR, the recent regulatory move to exempt certain firms from internal control disclosure regulation may be premature. For a large sample of publicly traded firms, the authors provide evidence that the lack of proper inventory acquisition, tracking, or valuation systems has a direct impact on firms’ operating performance.

    Citation:

    Feng, Mei, Li, C., McVay, S. E., & Skaife, H. 2015. Does Ineffective Internal Control over Financial Reporting affect a Firm's Operations? Evidence from Firms' Inventory Management. Accounting Review 90 (2): 529-557.

  • Jennifer M Mueller-Phillips
    Does SOX 404 Have Teeth? Consequences of the Failure to...
    research summary posted July 22, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements 
    Title:
    Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal Control Weaknesses.
    Practical Implications:

    The evidence showing that, all else equal, SEC sanctions following restatements are no more likely for firms that previously claimed to have effective internal controls (and, in some cases, are less likely) suggests that public enforcement of SOX 404 is unlikely to provide strong incentives to detect and disclose existing weaknesses. Also, the results showing that penalties stemming from various private mechanisms are more likely for firms that report their internal control weaknesses in advance of restatements suggests the existence of possible disincentives to detect and disclose existing weaknesses. Together, these results offer a potential explanation for why the majority of restatements occur at firms that previously claimed to have effective controls.

    Citation:

    Rice, S. C., Weber, D. P., & Wu, Biyu. 2015. Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal Control Weaknesses. Accounting Review 90 (3): 1169-1200.

  • Jennifer M Mueller-Phillips
    Early Warnings of Internal Control Problems: Additional...
    research summary posted May 25, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 12.0 Accountants’ Reports and Reporting, 12.06 Consequences of Adverse 404 Opinions 
    Title:
    Early Warnings of Internal Control Problems: Additional Evidence
    Practical Implications:

    The results of this study raise many interesting questions. The fact that accelerated filers’ adverse internal control opinions continue to be a surprise over 50 percent of the time suggest that auditors continue to find internal control problems that management had not previously identified or had not evaluated as MWs. The results related to non-accelerated filers provide some interesting data related to the ongoing debate about the efficacy of Section 404(b) testing by auditors. The authors also note that examining the early warnings of non-accelerated filers tells us only about what management of these companies report; it does not give us insight into what auditors would report. The results also raise other interesting issues for future research.

    Citation:

    Munsif, V., K. Raghunandan, and D. V. Rama. 2013. Early Warnings of Internal Control Problems: Additional Evidence. Auditing 32 (2).

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