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  • Jennifer M Mueller-Phillips
    Toward Effective Big Data Analysis in Continuous Auditing.
    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:
    Toward Effective Big Data Analysis in Continuous Auditing.
    Practical Implications:

    The Big Data qualities of Volume, Velocity, Variety, and Veracity contribute to the creation of the following Big Data Gaps: Data Consistency, Data Integrity, Data Identification, Data Aggregation, and Data Confidentiality. These Big Data Gaps create challenges for current CA systems. The paper outlines possible solutions to these gaps along with needed research topics with the aim of increasing the applicability of continuous auditing systems to Big Data. Big Data is a business phenomenon that is here to stay, and CA systems need to adapt to its challenges.

    Citation:

    Zhang, J., X. Yang, and D. Appelbaum. 2015. Toward Effective Big Data Analysis in Continuous Auditing. Accounting Horizons 29 (2): 469-476.

    Keywords:
    Big Data, continuous auditing, gap analysis
    Purpose of the Study:

    Big Data originates from traditional transactions systems, as well as new sources such as emails, phone calls, Internet activities, social media, news media, sensor recordings and videos, and RFID tags. Since much of this Big Data informs and affects corporate decisions that are important to both internal and external corporate stakeholders, auditors will need to expand their current scope of data analysis.

    Certain qualities, known as the four Vs, define the term Big Data: namely, massive Volume or size of the database, high Velocity of data added on a continuous basis, large Variety of types of data, and uncertain Veracity. Due to volume and velocity, the application of continuous auditing (CA) has become increasingly relevant for the automation and real-time analysis of Big Data. However, massive volume and high velocity also introduce gaps between the present state of audit analytics and the requirements of Big Data analytics in a continuous audit context. Moreover, variety and uncertain veracity present challenges beyond the capability of current CA methods. The purpose of this paper is to identify these gaps and challenges and to point out the need for updating the CA system to accommodate Big Data analysis.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

    The authors identify and discuss potential remediation for the five Big Data Gaps:

    • Data Consistency: Big Data systems supporting key business processes usually consist of a patchwork of different systems, where data may be fully or partially replicated, the informational content may be overlapped, and more derived data may be stored. This situation gives rise to the serious gap in data consistency.
    • Data Integrity: the volume and types of data are so expansive that it becomes more difficult to identify individual data as well as data sets that have been modified/ deleted/ hidden/ destroyed because of operating error, procedural error, illegal access, and/or network transmission failures. This difficulty in identifying integrity issues can create a domino effect that causes other reliable data to lose their value for audit analysis purposes, thus increasing audit risk in a Big Data, continuous audit environment.
    • Data Identification: refers to records that link two or more separately recorded pieces of information about the same individual or entity.
    • Data Aggregation: necessary for the normal operation of continuous auditing using Big Data and to meaningfully summarize and simplify the Big Data that is most likely coming from different sources.
    • Data Confidentiality: certain data, or more often the associations among data points, are sensitive and cannot be released to others.

    The authors identify the nine CA Challenges:

    • Audit on data with different formats
    • Audit on asynchronous data
    • Audit on conflicting data
    • Audit on illegally tampered data
    • Audit on incomplete data
    • Audit on data with various identifiers
    • Audit on aggregated data
    • Search encrypted data
    • Audit on encrypted data
    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
    Rotational internal audit programs and financial reporting...
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Rotational internal audit programs and financial reporting quality: Do compensating controls help?
    Practical Implications:

    The authors conclude that companies should consider the potential costs of using a rotational staffing model in the internal audit function and, if adopting this practice, should ensure the appropriate compensating controls are in place to mitigate such costs. The evidence on the consequences of systematic rotation will also be interesting to investors, boards of directors, audit committees, and management. These stakeholders rely on the IAF to monitor financial reporting, and they can benefit from evidence about how systematic rotation affects financial reporting quality. Furthermore, regulators and standard setters, such as the IIA, would benefit from understanding how these rotational assignments affect financial reporting quality and what organizations can do to address the potential consequences.

    Citation:

    Christ, M. H., A. Masli, N. Y. Sharp, and D. A. Wood. 2015. Rotational internal audit programs and financial reporting quality: Do compensating controls help? Accounting, Organizations & Society 44: 37-59.

    Keywords:
    internal auditing, financial statements, internal auditors, financial reporting qualities, internal controls
    Purpose of the Study:

    A report from the Institute of Internal Auditors finds that approximately two-thirds of Fortune 500 companies report that they systematically rotate their internal auditors into management positions outside of internal audit, this practice potentially causes the internal audit function (IAF) to be used or viewed as a training ground for future managers. This practice is somewhat perplexing given evidence from prior research suggesting it diminishes internal auditors’ objectivity.

