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    Integrating business risk into auditor judgment about the...
    research summary posted May 4, 2012 by The Auditing Section, last edited May 25, 2012, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement 
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    Title:
    Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach
    Practical Implications:

    The authors’ results indicate that audit methods like SSA help auditors see the connection between business risks and the risk of material misstatement and consider business risk in their assessments about the risks of material misstatement better.  The authors also indicate their results generally support the idea that when a mismatch arises between audit training and audit task structures, processing limitations are likely to occur (i.e. auditors will be less likely to effectively integrate business risk assessments with their assessment of RMM if they are trained in SSA but are not provided information in SSA format).

    Citation:

    Schultz Jr., J. J., J. L. Bierstaker, and E. O’Donnell. 2010.  Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach.  Accounting, Organizations, and Society 35 (2):  238-251. 

    Keywords:
    Risk and Risk Management, including fraud risk; business risk
    Purpose of the Study:

    The purpose of this study is to test whether the firms’ use of a strategic-systems approach (SSA) or a transaction-focused approach (TFA) influences the likelihood that auditors will integrate business risk judgments into their judgments about the risk of material misstatement (RMM) as required during the planning phase of the audit.  SSA focuses on business processes and evaluating key performance indicator benchmarks before analyzing accounting metrics to find conditions that increase the likelihood of misstatement, whereas TFA focuses on transaction cycle relationships. The argument is that SSA may improve audit effectiveness over use of TFA by considering business processes that drive financial performance and integrating nonfinancial benchmarks.

    Design/Method/ Approach:

    The authors used a laboratory experiment on experienced, staff-level auditors from different firms who had been trained in and used either SSA or TFA.  SSA auditors were from one US firm that used SSA and the TFA group was from Canadian graduate accounting students who had auditing experience through co-operative working arrangements completed during their junior and senior years from international firms using TFA.  Participants were asked to review background information and provide initial RMM at the overall level as well as for four individual accounts. Then participants were asked to learn about a client’s business processes, evaluate key performance indicators, and document the level of business risk. Finally, they were asked to evaluate RMM for the same four accounts and overall and to document the reasons for their decisions.

    Findings:
    • Auditors who were trained in SSA and were provided information in the SSA format integrated business risk into their judgments about RMM.
    • Auditors who were not trained in SSA or did not use the SSA format did not integrate business risk into their judgment about RMM as effectively.
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement
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