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  • Jennifer M Mueller-Phillips
    A Summary of Research and Enforcement Release Evidence on...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.10 Confirmation – Process and Evaluation of Responses in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness.
    Practical Implications:

    The review of AAERs identified failure to authenticate responses, collusion between auditee management and customers, and concealed side agreements and special terms as specific problem areas. These findings have several implications for standard setters, practitioners, and academic researchers. First is a need to improve response rates, as well as authenticate responses. Technology, perhaps involving third-party intermediaries, can help address these issues. Second, depending on the circumstances and identified risks, auditors may need to confirm the existence of side agreements and special terms. Auditors may also need to consider the possibility of collusion in their testing strategies. In addition, confirmation requirements may need to be extended to other accounts, at least in some circumstances.

    Citation:

    Caster, P., R. J. Elder, and D. J. Janvrin. 2008. A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness. Auditing: A Journal of Practice & Theory 27 (2): 253-279.

    Keywords:
    AAER evidence, audit confirmations, audit evidence, confirmation reliability
    Purpose of the Study:

    Confirmations are extensively used and are often perceived by practitioners to be one of the most persuasive forms of audit evidence. Yet academic research has found limitations that restrict confirmation effectiveness for many management assertions. In addition, a number of problems with false and forged confirmations are identified in Accounting and Auditing Enforcement Releases (AAERs). The Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have put confirmation evidence on their respective agendas. Academic research indicates that receivable confirmations can be effective evidence for the existence assertion. Low response rates, as well as respondent errors and directional bias in detecting errors, are key barriers to confirmation effectiveness. This study provides a synthesis of academic and practitioner research on confirmation use and effectiveness.

    Design/Method/ Approach:

    The authors conducted a review of the academic literature on confirmations. They found few current papers examining confirmations. Most prior research addressed the effectiveness of confirmation of accounts receivable. To provide additional evidence relevant to questions in the SAG briefing paper involving confirmation of other accounts, they reviewed AAERs and practitioner literature. They identified 113 confirmation-related AAERs involving 51 auditees.

    Findings:

    The authors’ primary findings are:

    • Currently, some auditors choose not to confirm accounts receivable without justifying how they met one or more of the criteria in Statement on Auditing Standards (SAS) No. 67 for not confirming the accounts.
    • Generally, confirmations are relatively effective in testing the existence assertion for accounts receivable. However, low response rates have a negative impact on confirmation effectiveness.
    • Anecdotal evidence and some research suggest confirmation response rates are declining. Research has identified several methods to improve response rates.
    • Confirmations are also somewhat effective in examining the valuation assertion for accounts receivable. However, confirmees fail to detect many seeded errors in controlled experiments and are more likely to detect and report errors that are unfavorable to the confirmee rather than favorable errors.
    • Collusion between auditee management and the confirmee was a problem area in receivables confirmations identified from AAERs. The relationship between management and the confirmee calls into question the perception by auditors of confirmees as “independent” third parties.
    • Fictitious responses provided by auditee management were a problem area identified from a review of AAERs for accounts receivable and cash balance confirmations. Current auditing standards do not require auditors to authenticate responses.
    • Enforcement actions described in the AAERs indicated problems with bank confirmations. With the exception of accounts receivable, U.S. auditing standards related to confirmations do not provide explicit guidance for specific accounts, such as cash, marketable securities or other account balances, as well as confirmation of special terms or side agreements.
    • Considerable evidence exists that electronic confirmations and other forms of electronic database queries (i.e., defined views of supplier and/or customer databases) are becoming more prevalent. Technology offers alternatives to standard paper confirmations that may provide for authentication and improve confirmation effectiveness.
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    The effect of an Audit Judgment Rule on audit committee...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 13.0 Governance, 13.05 Board/Audit Committee Oversight in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Although prior research has suggested that an audit judgment rule may improve audit quality, findings from this research suggest that audit quality may decrease. This is seen indirectly by the audit committee members’ belief that accounting estimates become less conservative and due diligence decreases when there is an audit judgment rule. However, this was not directly tested, and future research is needed to determine whether audit judgment rules are beneficial or not.

