Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    The Effect of Benchmarked Performance Measures and Strategic...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement 
    Title:
    The Effect of Benchmarked Performance Measures and Strategic Analysis on Auditors’ Risk Assessments and Mental Models
    Practical Implications:

    From a conceptual perspective, this study provides preliminary insight into how an auditor maps performance to risk.  The mapping is not simple, rather the complexities of audit standards, performance measure benchmarked type and auditor professional skepticism comingle to create a complex mapping of information contained in performance measures to an auditor’s risk assessments. In particular, our results indicate the increasing popular use by auditors of external benchmarks to provide independent evidence of the risks associated with client business units can lead to systematic differences in auditor risk assessments where no such differences in risk are warranted.  However, we find that auditors provided with in-depth strategic analysis were more likely to reach the normatively appropriate conclusion about risk regardless of the presence or absence of benchmarks for subsets of performance measures.  The finding that in-depth strategic analysis facilitates more accurate judgments about risk provides support for professional standards on risk assessment (ISA 315, PCAOB AS No. 8) and may indicate a need for more extensive guidance aimed at assisting auditors in developing an in-depth understanding of the strategic risks of clients. 

    For more information on this study, please contact Robert Knechel or Steve Salterio.

    Citation:

    Knechel, W. R., S. E. Salterio, and N. Kochetova-Kozloski. 2010. The effect of benchmarked performance measures and strategic analysis on auditors’ risk assessments and mental models. Accounting, Organizations and Society 35 (3):316-333.,

  • Jennifer M Mueller-Phillips
    The Effects of Clients’ Controversial Activities on Audit P...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 06.0 Risk and Risk Management, Including Fraud Risk, 06.04 Management Integrity, 06.06 Earnings Management 
    Title:
    The Effects of Clients’ Controversial Activities on Audit Pricing
    Practical Implications:

    We focus on the business risk associated with controversial corporate activities. By examining a wider range of controversial corporate activities, we are able to conduct a broader investigation into the association between auditor business risk and audit fees.  Our study finds that adverse social performance arising from controversial activities affects firms’ audit fees. Specifically, our results indicate that auditors charge fee premiums ranging from 5.4% to 13.2% for clients that are involved with controversial activities related to consumers, employees, the community, and the environment.  We also find that corporate controversial activities are associated with higher risks of financial misstatement and adverse financial performance.  These results provide triangulation on our inference that auditors’ raise their assessment of clients’ business risks when their clients are involved in controversial activities, and charge such clients higher audit fees.  

     

    For more information on this study, please contact Kevin Koh.

    Citation:

    Koh, K. and Y. H. Tong. 2013. The Effects of Clients’ Controversial Activities on Audit Pricing. Auditing: A Journal of Practice and Theory 32 (2): 67-96.

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