Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    A Risk Model to Opine on Internal Control.
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.02 Fraud Risk Models, 06.05 Assessing Risk of Material Misstatement, 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses 
    Title:
    A Risk Model to Opine on Internal Control.
    Practical Implications:

    The auditor needs a different model for audits of internal control. The auditor needs to apply two different models in an integrated audit, the original model for the opinion on the financial statements and a different model for the opinion on internal controls.

    The author believes standard setters should sponsor research on an appropriate risk model for audits of internal control. Even before the research is completed, the standards could be enhanced in the following ways:
    • indicate that the original audit risk model is intended for use only in financial statement audits, not internal control audits;
    • write standards that consistently use risk terminology and are clear as to which risk they are discussing; and
    • provide guidance on the use of models in integrated audits.

    Citation:

    Akresh, A. D. 2010. A Risk Model to Opine on Internal Control. Accounting Horizons 24 (1): 65-78.

  • Jennifer M Mueller-Phillips
    An Experimental Examination of Factors That Influence...
    research summary posted September 17, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses, 09.0 Auditor Judgment 
    Title:
    An Experimental Examination of Factors That Influence Auditor Assessments of a Deficiency in Internal Control over Financial Reporting.
    Practical Implications:

    The results should be of interest to auditing standard setters who provide guidance on the evaluation of control deficiencies as part of an integrated audit. Further, regulators inspecting public company audits may want to further review settings where control deficiencies were not evaluated as material weaknesses and assess whether the presence/absence of a financial statement misstatement was appropriately considered. The findings provide a more complete understanding of how the factors that auditors encounter during the audit engagement influence their judgment about whether identified deficiencies in ICFR are such that there is a reasonable possibility that a material misstatement of the company’s financial statements will not be prevented or detected on a timely basis (i.e., material weakness).

    Citation:

    Gramling, A. A., E. F. O'Donnell, and S. D. Vandervelde. 2013. An Experimental Examination of Factors That Influence Auditor Assessments of a Deficiency in Internal Control over Financial Reporting. Accounting Horizons 27 (2): 249-269.

  • Jennifer M Mueller-Phillips
    Audit Partner Evaluation of Compensating Controls: A Focus...
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 09.0 Auditor Judgment, 09.02 Documentation Specificity 
    Title:
    Audit Partner Evaluation of Compensating Controls: A Focus on Design Effectiveness and Extent of Auditor Testing
    Practical Implications:

    The results of this study are important for audit firms to consider when audit partners are evaluating the level of precision in a compensating control. The evidence indicates that the partner’s knowledge of the existence of a material weakness unrelated to a compensating control being evaluated results in partners preferring a more precise compensating control and requiring more audit testing. Furthermore, this has implications for the efficiency of the audits as control-related decisions are potentially being influenced by inappropriate factors.

    For more information on this study, please contact Audrey Gramling, Ed O’Donnell, or Scott D. Vandervelde. 

    Citation:

    Gramling, A., E. O’Donnell, and S.D. Vandervelde. 2010. Audit Partner Evaluation of Compensating Controls: A Focus on Design Effectiveness and Extent of Auditor Testing. Auditing: A Journal of Practice & Theory 29 (2): 175-187.

  • 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
    How Do Auditors Address Control Deficiencies that Bias...
    research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.01 Scope of Testing, 07.02 Assessing Material Weaknesses, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness 
    Title:
    How Do Auditors Address Control Deficiencies that Bias Accounting Estimates?
    Practical Implications:

    For practice, the authors provide evidence about the relation between control deficiencies and substantive tests in the integrated audit. A significant minority of senior auditors attempt to identify bias in an accounting estimate with increased sampling from the biased estimation process, though they have been told that the estimation process is biased. The authors provide theory consistent empirical evidence that auditors often reach questionable, optimistic judgments about the capability of audit evidence to address control deficiencies. Auditors will often revert to what they know best, and it is difficult to get people to look beyond the familiar, regardless of experience level.

    Citation:

    Mauldin, E. G., & Wolfe, C. J. 2014. How Do Auditors Address Control Deficiencies that Bias Accounting Estimates? Contemporary Accounting Research 31 (3): 658-680.

