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    The Effect of Benchmarked Performance Measures and Strategic...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 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 
    The Effect of Benchmarked Performance Measures and Strategic Analysis on Auditors’ Risk Assessments and Mental Models
    Practical Implications:

    From a conceptual perspective, this study provides preliminary insight into how an auditor maps performance to risk.  The mapping is not simple, rather the complexities of audit standards, performance measure benchmarked type and auditor professional skepticism comingle to create a complex mapping of information contained in performance measures to an auditor’s risk assessments. In particular, our results indicate the increasing popular use by auditors of external benchmarks to provide independent evidence of the risks associated with client business units can lead to systematic differences in auditor risk assessments where no such differences in risk are warranted.  However, we find that auditors provided with in-depth strategic analysis were more likely to reach the normatively appropriate conclusion about risk regardless of the presence or absence of benchmarks for subsets of performance measures.  The finding that in-depth strategic analysis facilitates more accurate judgments about risk provides support for professional standards on risk assessment (ISA 315, PCAOB AS No. 8) and may indicate a need for more extensive guidance aimed at assisting auditors in developing an in-depth understanding of the strategic risks of clients. 

    For more information on this study, please contact Robert Knechel or Steve Salterio.


    Knechel, W. R., S. E. Salterio, and N. Kochetova-Kozloski. 2010. The effect of benchmarked performance measures and strategic analysis on auditors’ risk assessments and mental models. Accounting, Organizations and Society 35 (3):316-333.,

    Audit Judgment, Benchmark, Strategic Analysis, Risk of Material Misstatement, Business Risk, Performance Measurement Systems.
    Purpose of the Study:

    The purpose of this paper is to examine the effect of two complex audit technologies commonly used by auditors, benchmarking of performance measures and strategic analysis, on the risk judgments of auditors carrying out the initial planning of an audit. The analysis of a client’s strategy and related business risks is an integral part of the auditor’s process for evaluating the risk of material misstatements in a client’s financial report.  In general, strategic analysis used in an audit includes assessing the competitive position adopted by the firm, identifying its critical success factors, and evaluating obstacles that might cause a chosen strategy to be less successful than desired.  While the strategic management literature employs such analysis to identify investment or operating opportunities, auditors view threats to client business success as a source of audit risk.  Strategic analysis may be conducted at the corporate level and supplemented with an analysis of individual strategic business units.  Consequently, an auditor will often assess the relative business risks associated with a strategic business unit (SBU) as a precursor to assessing audit risk and allocating audit effort. Management uses strategic based performance measures to control their organizations. Since auditors are required to use analytical procedures to assess the risk of material misstatement (SAS 107; ISA 315), strategic performance measures can also be used by an auditor to highlight situations where problems may exist in management’s strategy that can be a source of audit risk. Furthermore, the existence of independent third party benchmarks of these performance measures may provide further insight into the riskiness of the client’s strategy and the consequent potential for audit risk.

    Design/Method/ Approach:

    We conduct an experiment involving 87 audit seniors from a Big 4 audit firm in Canada in the early 2000’s that utilizes a Balanced Scorecard for organizing and evaluating analytical evidence about the performance of business units within a large client. During the experiment, participants were asked to rate the performance and risk level of two business units in the same organization.  We manipulated (1) the presence or absence of benchmarks for different types of performance measures (unit-specific or common across units) and (2) the extent of strategic analysis available to the auditor (in-depth vs. superficial).  

    • Our first finding is that external benchmarking can cause an auditor to focus on performance measures that are unique to a business unit and disregard performance measures that are common to multiple business units but not benchmarked. 
    • Our second finding is that an in-depth strategic analysis completed prior to assessing a client’s business risk or risk of material misstatement allows an auditor to incorporate more information from performance measures in risk assessments regardless of whether the performance measures are benchmarked.  Strategic analysis facilitates a more balanced and accurate assessment of the risks across the business units being evaluated.
    • Our third finding is that the latter result occurs because in-depth strategic analysis allows auditors to develop a more complete mental model of a client, a result that has been posited by academics and practitioners but not previously demonstrated.
    Client Acceptance and Continuance, Risk & Risk Management - Including Fraud Risk
    Assessing Risk of Material Misstatement, Business Risk Assessment (e.g. industry - IPO - complexity)