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    Strategic analysis and auditor risk judgments
    research summary posted March 11, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.02 Client Risk Assessment, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement 
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    Title:
    Strategic analysis and auditor risk judgments
    Practical Implications:

    The results of this study have important implications:

    • First, the results demonstrate that auditor judgments of the risk of material misstatement at the entity (financial statement) level are linked to the performance and documentation of strategic analysis of strategy positioning and the strategy implementation process
    • Second, this study provides preliminary evidence on the association between performing an analysis of the entity’s strategy implementation process and auditors’ judgments of the strength of the control environment
    • Third, the fact that auditors who performed strategic analysis did not identify a greater number of significant business and financial statement risks than auditors who did not perform strategic analysis warrants further research

    For more information on this study, please contact Natalia Kochetova-Kozloski.

    Citation:

    Kochetova-Kozloski, N., and W. F. Messier Jr. 2011. Strategic analysis and auditor risk judgments. Auditing: A Journal of Practice & Theory 30(4): 149-171.

    Keywords:
    risk assessment; strategic analysis; strategic positioning; strategy implementation.
    Purpose of the Study:

    Conducting a business risk-based audit requires the auditor to develop an understanding of the client and its environment, make risk assessments based on that knowledge, and design appropriate audit procedures to respond to those risks. A significant component of understanding the client and its environment involves conducting a strategic analysis of the client.

    The study investigates whether and how senior auditors’ strategic analysis of a client affects their identification of significant business and financial statement risks, and their risk assessments by addressing these two issues:

    • Whether strategic analysis undertaken by auditors to develop an understanding of the client’s business affects their risk identification
    • How two aspects of strategic analysis (analysis of strategic positioning and the strategy implementation process) influence auditors’ risk assessments
    Design/Method/ Approach:

    The study employed a 3 x 1 between-subjects factorial design with no strategic analysis (‘‘No SA’’) as a control condition, and analysis of strategic positioning (‘‘SA: strategic positioning’’) and analysis of strategy implementation process (‘‘SA: strategic process’’) as treatment conditions.  Experimental materials were delivered to the participants by e-mail or at a national training session. Sixty-seven (67) audit seniors from three Big 4 firms completed the experiment. The experimental materials included a cover letter, Additional Task Instructions, Risk Assessment and Audit Planning and Debriefing Questionnaire.

    Findings:

    The authors find:

    • Auditors who performed guided strategic analysis did not identify more significant business and financial statement risks than auditors who did not perform strategic analysis,
    • Senior auditors who performed strategic analysis of strategic positioning or the strategy implementation process assessed risk of material misstatement at the entity level more consistently with an expert panel than auditors who did not perform such an analysis,
    • Senior auditors’ analysis of the client’s strategy implementation process was associated with assessments of the strength of the control environment that were more consistent with the expert panel than assessments done by auditors who did not perform any strategic analysis or who performed only an analysis of strategic positioning.
    Category:
    Client Acceptance and Continuance, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Business Risk Assessment (e.g. industry - IPO - complexity), Client Risk Assessment