    Citation:

    Kang, Y.J., A.J. Trotman, and K.T. Trotman. 2015. The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society 46: 59-76.

    Keywords:
    audit judgment rule, professional skepticism
    Purpose of the Study:

    The purpose of this study is to examine how a proposed audit judgment rule impacts the professional skepticism of the members of an audit committee. Prior research has suggested that an audit judgment rule be implemented that requires courts and inspectors to not second-guess auditors’ reasoned judgments when they are made in good faith and in a rigorous manner. Currently, the concern is that auditors are engaging in defensive auditing and fearful of using innovative approaches to auditing accounting estimates. By examining the audit committees reaction to the proposed rule, the researchers are able to examine how audit committees believe this change impacts audit quality and how it impacts the behavior of the audit committee.

    Design/Method/ Approach:

    Data for this paper was collected prior to March 2015 by using an experiment with audit committee members from Australia. All participants had been on an audit committee in the past, and on average they had been on audit committees for 10.33 years.

    Findings:

    With the introduction of the audit judgment rule, there was an increase in perceived accountability in ensuring the reasonableness of the financial statements from the audit committee members. This was due to a belief that accounting estimates become less conservative and due diligence decreases. This increase in perceived accountability did not necessarily lead the audit committee members to act more professionally skeptical by asking more probing questions. However, the audit committee was more comfortable when they used innovative techniques in developing their accounting estimates. This was due to a belief that innovation leads to improved audit quality. Additional analysis demonstrates that former audit partners showed greater skepticism (by asking more probing questions) than other audit committee members.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Board/Audit Committee Oversight, Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    Construal instructions and professional skepticism in...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Construal instructions and professional skepticism in evaluating complex estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Given the concern from the PCAOB regarding auditors’ lack of professional skepticism, this paper finds a mechanism to increase and improve the level of professional skepticism. In addition, the technique the author finds (providing high-level construal instructions) to auditors is “simple to use, inexpensive, and can easily be tailored for a firm’s specific needs or language

    Citation:

    Rasso, J.T. 2015. Construal instructions and professional skepticism in evaluating complex estimates. Accounting, Organizations and Society 46: 44-55.

    Keywords:
    professional skepticism, material misstatement, auditor judgment
    Purpose of the Study:

    The purpose of this study is to examine whether instructing auditors to create summaries of their audit findings during evidence evaluation in a broad/abstract manner (creating high-level construals) increases professional skepticism. Theoretical research suggests that using these high-level construals (or interpretations) helps individuals to process and understand numerous pieces information. The author suggests that this method could help auditors to ‘see the big picture’, which could help identify patterns in the evidence or possible material misstatements. Then, auditors may be more willing to gather and evaluate additional evidence to test for these potential problems.

    Design/Method/ Approach:

    Data for this paper was collected prior to April 2015 by using a computerized experiment. Auditors were used as participants in the study, and they averaged 5.4 years of audit experience (ranging from staff auditor to partner). In addition, ninety percent of the auditors had audited fair value estimates in the past.

    Findings:

    Auditors that were given documentation instructions to create high-level construals were more likely to exert professional skepticism compared to auditors given low-level construals (identifying specifically how an estimate could be fairly stated or misstated) or auditors given no instructions. Specifically, they spent more time collecting and evaluating audit evidence, collected more evidence, and rated the risk of the fair value estimate higher. These findings suggest that auditors using the high-level construal instructions process the information from their findings better and recognize a need to gather more evidence when given an incomplete amount of evidence. In addition, when evidence suggests that the fair value is overstated, auditors given the high-level construal instructions are more likely to realize the high risk.

    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Auditors’ Professional Skepticism, Documentation Specificity, Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    Client Identification and Client Commitment in a Privately...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.
    Practical Implications:

    The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.

