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    Standards of Innovation in Auditing
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting 
    Standards of Innovation in Auditing
    Practical Implications:

    This paper claims that the ultimate challenge for innovation that the auditing profession needs to contemplate is whether it has the confidence and commitment to revise its own business models and to reconfigure its traditional modes of delivery and organization regarding the provision of statutory financial audits. After looking at the experience of BRA, innovation has the highest chance of success if it comes with a willingness both to develop the scope of the audit and to accept variation in aspects of the delivery of the audit. It is important to exercise responsible professionalism and recognize that there is value in audit beyond its codification, standardization, and commodification. 


    Curtis, E., C. Humphrey, and W. S. Turley. 2016. Standards of Innovation in Auditing. Auditing: A Journal of Practice and Theory 35 (3): 75-98.

    audit methodologies, international standard setting and regulation, business risk auditing, audit scope, audit firms, and audit profession
    Purpose of the Study:

    The term “business risk auditing” has been widely used to refer to a broad strand of similarly motivated methodological developments in a number of the major international firms in the mid- to late- 1990s. Despite variations between firms, there was a common emphasis on the need to consider client business risk and the related strategic and other controls as a fundamental part of the audit process, rather than focusing more narrowly on financial statement risk. The developments in the firms were seen by standard setters and regulators as representing a common generic trend of development in methodology, leading to the consideration of revisions in auditing standards, which is how the term BRA is applied.  The premise of BRA was based on the notion that audit failures typically arose from a failure on the part of auditors to identify and address client business risk in the course of their audit rather than from failures in the application of detailed testing procedures. The underlying motivation for this paper was to consider the capacity for innovation in auditing in light of the experiences of attempts to incorporate BRA in ISAs.

    Design/Method/ Approach:

    Analysis spans the period from 1998 to 2004. The authors examined documentation from the JWG, minutes of the IAPC/IAASB and U.S. Auditing Standards Board meetings. They also conducted in-depth interviews with key participants from every stage of the standard-setting process. 

    • The authors’ analysis has shown that the primary innovative features of BRA had been diluted over a year before the Enron case broken and well before the passing of the Sarbanes-Oxley Act in 2002.
    • The authors’ empirical analysis has shown that BRA was an innovation that the profession established but also significantly helped to limit.
    • The authors find that the inspection-based review and control procedures instigated by professional audit firms themselves can outweigh the number related to independent public inspections.
    • The authors find that the rise of integrated reporting and the resulting focus on the longer-term sustainability of the business is likely to stimulate such a renewed demand for a form of auditing that makes analysis of business risk central to the assurance process.
    • The authors find that BRA was made vulnerable because of a lack of sufficient numbers of suitably skilled staff, caused in turn by the way in which auditing firms are organized, and a business model in which a high proportion of the work is undertaken by relatively junior staff. 
    Standard Setting