Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    Financial Statement Disaggregation Decisions and Auditors’ T...
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Title:
    Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement
    Practical Implications:

    The findings of this study are relevant to financial reporting standard-setters and regulators interested in the effects of financial statement presentation standards on the reliability of the information presented, to auditing standard-setters and regulators who have a responsibility to clarify auditors’ responsibility for misstatement in disaggregated numbers, and to audit firms that must provide guidance to ensure consensus in their auditors’ judgments. Standard-setters should also consider the fact that FASB has also been considering issues related to balance sheet aggregation or netting of balances. As a consequence, the importance of the effects of aggregation on auditors’ materiality judgments may be broader than the focus of the current study.

    For more information on this study, please contact Robert Libby.
     

    Citation:

    Libby, R., and T. Brown. 2013. Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement. The Accounting Review 88 (2).

  • Jennifer M Mueller-Phillips
    The Effect of Past Client Relationship and Strength of the...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations
    Practical Implications:

    The authors note a number of implications for practitioners resulting from this study.  First, auditors need to be aware of the strength of the audit committee and the prior relationship with the client to determine potential dysfunctional results, particularly if dealing with a compromising client.  This could lead to making too large of a concession.  This study also shows the importance of having a strong audit committee and how that strength leads to having an auditor that is in a stronger position to negotiate.  However, it also shows the difficulty that can occur as a result of working on a client with a weaker audit committee.  Further, this study underscores the need to continue searching for other factors that may increase negotiation position in the event of a weak audit committee environment. 
     
    For more information on this study, please contact Helen L. Brown-Liburd.
     

    Citation:

    Brown-Liburd, H. L., and A. M. Wright. 2011. The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations. Auditing: A Journal of Practice & Theory 30 (4):51-69.

  • Jennifer M Mueller-Phillips
    The Effects of Prior Auditor Involvement and Client Pressure...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments
    Practical Implications:

    Regulators and investors are concerned that conflicts of interest between auditor and client may result in material adjustments that are waived when they should be proposed.  As a result, certain regulations have been implemented to prevent that conflict (i.e., SOX).  This research indicates that auditors may still favor client preferences when possible. Therefore, the reforms of SOX may not have been sufficient.
    The authors also note that this study mirrors what might result in an audit partner or audit firm rotation in that proposed adjustments are higher when the auditor had no involvement in waiving the prior period adjustments.  The authors state that audit firm rotation is expected to be costly and have a number of other negative consequences.  However, they also note their results show benefits to not having that prior involvement and thus some of the benefits of audit firm rotation (e.g., less conflict of interest/client pressure) could be attained by audit partner rotation. 
     
    For more information on this study, please contact Richard C. Hatfield.
     

    Citation:

    Hatfield, R. C., S. B. Jackson, and S. D. Vandervelde. 2011. The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments. Behavioral Research in Accounting 23 (2):117-130

  • Jennifer M Mueller-Phillips
    The Joint Influence of the Extent and Nature of Audit...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    The Joint Influence of the Extent and Nature of Audit Evidence, Materiality Thresholds, and Misstatement Type on Achieved Audit Risk
    Practical Implications:

    This study challenges the audit practice to think about what makes sufficient, relevant, and reliable audit evidence. It provides evidence that decreased audit risk does not always occur when materiality is lowered, an increased quantity of audit evidence is obtained, and traditional audit tests are performed. The nature and persuasiveness of the audit evidence should be evaluated in order to obtain the desired level of audit risk. 


    For more information on this study, please contact David V. Budescu.
     

    Citation:

    Budescu, D.V., Peecher, M.E and I. Solomon. 2012. The Joint Influence of the Extent and Nature of Audit Evidence, Materiality Thresholds, and Misstatement Type on Achieved Audit Risk. Auditing: A Journal of Practice and Theory 31 (2): 19-41.

  • The Auditing Section
    Auditors’ Decisions on Audit Differences that Affect S...
    research summary posted April 16, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.08 Evaluation of Errors – Statistical and Non-statistical, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Title:
    Auditors’ Decisions on Audit Differences that Affect Significant Earnings Thresholds
    Practical Implications:

    The results of this study are important for auditors to consider when making materiality judgments.  The evidence indicates that auditors are more likely to overlook the qualitative importance of adjustments that affect a client’s ability to meet or beat analysts’ forecasts.  Furthermore, findings suggest that auditors are more lenient with subjective audit differences.  The study suggests that providing auditors with guidance on qualitative materiality may improve materiality judgments, but it does not completely alleviate the differences among the earnings benchmarks. 

    Citation:

    Ng, T.B. 2007. Auditors’ Decisions on Audit Differences that Affect Significant Earnings Thresholds. Auditing: A Journal of Practice and Theory 26 (1): 71-89.

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  • The Auditing Section
    Accountability and auditors’ materiality judgments: The e...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions, 10.03 Interaction among Team Members 
    Title:
    Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.
    Practical Implications:

    Firms should consider the levels of accountability pressure and situations where they use them and consider how different levels of pressure may impact performance.  Higher levels of accountability pressure may increase effectiveness and increase the likelihood of finding material misstatements. 

    On the other hand, increased effectiveness and time spent due to higher levels of accountability pressure may cause inefficiencies and result in unnecessary effort.  Firms should evaluate the costs and benefits for their situations. 

    The authors note that this study only looks at the effect of accountability pressure from an unknown partner.  In the real world, auditors have accountability pressures from many levels such as other superiors, clients, regulators, and audit committees. 
    Further, the auditor may have assessed things differently if they knew the partner that was performing their review.

    Citation:

    DeZoort, T., P. Harrison, and M. Taylor. 2006.  Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.  Accounting, Organizations, and Society 31 (4-5):  373-390. 

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  • The Auditing Section
    A Review and Integration of Empirical Research on...
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Title:
    A Review and Integration of Empirical Research on Materiality: Two Decades Later
    Practical Implications:

    The results of the studies documented in this review suggest that there is a great deal of variability in the approaches taken by firms for establishing materiality. Such differences in materiality methods can affect both the effectiveness and efficiency of audits. For example, if firms differ in how they allocate materiality to financial statement accounts, then the scope of the work could differ across audits with similar characteristics. Auditors also appear to differ in terms of the factors they consider for determining the materiality of internal control weaknesses, suggesting that auditors may need more structured criteria to make materiality judgments about internal control weaknesses. Materiality judgments are influenced by authoritative guidance, suggesting that standard setters and audit firms have the ability to influence auditors’ materiality judgments by providing auditors with specific guidance.

    Citation:

    Messier, Jr., W.F., N. Martinov-Bennie, and A. Eilifsen. 2005. A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice and Theory 24 (2): 153-187.

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  • The Auditing Section
    Effects of Qualitative Factor Salience, Expressed Client...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Title:
    Effects of Qualitative Factor Salience, Expressed Client Concern, and Qualitative Materiality Thresholds on Auditors’ Audit Adjustment Decisions
    Practical Implications:

    Individual auditors have wide variations in the materiality thresholds the auditors use to assess qualitative materiality.  Greater clarity in materiality guidance can potentially reduce the variability in auditors’ materiality threshold judgments pertaining to qualitative materiality factors.

    Citation:

    Ng, T. B-P and H. T. Tan. 2007. Effects of qualitative factor salience, expressed client concern, and qualitative materiality thresholds on auditors’ audit adjustment decisions. Contemporary Accounting Research 24 (4): 1171-92.

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