    Citation:

    Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.

    Keywords:
    organizational identification, organizational commitment, social identity theory, social exchange theory, auditor objectivity
    Purpose of the Study:

    Prior accounting scandals raised concerns that auditors’ relationships with their clients lower auditor independence, which in turn lowers professional skepticism, and ultimately decreases audit quality. Accounting research attempting to shed light on the social processes related to such concerns suggest that client identification can decrease auditor. However, the authors argue that client identification (i.e., “the extent to which an auditor’s self-concept and self-definition are derived from perceived oneness with the client”) differs from client commitment (i.e., “a responsibility for and a dedication to the client, but the auditor and client remain separate psychological entities”). The purpose of this study is to discover if (1) client identification and client commitment are two different ideas, (2) client identification detracts from auditor objectivity, and (3) client commitment enhances auditor objectivity.

    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires emailed to auditors, ranging from staff auditors to partners, at a large regional public accounting firm during the summer of 2013. Survey participants were asked questions about client identification and client commitment, and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation.

    Findings:
    • The authors find that client identification and client commitment really are two different ideas.
    • The authors find that client identification is associated with lower auditor objectivity.
    • The authors find that client commitment is associated with higher auditor objectivity.
    • The authors find that number of years of audit experience impacts auditor objectivity for auditors at lower levels in the audit firm’s hierarchy (i.e., staff auditors and seniors), but not those at higher levels in the hierarchy (i.e., manager and above). In other words, more junior staff exhibit greater audit objectivity if they have more years of audit experience.

    These results suggest that audit firms specializing in privately held clients may enhance audit quality by decreasing auditors’ client identification and increasing auditors’ client commitment.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Independence & Ethics
    Sub-category:
    Adequacy of Disclosure, Auditors’ Professional Skepticism, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    The Effects of Internal Audit Report Type and Reporting...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors' Risk Judgments.
    Practical Implications:

    This study’s results are important to regulators thinking about requiring issuance of an internal audit report and practitioners planning how to respond to such proposals. The authors suggest that the assurance internal audit report, which leads to more conservative risk assessment when internal auditors mainly report to the audit committee, may prove rather costly and unpopular among internal auditors. Meanwhile, the descriptive internal audit report, which prior research found to be useful to investors, does not make internal auditors more conservative, but it may prove less costly and more popular among internal auditors. Ultimately, these findings suggest that regulators need to discuss any internal audit report proposals with key stakeholders, including internal auditors, before getting too far into the rule making process. 

    Citation:

    Boyle, D. M., F. T. DeZoort, and D. R. Hermanson. 2015. The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors' Risk Judgments. Accounting Horizons 29 (3): 695-718.

    Keywords:
    internal audit, descriptive report, assurance report, reporting relationship, accountability
    Purpose of the Study:

    External stakeholders want information to help them better understand corporate governance at the companies they follow. Although disclosure about many elements of corporate governance is currently available, little is known about the internal audit function. Such information asymmetry may be decreased via the issuance of an internal audit report. In fact, a few organizations have voluntary started issuing internal audit reports to external stakeholders. However, nothing is known about whether and how different forms of these reports impact internal auditors’ judgments. These judgments may also be impacted by whether the internal auditors mainly report to management or the audit committee. The purpose of this study is to discover:

    • How do descriptive internal audit reports (i.e., reports describing the “composition, responsibilities, accountability, activities, and resources” of the internal audit function) impact internal auditors’ fraud risk and control risk assessments?
    • How do assurance internal audit reports (i.e., reports containing the internal auditors’ opinion of the organization’s “internal control effectiveness”) impact internal auditors’ fraud risk and control risk assessments?
    • How do different types of reporting structure (e.g., reporting directly to management vs. the audit committee) impact internal auditors’ fraud risk and control risk assessments?

    The authors hope to find answers to these questions in order to provide regulators with insights that can be used when considering potential regulation of the internal audit function.
     

