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  • 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 
    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
  • 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 
    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 
    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
  • Jennifer M Mueller-Phillips
    A Summary of Research and Enforcement Release Evidence on...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.10 Confirmation – Process and Evaluation of Responses 
    Title:
    A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness.
    Practical Implications:

    The review of AAERs identified failure to authenticate responses, collusion between auditee management and customers, and concealed side agreements and special terms as specific problem areas. These findings have several implications for standard setters, practitioners, and academic researchers. First is a need to improve response rates, as well as authenticate responses. Technology, perhaps involving third-party intermediaries, can help address these issues. Second, depending on the circumstances and identified risks, auditors may need to confirm the existence of side agreements and special terms. Auditors may also need to consider the possibility of collusion in their testing strategies. In addition, confirmation requirements may need to be extended to other accounts, at least in some circumstances.

    Citation:

    Caster, P., R. J. Elder, and D. J. Janvrin. 2008. A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness. Auditing: A Journal of Practice & Theory 27 (2): 253-279.

    Keywords:
    AAER evidence, audit confirmations, audit evidence, confirmation reliability
    Purpose of the Study:

    Confirmations are extensively used and are often perceived by practitioners to be one of the most persuasive forms of audit evidence. Yet academic research has found limitations that restrict confirmation effectiveness for many management assertions. In addition, a number of problems with false and forged confirmations are identified in Accounting and Auditing Enforcement Releases (AAERs). The Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have put confirmation evidence on their respective agendas. Academic research indicates that receivable confirmations can be effective evidence for the existence assertion. Low response rates, as well as respondent errors and directional bias in detecting errors, are key barriers to confirmation effectiveness. This study provides a synthesis of academic and practitioner research on confirmation use and effectiveness.

    Design/Method/ Approach:

    The authors conducted a review of the academic literature on confirmations. They found few current papers examining confirmations. Most prior research addressed the effectiveness of confirmation of accounts receivable. To provide additional evidence relevant to questions in the SAG briefing paper involving confirmation of other accounts, they reviewed AAERs and practitioner literature. They identified 113 confirmation-related AAERs involving 51 auditees.

    Findings:

    The authors’ primary findings are:

    • Currently, some auditors choose not to confirm accounts receivable without justifying how they met one or more of the criteria in Statement on Auditing Standards (SAS) No. 67 for not confirming the accounts.
    • Generally, confirmations are relatively effective in testing the existence assertion for accounts receivable. However, low response rates have a negative impact on confirmation effectiveness.
    • Anecdotal evidence and some research suggest confirmation response rates are declining. Research has identified several methods to improve response rates.
    • Confirmations are also somewhat effective in examining the valuation assertion for accounts receivable. However, confirmees fail to detect many seeded errors in controlled experiments and are more likely to detect and report errors that are unfavorable to the confirmee rather than favorable errors.
    • Collusion between auditee management and the confirmee was a problem area in receivables confirmations identified from AAERs. The relationship between management and the confirmee calls into question the perception by auditors of confirmees as “independent” third parties.
    • Fictitious responses provided by auditee management were a problem area identified from a review of AAERs for accounts receivable and cash balance confirmations. Current auditing standards do not require auditors to authenticate responses.
    • Enforcement actions described in the AAERs indicated problems with bank confirmations. With the exception of accounts receivable, U.S. auditing standards related to confirmations do not provide explicit guidance for specific accounts, such as cash, marketable securities or other account balances, as well as confirmation of special terms or side agreements.
    • Considerable evidence exists that electronic confirmations and other forms of electronic database queries (i.e., defined views of supplier and/or customer databases) are becoming more prevalent. Technology offers alternatives to standard paper confirmations that may provide for authentication and improve confirmation effectiveness.
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Assessing Risk with Analytical Procedures: Do...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, 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 
    Title:
    Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns?
    Practical Implications:

    The diagrams used in this study contained identical information about changes in accounts; however, auditors who used a diagram that illustrated information in a way that explicitly outlined associations among accounts came to different conclusions about risk than those who used a simple business process diagram. Changing the way information is presented to auditors during the planning phase of an audit could help auditors develop more reliable risk assessments and could significantly improve the audit practice. 

    For more information on this study, please contact Ed O’Donnell.
     

    Citation:

    O’Donnell, E., and J. Perkins. 2011. Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing: A Journal of Practice and Theory 30 (4): 273-283.

