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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
    Two Decades of Behavioral Research on Analytical Procedures:...
    research summary posted May 28, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.07 Interim Testing Procedures – Nature, Timing and Extent 
    Title:
    Two Decades of Behavioral Research on Analytical Procedures: What Have We Learned?
    Practical Implications:

    The previous two decades of APs research have provided a number of important findings regarding the generation and evaluation of hypotheses for significant differences between the auditor’s expectations and the client’s reported results. The authors note that a vast majority of the research focused on performing preliminary and substantive APs. Therefore, this review emphasizes the need for more research on the use of APs during the final stages of the audit. The authors intend for this paper to lead to an increased recognition of the important of performing research on APs with the intent of improving audit practice. 

    Citation:

    Messier, W. F., C. A. Simon, and J. L. Smith. 2013. Two Decades of Behavioral Research on Analytical Procedures: What Have We Learned? Auditing 32 (1).

    Keywords:
    analytical procedures; auditing standards; risk assessment procedures
    Purpose of the Study:

    Audit researchers have conducted a substantial amount of behavioral research examining various aspects of the analytical procedures process. A comprehensive review of behavioral research on external auditors’ use of analytical procedures (APs) published over the last two decades is presented in this paper. With audit regulators recently revising AP standards and PCAOB inspections identifying more deficiencies related to firms’ performance of APs, this review comes at an important time. A review of this research will help identify areas where research has cited deficiencies and suggest ways to overcome those problems. 

    Design/Method/ Approach:

    This review was framed around four phases of the analytical procedures process: develop an expectation, establish a tolerable difference, compare the expectation to the recorded amount and investigate significant differences, and evaluate explanations and corroborative evidence. This approach allows the authors to discuss the phases of the analytical procedure process as outlined in practice. It also allows them to highlight what prior research has found and where future research is needed to improve the understanding and performance of APs. 

    Findings:
    • While the PCAOB’s inspections have repeatedly raised concerns with auditors forming insufficiently precise expectations and setting an appropriate tolerable difference, relatively little research has been conducted in these phases of the framework. 
    • The PCAOB has asserted that audit teams do not always investigate significant differences, a considerable amount of research has examined this phase, mainly testing issues related to the generation of hypotheses.
    • Auditors’ ability to generate hypotheses can be affected by numerous source factors, contextual factors, and auditor characteristics. 
    • The PCAOB has expressed concerns regarding auditors’ lack of obtaining corroborative evidence for client expectations during the fourth phase. 
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Interim Testing Procedures – Nature - Timing & Extent
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