    Design/Method/ Approach:

    The authors collected their evidence prior to August 2013 via a case emailed to highly experienced IIA members working at public and nonpublic companies. In this case, the authors manipulated the presence of a descriptive internal audit report, presence of an assurance internal audit report, and whether the internal auditor reported to management or the audit committee. Participants were asked to make fraud risk and control risk assessments, as well as explain whether and why they support or do not support the issuance of descriptive and assurance internal audit reports.

    Findings:
    • Compared to their non-reporting peers, internal auditors who provide descriptive internal audit reports do not make more conservative fraud risk or control risk assessments.
    • Compared to their non-reporting peers, internal auditors providing assurance internal audit reports make (do not make) more conservative fraud (control) risk assessments.
    • Internal auditors providing assurance internal audit reports do not make more conservative fraud risk or controls risk assessments than peers providing descriptive internal audit reports.
    • Internal auditors reporting mainly to the audit committee make more conservative fraud risk or control risk assessments than peers reporting mainly to management.
    • Internal auditors providing assurance internal audit reports who report mainly to management (the audit committee) have the least (most) conservative control risk assessments. 
    • Of internal auditors not providing assurance internal audit reports, those reporting mainly to management or mainly to the audit committee make equally conservative control risk assessments.
    • Both public and nonpublic internal auditors show moderate support for descriptive internal audit reports, with support from nonpublic internal auditors marginally higher than from public internal auditors. Participants believe that while descriptive internal audit reports may enhance the prestige of the internal audit function and enhance corporate governance, they not be relevant to external stakeholders and may interfere with internal audits’ true role.
    • Compared to support for descriptive internal audit reports, support for assurance internal audit reports is lower. Participants believe that although assurance internal audit reports may enhance corporate governance, they may open internal audit to scapegoating, interfere with internal audits’ true role, lead to replication of external auditors’ work, and take away the flexibility that lets internal audit focus on important areas that the external auditors consider out of scope.
    • Internal auditors expect descriptive (assurance) internal audit reports to cost about 17.5% (59.3%) of an internal audit department’s current budget.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Audits of Complex Estimates as Verification of Management...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice.
    Practical Implications:

    Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.  

    Citation:

    Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.

    Keywords:
    Complex Estimates, Subjectivity, Institutional Theory, Valuation Specialists, Professional Skepticism, Interviews
    Purpose of the Study:

    Complex estimates are increasingly important to financial statements and of growing concern to both regulators and investors. While auditors have well-established procedures for auditing more objective account balances (i.e., valued at historical cost), little is known about the process auditors use to evaluate more subjective, complex estimates. This article conducts interviews with experienced audit personnel to determine how auditors evaluate such estimates, determines the problems with such approaches, and uses “institutional theory” to theorize the reason such problems exist and persist. The authors consider the influence of both audit firms themselves and regulators (i.e., information from PCAOB inspection reports) on auditors’ complex estimate audit procedures.

    Design/Method/ Approach:

    The authors conducted semi-structured phone interviews with experienced audit personnel. Participants are from 6 large accounting firms with at least manager level experience. Interviews were conducted between October and November 2010. The authors analyzed the audit process steps discussed by participants for complex estimates and coded these steps according to the PCAOB auditing standards related to accounting estimates (AU 342 and 328).  For steps that could not be appropriately classified into ones discussed by the auditing standards, the authors developed additional classifications.

    Findings:

    While auditing standards allow for different approaches to evaluating complex estimates (e.g., testing management process, preparing independent estimate, etc.), the authors find that auditors usually just test management’s process (i.e., verifying inputs such as historical cost, understanding who and how estimate is generated, testing controls surrounding process, and testing sensitivity of assumptions used).  