    Keywords:
    analytical procedures; causal-loop diagrams: pattern recognition; risk assessment.
    Purpose of the Study:

    Auditors assigned to an assurance engagement must perform analytical procedures to identify any situations that could increase the risk of material misstatement in accounts. However, even when auditors perform adequate and appropriate procedures to assess risk, auditors often fail to recognize conditions that increase the risk of misstatement. This can occur when evidence manifests through inconsistent fluctuation of related accounts instead of manifesting through inconsistent fluctuations for a single account. This study addresses this auditor weakness by evaluating whether the way information is presented in the diagrams used to perform analytical procedures affects an auditor’s assessment of risk during the planning phase of an audit engagement. The authors suggest that an alternative way of presenting information could potentially allow auditors to more appropriately recognize and respond to patterns of changes in accounts. The two different types of information presentation compared in this study are:

    • Causal-loop diagram- a system-thinking tool that explicitly illustrates associations among process components.
    • Business-process diagram- a diagram that provides equivalent information than that presented in a causal loop diagram but presents it in a different format without explicit illustrations.
       
    Design/Method/ Approach:

    The authors collected the evidence for this study prior to November 2011. The lab experiment was conducted using auditors with audit experience ranging from 20 to 84 months, with an average of 41.7 months. The auditors were randomly assigned to a task that entailed either identifying fluctuations or explaining fluctuations by performing analytical procedure on given financial information with seeded inconsistent fluctuations in related accounts. Half of the participants in each task used the business process diagram while the other half used the causal loop diagram to reach a conclusion.

    Findings:
    • Compared to participants in the experiment who used the business process diagram, those who used the causal-loop diagram found the evidence about patterns in inconsistent fluctuations among related accounts more important and relevant to risk.
    • Compared to participants in the experiment who used the business process diagram, those who used the causal- loop diagram concluded that there was a higher level of misstatement risk given the inconsistent fluctuations in related accounts.
    • The findings suggest that changing the way information is organized and presented to auditors can increase their pattern focus when they perform analytical procedures during the planning phase and could potentially improve their assessment of misstatement risk.
    • Results from this study should be evaluated with respect to the limitations inherent in the laboratory experiment. It is possible that the auditors using the different diagrams could have come to the same conclusion about risk had they had as much evidence as is typically gathered from analytical procedures in real engagements. Future research should address this issue to come to a definitive conclusion about the usefulness of systems-thinking audit tools with respect to assessing misstatement risk.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement
  • The Auditing Section
    Attention to Evidence of Aggressive Financial Reporting and...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Attention to Evidence of Aggressive Financial Reporting and Intentional Misstatement Judgments: Effects of Experience and Trust
    Practical Implications:

    The results of this study are important for audit firms to consider when making audit personnel assignments in order to take advantage of individual traits and experiences.  Audit firms may benefit from audit team structures that include members with varying levels of trust and varying levels of prior fraud experience.  Diversifying audit team composition may improve fraud detection while maintaining audit efficiency. 

    Citation:

    Rose, J.M. 2007. Attention to evidence of aggressive financial reporting and intentional misstatement judgments: Effects of experience and trust. Behavioral Research in Accounting 19(1): 215-229.

    Keywords:
    aggressive reporting; experience; fraud; skepticism; trust
    Purpose of the Study:

    Auditors face increased pressure to detect and prevent fraud and increased responsibilities to maintain professional skepticism as a result of SAS No. 99.  Yet their ability to do so may be constrained by their individual traits or experiences.  Previous research has not sufficiently addressed auditors’ ability to detect potentially fraudulent reporting or auditors’ judgment concerning misstatements and has not evaluated auditor characteristics that can influence attention to evidence of aggressive reporting. 
    This paper investigates the following factors:  

    • Whether professional skepticism increases auditors’ attention to evidence of aggressive reporting. 
    • Whether dispositional trust affects auditor’s critical evaluation of audit evidence.  Dispositional trust is a personality trait which affects professional behavior by influencing the degree to which an individual believes that people are typically trustworthy or that they will personally benefit by trusting others.
    • Whether fraud-specific audit experience results in the development of knowledge structures that are useful for the detection of potentially fraudulent and aggressive reporting practices. 
    Design/Method/ Approach:

    The authors collected their evidence using a simulated task completed by practicing auditors from Big 4 and national accounting firms with an average of 3.6 years of experience.  Participants were given background information along with 45 pieces of audit evidence for a hypothetical audit client, and told that they were performing workpaper reviews for the client. Then, participants were asked to perform a surprise free recall of the information. Finally, participants were asked to make a judgment on the likelihood that the client’s financial statements were intentionally misstated.  Participants were assigned to either a higher or lower level of client-related skepticism and aggressive or non aggressive individual audit evidence items.