    The authors extend prior research on the effects of systematically rotating internal auditors into operational management by conducting interviews with chief audit executives and audit committee chairpersons to develop an initial framework of how this practice is thought to impact financial reporting outcomes. The authors then use this initial framework to guide an archival analysis that tests for the presence of key associations between such rotation and financial reporting quality. They posit that specific types of rotational programs have the potential to reduce financial reporting quality. Consistent with prior research, the authors focus on the systematic rotational programs that result in internal auditors later obtaining management positions because these practices are most prevalent and have the potential to impair financial reporting quality. Hereafter, the authors refer to these practices as “systematic rotation.”

    Design/Method/ Approach:

    The authors interviewed heads of internal audit (CAEs) from 11 companies of varying sizes and industries and two audit committee chairpersons who (combined) have worked with 12 unique companies. Interviews lasted an average of 46 min. Six of eleven (55%) interviewees are from Fortune 500 companies. Eight of eleven companies use formal rotation programs, one uses informal rotation, and two do not use rotation. The authors collected this data prior to June 2015.

    Findings:

    The authors find that use of systematic rotation is associated with higher accounting risk. This result suggests that systematic rotation weakens the effectiveness of internal audit’s monitoring of financial reporting within the organization. This result is also consistent with the view from prior research that some rotational IAFs operate primarily as a management training ground, at the expense of the effectiveness of traditional internal audit activities.

    However, consistent with their predictions, other organizations implement compensating controls that mitigate this negative relation. Specifically, organizations that (1) rotate only staff internal audit positions (e.g., not the head of internal audit), (2) have more effective audit committees, or (3) have management who directs internal audit to focus on financial reporting (as opposed to operational or IT audits) are able to reduce the negative financial reporting effects associated with systematic rotation of internal auditors into management positions.

    Further, at least in this data, when all three types of compensating controls are present, the negative association between systematic rotation and financial reporting quality is eliminated. Thus, the results suggest that control-conscious organizations can use compensating controls to prevent systematic rotation from reducing financial reporting quality.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Big data analytics in financial statement audits.
    research summary posted September 11, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 10.0 Engagement Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Big data analytics in financial statement audits.
    Practical Implications:

    This article provides a concise introduction to Big Data analytics by providing examples of Big Data success stories in non-audit fields and drawing auditing parallels. It then indicates several characteristics of Big Data which should be considered when implementing Big Data analytics, specifically as they relate to audit procedures.

    Citation:

    Cao, M., R. Chychyla, and T. Stewart. 2015. Big data analytics in financial statement audits. Accounting Horizons 29 (2): 423-429.

    Keywords:
    Big data, analytical methods, auditing
    Purpose of the Study:

    The authors provide examples of Big Data analytics in other fields and suggest analogous auditing applications. They then briefly discuss characteristics of Big Data analytics that are specifically of relevance for the audit setting.

    Design/Method/ Approach:

    This study uses examples of Big Data in other industries to provide guidance for auditors on implementing Big Data audit analytics. There is no original analysis or unique data.

    Findings:

    The authors outline several examples of implementation of Big Data analytics in other fields and draws parallels to the audit world.

    • Using Google’s “Profile of Mood States” based on millions of tweets to predict shifts in the Dow Jones Industrial Average. The audit parallel: Using similar tools to predict bankruptcy or assess overall financial health of a firm to identify engagements/litigation risk.
    • Walmart uses sales transaction data to predict which items (surprisingly, Strawberry Pop-Tarts) have increased sales in response to dangerous weather patterns. The audit parallel: using sales trend data to identify problematic segments in scoping.
    • Ayata’s Prescriptive Analytics uses data from oil and gas drilling sites, such as images, video, sound, text, and numbers to predict optimal drilling sites. The audit parallel: Using new types of data for audit evidence to confirm existence of events and validate reporting elements.
    • The Los Angeles police department uses data from crime scenes to predict the most likely timing and location of crimes in order to deploy officers. The audit parallel: identifying fraud risks and focusing audit effort toward fraud detection.

    The authors then identify characteristics of Big Data that need to be considered when implementing analytics. They note that Big Data analytics are fundamentally different from procedures based on sampling since all data can be used. They note that Big Data helps determine that things are associated with one another, but not necessarily that one thing causes another. Lastly, they note that a key benefit to Big Data is that analytics can be continuously updated.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Behavioral implications of big data’s impact on audit j...
    research summary last edited September 11, 2015 by Jennifer M Mueller-Phillips, tagged 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:
    Behavioral implications of big data’s impact on audit judgment and decision making and future research directions.
    Practical Implications:

    The authors outline potential pitfalls in the use of big data noted in auditing and psychology literature. Specifically, they focus on areas in which auditor decision making may be negatively influenced. They note that big data may lead to inefficient and/or incorrect decisions resulting from having too much information, not being able to determine what is relevant to the decision, not finding correct patterns in the data/finding incorrect patterns, and having data which may be too ambiguous to be used effectively. They then outline potential solutions to these problems, such as having decision aids, fitting the task to the system to auditor experience level, and providing contextual (“big picture”) training.