    Based on institutional theory, the authors theorize two key reasons that auditors mainly use management process verification when auditing complex estimates instead of other (potentially more creative and skeptical) approaches. The reasons are:

    • Both audit firm policies and professional standards generally emphasize management process verification techniques over other potential techniques. Additionally, regulators (i.e., PCAOB) reinforce/encourage this behavior because inspection findings largely focus on problems with auditing management’s process instead of suggesting alternative, superior auditing methods.
    • Audit firms employ valuation specialists who have the necessary knowledge to more critically analyze complex estimates. This fact means that financial statement auditors generally do not have the necessary knowledge to critically analyze management’s models or develop an independent expectation. When auditors do use such specialists, they over-rely on their work.
    • Given the lack of guidance regarding complex estimates, firms tend to use practices that have been previously legitimized. For auditing of complex estimates, verification (which works well to audit less subjective accounts) is used to audit more subject complex estimates. Auditing standards also mainly emphasize verification.
    • Given inspection pressures, firms find it safer and more legitimate to mimic each other’s policies and procedures for auditing complex estimates instead of develop new ones.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Auditors’ Professional Skepticism, Evaluation of Evidence, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Sustainability ServicesTraining & General Experience, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    Firm-Level Formalization and Auditor Performance on Complex...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Firm-Level Formalization and Auditor Performance on Complex Tasks.
    Practical Implications:

    This study augments prior research by providing evidence of these same effects while measuring formalization in terms of where participants gained their prior audit experience. These results are relevant to organizations as they make decisions to add policies, procedures, or tools that may alter the level of formalization in their decision processes. The results may also be of interest to professionals seeking a work environment that is best suited to their goals and abilities. Several approaches may be used to mitigate the potentially negative implications of formalization. For example, firms might encourage the development of audit judgment by including opportunities for judgments that go beyond prescribed patterns.

    Citation:

    Stuart, I. C., and D. F. Prawitt. 2012. Firm-Level Formalization and Auditor Performance on Complex Tasks. Behavioral Research in Accounting 24 (2): 193-210.

    Keywords:
    audit structure, auditing, formalization, task performance
    Purpose of the Study:

    Formalization is an integral component of organizational structure. Firms choose different levels of formalization to increase the consistency of routine decisions and to bring uniformity to decision process outcomes. While formalization can have positive effects in many decision making contexts, the behavioral consequences of formalization must be carefully considered to assess properly the consequences associated with chosen levels of formalization. The influence of decision process formalization on knowledge acquisition, integration, and application and the tendency for decision makers to rely inappropriately on prescribed processes and procedures are issues of particular relevance to organizations providing guidance to professionals with relatively little experience.

    This study takes a first step in exploring the impact of decision process formalization (hereafter referred to only as formalization) on the development of an organization’s human resources by examining the relationship between the degree of firm-wide formalization and the individuals’ performance on tasks of varying complexity. Since auditors perform different tasks as they gain experience, one might think that the managers’ performance on tasks would not be affected by the formalization of tasks they performed as staff; however, the authors argue that since knowledge can be transferred across tasks, the effect of task formalization on knowledge acquisition has broad implications on the performance of auditors throughout the firm. Auditors who begin their careers in a formalized setting may lose opportunities to learn, which will hinder their future performance when they perform different tasks that may not be as formalized.

    Design/Method/ Approach:

    Practicing auditors from two Big 4 firms (12 locations of the less formalized firm and 11 locations of the formalized firm) participated in the study. The overall response rate was 47 percent. The data analysis reported in the following section was performed on a final sample of 81 auditors (45 from the formalized firm and 36 from the less formalized firm). The average experience level of the auditors was 43 months. The evidence was gathered prior to December 2011.

    Findings:

    This study posits that there are differential opportunities for development of professional judgment depending on a firm’s choice of the level of formalization. The results indicate that auditors from both firms performed equally well on relatively simple tasks. However, auditors from less formalized firms outperformed auditors from formalized firms on complex audit tasks. Differences in participant characteristics (months of experience, motivation, and ability) did not explain between-firm differences in auditor performance. 