  • Jennifer M Mueller-Phillips
    Internal Control Assessment and Interference Effects
    research summary posted February 17, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses 
    Title:
    Internal Control Assessment and Interference Effects
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their audit process.  First, our findings strongly indicate that auditors will be more likely to identify weaknesses in the control system if they first brainstorm about the risks that could occur (e.g. “goods may be shipped but the sale is not recorded”, “accounts receivable may be written off without proper authorization”, or “purchase may be recorded when goods/services were not received”).  Then, the controls in the system should be identified and mapped back against the risks to determine if there are any deficiencies in the system.   Second, our findings also indicate that audit efficiency will be enhanced if another member of the audit team (such as the audit senior or reviewer) identifies controls first, i. e., does not  consider the risks first; as looking at the risks first appears to inhibit identification of controls. 

    For more information on this study, please contact Janet Morrill (Janet.Morrill@umanitoba.ca). 

    Citation:

    Morrill, J., C. Morrill and L. Kopp. 2012. Internal Control Assessment and Interference Effects. Behavioral Research in Accounting 24 (1): 73-90

  • Jennifer M Mueller-Phillips
    Internal control deficiencies in tax reporting: A detailed...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses 
    Title:
    Internal control deficiencies in tax reporting: A detailed view.
    Practical Implications:

    The authors use a unique data set to shed light on characteristics which lead to material weaknesses, specifically in tax-related accounts relative to other accounts. The data (obtained from several international accounting firms) allows the authors to determine which characteristics of tax-related internal control deficiencies are different from other deficiencies, prevent them from being remediated, and cause them to rise to the level of a material weakness. Results suggest that tax deficiencies, relative to other account-specific deficiencies, are less likely to be remediated, more severe, and more likely to cause a financial misstatement. Tax-related deficiencies are less likely to get remediated by year-end if discovered by the auditor, if the control was deficient in design, or if the control pertained to monitoring. This paper underscores the importance of auditor involvement in internal control reporting in taxes.

    Citation:

    Graham, L. and J.C. Bedard. 2015. Internal Control Deficiencies in Tax Reporting: A Detailed View. Accounting Horizons 29 (4): 917-942.

  • Jennifer M Mueller-Phillips
    Management control system design, ownership, and performance...
    research summary posted November 14, 2016 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses 
    Title:
    Management control system design, ownership, and performance in professional service organizations
    Practical Implications:

    This study provides some of the first empirical evidence of the characteristics of efficient MCS design for PHOs. This evidence has the potential to assist primary healthcare owners, managers and their advisors to better understand the relationship between ownership and MCS design and thereby improve the effectiveness and efficiency of delivery of primary care. 

    Citation:

    King, R. and P. Clarkson. 2015. Management control system design, ownership, and performance in professional service organizations. Accounting, Organizations and Society 45: 24-39. 

  • Jennifer M Mueller-Phillips
    Material Weakness Remediation and Earnings Quality: A...
    research summary posted October 16, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    Title:
    Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency.
    Practical Implications:

    Combining the remediation and earnings quality analyses, the results imply that investors should be most concerned about MWs in information technology, segregation of duties, account reconciliations, taxation, revenues, and inventory. These types occur frequently and are slow to remediate; thus, their effects on financial reporting linger longer than others. Their link to near-term earnings quality is evident, as their remediation reduces abnormal accruals, and/or their lack of remediation in the following year further increases accruals. In general, these results suggest that financial statement users should adopt a more granular view of remediation, as successful remediation of some specific MWs can signal improvement in the quality of disclosed financial information even if other MWs remain unremediated.

    Citation:

    Bedard, J. C., R. Hoitash, U. Hoitash, and K. Westermann. 2012. Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency. Auditing: A Journal of Practice & Theory 31 (1): 57-78.

  • The Auditing Section
    Reducing Management’s Influence on Auditors’ Judgments: An...
    research summary posted May 7, 2012 by The Auditing Section, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Reducing Management’s Influence on Auditors’ Judgments: An Experimental Investigation of SOX 404 Assessments
    Practical Implications:

    The results of this study are important for audit firms to consider in planning, implementing, and documenting their assessment of internal controls.  Findings suggest that auditors are influenced by knowing management’s classification of the ICFR issue before making their assessment. The authors suggest this “knowledge bias” impairs independence and could also reduce audit effectiveness, impact tests of controls, and the reliance of others’ work (i.e., internal auditors).  There are additional implications for other parts of the audit (e.g., auditing estimates) where the audit client presents information that may bias an “independent assessment” of the account(s) being audited. However, as findings in this study suggest, requiring auditors to consider and explicitly document the potential impact the deficiency may have on the financial statements may reduce the impact of such knowledge biases.

    Citation:

    Earley, C. E., Hoffman, V.B., and J. R. Joe. 2008. Reducing Management’s Influence on Auditors’ Judgments: An Experimental Investigation of SOX 404 Assessments. The Accounting Review 83 (6) 1461-1485

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