Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The Effect of Documentation Structure and Task-Specific...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 09.0 Auditor Judgment, 09.02 Documentation Specificity 
    607 Views
    Title:
    The Effect of Documentation Structure and Task-Specific Experience on Auditors’ Ability to Identify Control Weaknesses
    Practical Implications:

    The authors find that experienced component reviewers react differently to their preparers’ assessments/documentation than their counterparts in the supporting or balanced documentation conditions. Implicit results of the study also indicate that audit firms should consider how workpaper documentation is structured when assessing control weaknesses.

    Citation:

    Agoglia, C. P., Beaudoin, C., and Tsakumis, G. T. 2009. The Effect of Documentation Structure and Task-Specific Experience on Auditors’ Ability to Identify Control Weaknesses. Behavioral Research in Accounting 21(1): 1-17.

    Keywords:
    Review process; control environment; fraud assessment; control weakness;
    Purpose of the Study:

    Recent high-profile audit failures prompted Congress and standard-setting bodies to pass regulations emphasizing and expanding the auditor’s role in fraud detection (e.g., the Sarbanes-Oxley Act of 2002 and Statement on Auditing Standards No. 99). These new regulations require auditors to assess and issue an opinion on the effectiveness of clients’ internal controls. The intended purpose of these regulations is to help ensure adequate controls are in place to deter fraud from occurring or to detect any fraud that occurs. This paper examines how auditors assess fraud and the impact that experience assessing fraud has on members of a firm’s review team. In particular, the authors focus on the effect of workpaper documentation structure on the audit review team’s ability to identify significant control weaknesses. Below are two objectives that the authors address in their study: 

    • Workpaper documentation. Auditors typically document their assessments in audit working papers. Accuracy and completeness of documentation, which may come in varying forms, is important as the working papers could be used in the event of litigation (e.g. with the Enron scandal, a lack of proper audit documentation was key in making convictions). 
      Insufficient documentation by auditors can flow through the review process and negatively impact review team judgments. Consequently, it is important to consider factors that may improve review team performance in such settings.
    • Auditor experience. Academic research and practical anecdotal evidence indicate task-specific experience (e.g. performing audits) often improves auditors’ judgments. Task-specific experience provides the opportunity for the development of enhanced knowledge structures, which can improve auditors’ decision-making effectiveness. As such, auditors’ (reviewers’) experience performing (reviewing) internal control assessments (what the authors refer to as task-specific experience) could influence his/her effectiveness in identifying control weaknesses that present opportunities for fraud.
    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires presented to practicing auditors from large international accounting firms in the early 2000s time period. One-half the participants were randomly assigned as workpaper preparers and the other half workpaper reviewers. Participants were provided a case containing control environment evidence for a hypothetical client, which was based on an actual firm that had experienced fraud. Preparers were asked to compile documentation regarding the client’s control environment and to identify control environment weaknesses. They were asked to structure their workpaper documentation using one of three assigned documentation structures:

    • “Supporting Documentation” – preparers provide evidence supporting their conclusions;
    • “Balanced Documentation” – preparers document important positive and negative evidence of the control environment;
      and
    • “Component Documentation” – preparers document important positive and negative information for components of the control environment.  

    Preparers were then asked questions regarding their assessment (likelihood) of specific fraud risk factors being present in the audit client’s control environment. 

    A reviewer was paired with each preparer and provided the same client background as preparers.  They reviewed the preparer’s fraud assessment workpaper documentation (documented in one of the three ways, noted above) and then were asked to assess the likelihood of specific fraud risk factors present in the audit client’s control environment.

    Findings:
    • The authors finds that preparers using the component documentation structure are less effective at identifying control weaknesses (i.e., inappropriately assessed control weaknesses more favorably) than those using either the supporting or balanced documentation structures.
    • Preparers using component method of documentation also had lower quality of workpaper documentation.
    • The authors find that task-specific experience mitigates the effect of documentation structure on auditor fraud risk judgments.
    • The authors find that experienced preparers are less influenced by component documentation structure than their less experienced counterparts.
    • The authors find that reviewers with greater experience appear to be better able to overcome judgment difficulties encountered by their preparers.
    Category:
    Internal Control, Auditor Judgment
    Sub-category:
    Assessing Material Weaknesses, Documentation Specificity
    Home:
    home button