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
  • Jennifer M Mueller-Phillips
    Infer, Predict, and Assure: Accounting Opportunities in Data...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Infer, Predict, and Assure: Accounting Opportunities in Data Analytics.
    Practical Implications:

    This article is important to practitioners as well as academics because they will be using data analytics in accounting and auditing tasks and will need to specify system design characteristics needed to effectively accomplish these tasks. The authors identify several research questions for further study.

    Citation:

    Schneider, G. P., J. Dai, D. J. Janvrin, K. Ajayi, and R. L. Raschke. 2015. Infer, Predict, and Assure: Accounting Opportunities in Data Analytics. Accounting Horizons 29 (3): 719-742.

    Keywords:
    AIS meta-theory, data analytics, task processes
    Purpose of the Study:

    The objective of this paper is to examine how data analytics will impact the accounting and auditing environment, identify emerging management and regulatory challenges, and outline new research opportunities. To incorporate and process both structured and unstructured data to support decisions, accountants are working with a new set of sophisticated tools known as data analytics. Data analytics is the process of using structured and unstructured data through the applications of various analytic techniques such as statistical and quantitative analysis and explanatory and predictive models to provide useful information to decision-makers. Data analytics involves complex procedures that extract useful knowledge from large data repositories. Compared with conventional approaches, data analytics offer advantages in terms of cost-effectiveness), scalability, and capability to identify new patterns in real time.

    Several challenges and risks may arise with data analytics. First, how can voluminous data stored in heterogeneous and differently organized data sources be converted into structured, hence well interpretable, format? In doing so, uncorrelated data needs to be filtered out. The challenge is to identify what data needs to be filtered out. Further, how can structured data repositories be managed, processed, and transformed in order to derive needed information for decision-making purposes? Finally, data analytics applications often are highly scalable.

    Design/Method/ Approach:

    This article is a commentary. 

    Findings:

    The authors expand upon the challenges and risks via adopting the organizing principles of the metatheory of AIS and apply it to data analytics. The first principle states that data analytics research should be task-focused. Their analysis concentrated on three tasks to which accountants often apply data analytics: infer, predict, and assure. The second organizing principle notes that task requirements are the start of the process that establishes the set of system design characteristics needed. They note that the lack of accepted models of data analytics and related perceptions is a significant challenge that should be considered. The third principle suggests that the impact of data analytics on task performance should be examined within the context of cognitive, technological, and organizational contingency factors. They identify several research questions related to each of these contingency factors. Finally, the fourth principle states that the outcome of data analytics is task performance. The authors discuss how evaluating the infer, predict, and assure tasks completed with data analytics may occur at either the individual or organizational level. In addition, often the outcome of data analytics contains private and/or confidential information and more research is needed to examine how organizations can address their responsibilities to maintain privacy and confidentiality.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Big Data in Accounting: An Overview.
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 09.0 Auditor Judgment in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Big Data in Accounting: An Overview.
    Practical Implications:

    The availability of Big Data will precipitate substantive changes in accounting education, research, and practice. In education, in particular accounting and auditing, the use of Big Data will increase the statistical and IT content in curricula, probably breaking the current set of limitations represented in the CPA exam. Research in the more traditional fields in accounting, such as capital markets research, will benefit from dimensional increases in data availability and will be conditional on improvements of the researcher’s skill sets in areas such as modeling, statistics, and text mining. Practice, in particular internal audit departments, will be the leading facilitator of accounting Big Data usage, while attempting to keep abreast or in sync with the developments in corporate data utilization in fields like marketing, supply chain, and customer services.

    Citation:

    Vasarhelyi, M. A., A. Kogan, and B. M. Tuttle. 2015. Big Data in Accounting: An Overview. Accounting Horizons 29 (2): 381-396.