    Findings:
    • The authors find that increased skepticism is associated with increased attention to aggressive reporting, and as a result, increased belief that intentional misstatement has occurred.
    • Less trusting auditors appear to pay more attention to evidence of aggressive reporting than do more trusting auditors.  
    • The authors find that prior fraud-specific experience positively influences auditor’s judgments of intentional misstatement.  Prior fraud experience may allow auditors to develop fraud-based explanations for aggressive reporting and develop knowledge structures that include potential indicators of fraud. 
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Fraud Risk Assessment, Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind
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  • Jennifer M Mueller-Phillips
    Attracting Applicants for In-House and Outsourced Internal...
    research summary posted April 18, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
    Title:
    Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors.
    Practical Implications:

    This study offers insights into why internal auditing is experiencing a shortage of qualified job candidates and offers a potential solution to the problem. The authors find that external auditors have negative perceptions about internal auditing, and these negative perceptions are associated with a (1) decreased desire to apply for internal auditing positions, (2) lower likelihood of recommending an in-house internal auditing career to high-performing students, and (3) higher likelihood of recommending an in-house internal auditing career to mediocre students. Internal auditors can try solving this problem by improving perceptions about internal auditing via a media campaign that raises awareness about the true internal audit career path.

    Citation:

    Bartlett, G.D., J. Kremin, K.K. Saunders, and D.A. Wood. 2016. Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons 30 (1): 143-156.

    Keywords:
    internal audit, hiring decisions, outsourcing, external auditors
    Purpose of the Study:

    The internal audit function can help organizations strengthen their risk management and corporate governance, yet the demand for qualified candidates to fill internal audit job openings exceeds the supply of interested applicants. Consequently, the internal audit function may find itself short-staffed and/or staffed with lower quality candidates, which may limit its ability to add value to the organization. In order to correct this problem, it is important to fully understand its scope and its root cause(s). Prior research attempting to gain this understanding has focused on investigating how accounting students’ beliefs about internal audit impact their interest to pursue an internal audit career. The authors of this paper extend this research by:

    • Investigating how external auditors’ beliefs about internal audit impact (1) their interest to pursue an internal audit career and (2) their recommendations to students about pursuing an internal audit career,  
    • Investigating differences in external auditor’s perceptions of in-sourced versus out-sourced internal audit, and
    • Asking external auditors to suggest what needs to be done to improve their perceptions of internal audit.
    Design/Method/ Approach:

    The authors use data from three sources. First, the authors performed an experiment using experienced external auditorsmostly seniors or associateswho were asked whether they would apply for a job described as either an accounting, in-house internal audit, or outsourced internal audit position. Second, the authors performed another experiment using experienced external auditorsmostly managers or directorswho were asked whether they would recommend that a high-performing (mediocre performer) student pursue an external audit, in-house internal audit, or outsourced internal audit career. Third, the authors surveyed high-ranking former/current external auditors who never worked in internal audit about what would make internal auditing a more appealing career for them.

    Findings:
    • When the same job opening is labeled as either accounting, in-house internal auditing, or outsourced internal auditing, the accounting label is likely to attract two times as many external auditor applicants as the other two labels.
    • External auditors are equally willing to apply for in-house internal auditing or outsourced internal auditing positions.
    • External auditors have more negative perceptions of in-house internal auditors than outsourced internal auditors.
    • External auditors have negative perceptions of the internal auditing profession. They believe that (1) others have negative stereotypes about the profession, (2) business professionals do not respect internal auditors, and (3) internal auditors do boring work.
    • Those less interested in applying for internal audit jobs have negative perceptions of internal auditing.
    • The average external auditor willing (unwilling) to apply for an internal audit position would want to receive at least 124% (149%) of his current salary before being willing to switch from his current external audit job to an internal audit job.  
    • External auditors will be most likely to recommend that top-performing students work in external audit and mediocre students work in in-house internal audit.
    • External auditors will equally recommend that top-performing students and mediocre students should consider outsourced internal audit as a second best career path.
    • External auditors have more negative perceptions of outsourced internal auditing than external auditing on most dimensions, except in regards to work-life balance. They believe that work-life balance is better for outsourced internal auditors.
    • Current and former external auditors believe that internal auditing could become more appealing if internal auditors do more interesting work, receive more respect, perform value-added tasks, receive better compensation, and have better promotion opportunities. Because internal auditors appear to already be following these suggestions, internal auditors may benefit from giving others a better understanding of internal audit careers.
    Category:
    Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors, Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    Audit risk Assessments Using Belief versus Probability
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, 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, 08.04 Auditors’ Professional Skepticism 
    Title:
    Audit risk Assessments Using Belief versus Probability
    Practical Implications:

