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    The Impact of Management Integrity on Audit Planning and...
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.04 Management Integrity, 14.01 Earnings Management 
    The Impact of Management Integrity on Audit Planning and Evidence
    Practical Implications:

    The results of this study are important because, while severe cases of low integrity may be weeded out during client acceptance, auditor firms tend to retain clients with a wide spectrum of integrity levels that must be managed throughout the audit process. Thus evidence regarding how the integrity of management influences auditors (1) assessment of risk, (2) planning of audit procedures, and (3) identification of misstatements may be useful for developing training materials or best practices for approaching audits on the lower end of the integrity spectrum.


    Kizirian, T.G., B.W. Mayhew, and L.D. Sneathen, Jr. 2005. The impact of management integrity on audit planning and evidence. Auditing: A Journal of Practice & Theory 24 (2): 49-67.

    Audit risk model, management integrity, evidence
    Purpose of the Study:

    Management integrity (i.e., “tone at the top”) is a key determinant of the client’s risk structure and provides the foundation of internal control. As a result, it is important that auditors incorporate this risk component into their audit judgments. Furthermore, auditors rely on management to provide a great deal of audit evidence. Thus, auditors must carefully evaluate management integrity to assess the credibility of management-supplied evidence. To determine the extent to which auditor judgments are influenced by perceptions of management’s integrity, this study examines the effect of auditor-assessed management integrity on three aspects of the audit: (1) auditors’ assessments of risk of material misstatement (RMM), (2) audit planning, and (3) audit outcomes (i.e., identification of misstatements).

    Design/Method/ Approach:

     The authors collected their data from working papers of 60 clients of a U.S. Big 4 auditing firm. The working papers used were from engagements performed between 1996 and 1999. In all of the selected engagements, the auditors had documented an explicit assessment of management integrity as either “strong,” “moderate,” or “weak.”

    • Auditor-assessed management integrity is negatively related to the auditor’s assessment of RMM (i.e., high integrity is related to low risk assessments). However, the primary driver of auditors’ risk assessments appears to be whether or not the auditors identified a misstatement during the prior year audit (i.e., identification of a prior year error leads to higher assessments of RMM). In the case of a prior year misstatement, management integrity has no additional impact on assessments of RMM.
    • The auditor responds to low management integrity by requiring more persuasive evidence to support audit assertions. Additionally, management integrity was not related to the timing or extent of audit procedures. This suggests that when management integrity is low, the auditor goes outside the client for independent data verification rather than simply increasing the analysis of the client’s information.
    • When the auditor assesses that management is of low integrity, they are more likely to discover misstatements. Furthermore, the authors find that this is not just because the auditor tends to be more diligent in their testing when management is of low integrity. This suggests that management integrity is a good indicator of the likelihood that the financials are misstated.  
    Risk & Risk Management - Including Fraud Risk
    Client Risk Assessment, Management Integrity, Assessing Risk of Material Misstatement, Earnings Management, Earnings Management
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