    Keywords:
    analytics, audit judgment, enterprise data ecosystem, reporting, standards, storage
    Purpose of the Study:

    The term Big Data is fairly new but seems to be applied in almost every area of human activity at the moment. It is not defined in the rigorous meaning of the word, and it is usually used under the assumption that the readers understand it at the intuitive level. The reason for this popularity is the exponentially growing amount of information made available by developments in computing and telecommunications technology, particularly the Internet and environmental sensing. This paper sheds light on the meaning of Big Data in the accounting and auditing domains.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • The definition of Big Data is conditional on the environment being used.
    • Processing needs are nonlinear with the size of data. Even small datasets may be computationally difficult if models are complex.
    • There is a progressive extension of the feasible dataset. Inclusion of sources is mainly an economic and legal issue and not one of feasibility.
    • Newly included data structures contain a wide set of not previously determined/used parameters, which by themselves may be informational.
    • Extended, nontraditional data sources may substantively change the domains of accounting and auditing.
    • Linkages of traditional extended data, as found in ERPs, to new sources of data may provide very strong confirmatory evidence for economic activity.
    • Accounting, auditing, and management extensions into Big Data usage overlap and present powerful opportunities in the next decade but also the re-conceptualization of functions in an age of computer intelligence and automation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Drivers of the Use and Facilitators and Obstacles of the...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Drivers of the Use and Facilitators and Obstacles of the Evolution of Big Data by the Audit Profession.
    Practical Implications:

    “The scale and scope of changes that Big Data are bringing about are at an inflection point, set to expand greatly, as a series of technology trends accelerate and converge.” (McKinsey Global Institute) There are very few true disruptive innovations that induce such an inflection point: a situation in which the existing trajectory of long-used practices come to be seen as no longer sustainable and business heads off in an entirely new direction. Whether Big Data will prove to be a disruptive force is still an open question. However, if that does indeed prove to be the case, then auditors should heed the warnings that the firms that succeed past the inflection point are often not the ones that precede it. 

    Citation:

    Alles, M. G. 2015. Drivers of the Use and Facilitators and Obstacles of the Evolution of Big Data by the Audit Profession. Accounting Horizons 29 (2): 439-449.

    Keywords:
    auditing, Big Data, disruptive innovation, ERP
    Purpose of the Study:

    Given both its promise and the challenges Big Data pose to businesses in general, this paper examines the drivers of the use of Big Data by the audit profession and the facilitators and obstacles for how that use will evolve in the near future. Drivers refer to the exogenous forces that will make the use of Big Data a historical inevitability and a strategic necessity, as opposed to an entirely endogenous choice by auditors based on their preferences alone. Facilitators and obstacles are the factors that determine how Big Data usage will evolve in audit practice, with auditing standards identified as the most significant facilitator and the lack of trained personnel as potentially the greatest obstacle.

    Given the growing attention paid by the business media and the investor community to Big Data, it is important to consider to what extent the audit profession will embrace Big Data and how its usage will evolve over time. Data is seen as a tool for businesses to uncover unforeseen correlations in data that can be exploited to increase profits by, for example, developing new marketing strategies. Auditing, however, is more constrained by standards and, in the case of external auditing, focused on the specific task of attesting to management assertions. The constraints of history and legal structure that impose on auditing have to be taken into consideration when analyzing the likely evolution of Big Data in auditing.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

    The author hypothesizes in this paper that auditor use of Big Data will likely not happen unless the failure to adopt Big Data is perceived by the audit profession as a serious threat. This paper posits that the most likely driver of the use of Big Data by auditors is client use of Big Data that auditors will feel that they have no choice but to embrace Big Data if and when Big Data becomes as important to the operation of the businesses of their clients in the next decade as ERP systems proved to be in the one before. In other words, the imperative to keep up with their clients’ reliance on Big Data is the exogenous driver that will force auditors to also adopt Big Data. Only when faced with such unavoidable exogenous pressure will Big Data become a strategic necessity and not just another option for auditors, just as they shifted away from the tactic of auditing around the computer and developed IT auditing when the ubiquity of ERP and other IT systems of their clients made overlooking information technology as an object of assurance and a tool of auditing, simply infeasible.

    Category:
    Auditing Procedures - Nature - Timing and Extent