    The primary contribution of the paper is the presentation of four alternative concepts or definitions of audit risk. The feasibility and impact on auditor judgments of auditors applying these approaches to audit risk assessments are tested in an experimental setting where a second aspect of auditing – how assertions are framed – is also examined. Both the risk assessment approach and assertion framing had a significant impact on risk assessment both before and after audit evidence was evaluated. Importantly, auditors who were given a negatively stated audit assertion tended to be more skeptical than those who were given a positively framed assertion. This result has possible audit effectiveness and efficiency implications. 

    Citation:

    Fukukawa, H., and T. Mock. 2011. Audit risk assessments using belief versus probability. Auditing: A Journal of Practice and Theory 30 (1): 75-99.

    Keywords:
    auditors’ risk assessments; belief functions; probability; assertion framing effects
    Purpose of the Study:

    To present and experimentally compare alternative approaches to defining audit risk based on probability theory and the theory of belief functions and the effects of these approaches and of assertion framing on audit judgment. The risk measures studied were:

    1. Belief that an assertion is false
    2. Plausibility that an assertion is false, which is the sum of the belief that an assertion is false and the explicitly measured ambiguity and thus is the most conservative measure
    3. Probability that an assertion is false
    4. Cobb-Shenoy transformed belief that an assertion is false

    The first two approaches are belief-based, while the third is a probability-based approach. The logical connection between probability and belief assessments is used to define and operationalize the forth measure.

    Additionally, this study experimentally tests the effects of positive and negative  assertion framing on risk assessment and whether or not these effects are contingent on the approach to risk assessment and the evidence presented.

    Design/Method/ Approach:

    An experiment was conducted using practicing auditors drawn from Big 4 firms in Japan. Each participant was randomly assigned to one of four conditions where the factors manipulated were assertion framing and approach to risk assessment. The participants were presented with tasks for which they made a series of audit risk assessment judgments related to assertions presented about trade accounts receivable.

    Findings:

    The authors found the risk assessment approach effects to be significant with the belief-based risk assessments being smallest, the plausibility assessments being largest, and the probability assessments and the Cobb-Shenoy transformed belief assessments being in-between. Most of the paired comparisons between these measures were statistically significant. These results imply that any audit methodology that focuses on any one of these risk assessment measures is likely to result in substantially different risk assessments and potentially significant effects on audit efficiency and effectiveness.

    The authors also found evidence of significant audit assertion framing effects. Firstly, auditors who were given a negatively stated audit assertion tended to be more skeptical than those who were given a positively framed assertion. Also, the results showed that auditors are prone to confirm a given assertion regardless of whether it is stated positively or negatively. The pervasive framing effects are more significant after audit evidence is presented, more significant when stronger audit evidence is presented, and are influenced by the risk assessment approach. The existence of such assertion framing effects clearly may directly affect audit effectiveness and efficiency.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    Audit Sampling Research: A Synthesis and Implications for...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 08.03 Conclusions Based on Samples, 09.0 Auditor Judgment, 09.08 Evaluation of Errors – Statistical and Non-statistical 
    Title:
    Audit Sampling Research: A Synthesis and Implications for Future Research
    Practical Implications:

    Although little research evidence exists on the effectiveness of audit sampling, auditors should consider the effectiveness of audit sampling compared to other sources of evidence, and the use of statistical compared to nonstatistical sampling for both tests of controls and tests of details to develop the most effective and efficient sampling plans. Auditors that use nonstatistical sampling techniques should evaluate procedures to determine whether sample sizes and evaluation of results are comparable to sample sizes and conclusions reached using statistical methods. Auditors also often fail to project sample misstatements and explicitly consider sampling risk; auditor performance in the evaluation of samples is enhanced with the use of standardized sampling templates.

    For more information on this study, please contact Randy Elder, rjelder@syr.edu.

