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    The Effects of Client and Preparer Risk Factors on Workpaper...
    research summary posted May 9, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
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    Title:
    The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness
    Practical Implications:

    The results suggest that although preparer risk is not a driver of review effort, it nevertheless can affect accuracy when client risk is high. The results of this study are useful for understanding how client risk and preparer risk interact to influence workpaper review effort and accuracy. Overall, it appears that reviewers expect highly competent preparers to identify and correct errors. Accordingly, reviewers tend to rely on the work of a competent preparer and allow low preparer risk to compensate for high client risk. The authors note that although this is an efficient strategy, it can adversely affect the reviewer’s effectiveness by reducing the accuracy with which they identify errors.

    Citation:

    Asare, S. K., C. M. Haynes and J. G. Jenkins. 2007. The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness. Behavioral Research in Accounting 19 (1): 1-17.

    Keywords:
    workpaper review, client engagement risk, workpaper preparer risk, review effort, review accuracy
    Purpose of the Study:

    When reviewing workpapers, auditors must accept some degree of risk. This risk is composed of (1) client risk and (2) preparer risk. Client risk refers to the risk that the information provided by the client is materially misstated and preparer risk refers to the risk that the workpaper preparer failed to identify, investigate and/or resolve existing material misstatements. The purpose of this study is to examine how combined client risk and preparer risk affect the effort and accuracy of the workpaper reviewer.

    Design/Method/ Approach:

    Fifty-three experienced auditors reviewed an actual set of audit workpapers which were originally prepared and reviewed by a Big 4 accounting firm. The workpapers related to the sales and collection cycle and contained one uncorrected revenue recognition error and ten seeded mechanical errors.

    Participants were asked to assume the role of in-charge auditor and instructed to review the workpapers. They were also provided with information about whether client risk was high (e.g., “Management’s accounting policies and estimates are aggressive”) or low (e.g., “Management’s accounting policies and estimates are conservative”) and information about whether preparer risk was high (e.g., “Jane’s ranking among staff accountants in your office is in the 50th percentile”) or low (e.g., Jane’s ranking among staff accountants in your office is in the top 5 percent”).

    After reviewing the workpapers, participants were asked whether they agreed or disagreed with the preparer’s conclusions. Their effort was measured by the amount of time they spent reviewing the workpapers and their accuracy was measured by the number of errors that they correctly identified.

    Findings:
    • The authors find that reviewers expended more effort during their review when reviewing workpapers of a high-risk client, relative to a low risk client. However, the preparer risk did not make a difference in the amount of effort exerted.
    • The authors also find that reviewers were more accurate in their review (i.e. correctly identified more errors) when both client risk and preparer risk were high. However, the preparer risk did not make a difference in accuracy when the client risk was low.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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