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.

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.

http://www.auditingresearchsummaries.org

The extent to which auditors’ judgments are persuaded by information from management represents asignificant issue for audit practice, especially when information from more objective sources is also available.  The evidence indicates that less experienced senior auditors rely on information from management that is aligned with management’s self-interest to a greater extent than more experienced audit seniors.  This reliance raises a concern that some senior auditors assess audit evidence more favorably than may be warranted because they inappropriately rely on information provided by management. A lack of appropriate skepticism has the potential to make audits ineffective and expose the firm to audit failures.  The study suggests the importance of carefully assigning audit tasks to auditors with an appropriate level of experience.

Kaplan, S. E., E. F. O’Donnell, and B. M. Arel. 2008. The Influence of Auditor Experience on the Persuasiveness of Information Provided by Management. Auditing: A Journal of Practice & Theory 27 (1): 67-83.

The results suggest that auditors’ AIS expertise can play a significant role in complex AIS settings and in their ability to compensate for CAS competence deficiencies.  The authors note that it may be prudent for firms to consider the combined capabilities of individuals when assigning auditors and CAS to engagements with complex AIS.

Brazel, J. F. and C. P. Agoglia. 2007. An examination of auditor planning judgments in a complex accounting information system environment. Contemporary Accounting Research 24 (4): 1059-83.