    Citation:

    Elder, R. J., A. D. Akresh, S. M. Glover, J. L. Higgs, and J. Liljegren.  2013. Audit sampling research: A synthesis and implications for future research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 99-129

    Keywords:
    Audit sampling, audit evidence, post-SOX environment
    Purpose of the Study:

    While research has influenced auditing standards for audit sampling, academic research provides limited insights into the current use of audit sampling. We synthesize relevant research based on a sampling decision framework and suggest areas for additional research. Important judgments include determining:

    • Does sampling apply
    • What type of sampling to apply (e.g., attribute or monetary sampling)
    • Whether to use statistical or nonstatistical techniques, including appropriate inputs to determine sample size and evaluate results
    • Consideration of environmental factors such as regulation, litigation, competition, culture, and technology 
    Design/Method/ Approach:

    We first design a framework of the audit sampling process based on existing auditing standards and guidance. We then review relevant literature for each step in the audit process. A fairly extensive literature exists on some sampling issues, such as determination of sample size and projection of misstatements found in the sample. An extensive, but generally dated literature also exists on various statistical sampling techniques. However, limited evidence exists for many issues related to audit sampling.

    Findings:

    Auditing standards and guidance on audit sampling have not changed significantly since SAS No. 39 (1981) and the first Audit Sampling Accounting and Auditing Guide (AICPA 1983). However, a review of the literature suggests there have been major changes in sampling practices over the last three decades. Key findings from previous research include:

    • Limited research evidence exists on the extent of the use of statistical and nonstatistical sampling for tests of controls and tests of details, and how use of these methods has changed over time or across client characteristics or other environmental factors.
    • Little research evidence also exists as to the effectiveness of audit sampling relative to other audit procedures or the effectiveness of nonstatistical audit sampling relative to statistical audit sampling in providing sufficient audit evidence.
    • When auditors select samples statistically (e.g., randomly) and evaluate the results nonstatistically, research suggests they may be prone to decision biases.
    • Auditors often underestimate risks in order to minimize the extent of testing in tests of details, which could potentially compromise audit effectiveness.
    • Several studies find that auditors may not consistently project sample misstatements as required by auditing standards, which could lead to incorrect acceptance of accounting populations. However, more recent research suggests that when decision aids such as templates are used, auditors do usually project misstatements observed in the sample to the population.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Conclusions Based on Samples, Evaluation of Errors - Statistical and Non-statistical, Sample Selection – use of statistical sampling
  • Jennifer M Mueller-Phillips
    Auditing Fair Value Measurements: A Synthesis of Relevant...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    Auditing Fair Value Measurements: A Synthesis of Relevant Research.
    Practical Implications:

    The authors believe that when armed with knowledge of how management may intentionally or unintentionally introduce error into their FVMs, auditors will be better able to take steps to adjust for this error. Currently, professional skepticism is the best way to combat this problem. Researchers and policy makers within firms need to grapple with the possibility that existing audit team structure and incentives may not be compatible with audits that require more and more specialized valuation knowledge.

    Citation:

    Martin, R. D., J. S. Rich, and T. J. Wilks. 2006. Auditing Fair Value Measurements: A Synthesis of Relevant Research. Accounting Horizons 20 (3): 287-303.

    Purpose of the Study:

    In order to contribute to the PCAOB project on auditing fair value measurements (FVMs), the authors synthesize and discuss the implications of academic research that should be relevant to auditors, standard-setters, and academics who increasingly deal with the complexities of auditing FVMs. The authors structure their synthesis of prior research along two dimensions:

    1. An emphasis on the auditor’s need to understand how FVMs are prepared, including an awareness of the potential pitfalls and biases inherent in preparing FVMs, and
    2. The audit steps and procedures necessary to verify and attest to FVMs, including an awareness of the potential biases inherent in auditing FVMs.
    Design/Method/ Approach:

    Structuring the synthesis along the aforementioned dimensions, the authors first focus on the generation of FVMs because they believe auditors cannot exercise due care in the audits of FVMs without a thorough understanding of the underlying valuation techniques and inputs used in assessing FVMs. They focus second on research related to verification and attestation procedures for FVMs, even though very little research directly examines the auditing of FVMs.

    Findings:
    • FVMs frequently incorporate forward-looking information reflected in market place exchanges as well as judgments about the applicability of those market inputs to company-specific conditions.
    • Future events and conditions cannot be predicted with certainty, so an element of judgment is always involved.
    • Specialists are often required to audit FVMs.
    • The structures of audits teams may inhibit the utilization of knowledge of such specialists in today’s audit firms. 
    • A number of errors and biases likely affect prepares’ valuation judgments, and auditors should be aware of those.
    • Auditors may rely on internal controls over FVM estimation process.
    • Auditors must be able to identify key assumptions and inputs in the FVM process.
    Category:
    Audit Team Composition, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism, Use of Specialists (e.g. financial instruments – actuaries - valuation)

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