    Citation:

    Brown-Liburd, H., H. Issa, and D. Lombardi. 2015. Behavioral implications of big data’s impact on audit judgment and decision making and future research directions. Accounting Horizons 29(2): 451-468.

    Keywords:
    Big data, audit judgment, data analytics, information processing weaknesses
    Purpose of the Study:

    Big datahigh-volume, high-velocity, and high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision makinghas been the new trendy topic in the future of auditing. This paper outlines potential implications on the actions of the auditor resulting from the use of big data, specifically drawing from literature on psychology and auditing.

    Design/Method/ Approach:

    This paper summarizes the current literature in psychology and auditing specifically to bring to light potential issues resulting from incorporation of big data in auditing. No data is used and no analyses are performed.

    Findings:

    The authors find four primary areas where research in auditing and psychology indicate potential negative effects of big data on audit performance, specifically in auditor judgment and decision making:

    • Auditors may make inefficient decisions, struggle to differentiate relevant information, struggle to identify relationships between detail and overall trends, and disregard large portions of information (information overload).
    • Auditors may make poorer decisions due to the excess of irrelevant information innate in big data. They may be unable to filter relevant information from the noise, thus being less efficient in analyzing data and potentially using irrelevant information in decision making (information relevance).
    • The sheer magnitude of data to analyze may force auditors to become worse at recognizing patterns, applying knowledge to the audit task, weighting evidence, or extrapolating patterns into longer times series (pattern recognition).
    • Auditorsif they have a low tolerance for ambiguitymay neglect information once a simple solution or response is identified, potentially ignoring relevant but more complex information (ambiguity).

    The authors then provide examples of solutions to these problems, such as 1) providing decision models 2) having inexperienced auditors use expert systems (requires minimal auditor interpretation) 3) provide auditors with more contextual experience and training so they can interpret patterns in big data 4) leverage predictive models that can indicate areas of increased risk.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Big data as complementary audit evidence.
    research summary last edited September 11, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Big data as complementary audit evidence.
    Practical Implications:

    Incorporating Big Data into an audit poses several challenges. This article establishes how Big Data analytics satisfy requirements of audit evidence, namely that it is sufficient, reliable, and relevant. The authors bring up practical challenges (such as transferring information, privacy protection, and integration with traditional audit evidence) and provide suggestions for addressing them in incorporating Big Data into audit evidence. They also suggest that Big Data can complement tradition audit evidence at every level of audit evidence: financial statement, individual account, and audit objective.

    Citation:

    Yoon, K., L. Hoogduin, and L. Zhang. 2015. Big data as complementary audit evidence. Accounting Horizons 29 (2): 431-438.

    Keywords:
    Big data, audit evidence
    Purpose of the Study:

    This paper frames Big Data in the context of audit evidence, specifically looking at the requirements for something to be considered audit evidence, to provide an argument for the usefulness of Big Data to auditors. The authors address the sufficiency, reliability, and relevance of Big Data analytics; they then outline potential challenges to using Big Data for adequate audit evidence.

    Design/Method/ Approach:

    The authors summarize existing literature on audit evidence as it applies to Big Data. They perform no original analyses, but rather discuss the characteristics of Big Data analytics as they relate to regulations and research findings.

    Findings:

    The authors address:

    • Sufficiency: The authors suggest thatwhen used appropriatelyBig Data analytics can meet sufficiency requirements for audit evidence. They provide the example of using an employee’s emails to identify motivation or rationalization of fraud to demonstrate Big Data supplementing traditional audit evidence where traditional methods may be deficient in sufficiently documenting audit conclusions.
    • Reliability: Big Data, being typically from a third party and massive in nature, is argued to be generally reliable for audit evidence. They note that Big Data can validate things such as shipping terms to independently verify cutoff.
    • Relevance: The relevance of Big Data is primarily driven by the timeliness of its availability. Traditional audit evidence is often gathered after-the-fact, however Big Data-based auditing can analyze current trends to provide timely information. They provide several examples, such as using management’s discussion of forecasts. Research has linked overly optimistic press releases to fraud, so using Big Data techniques on earnings forecasts may assist in assigning fraud risk.
    • Integration with Traditional Audit Evidence: The authors acknowledge that Big Data may not always easily bridge into traditional audit evidence, however they provide a discussion of weighting evidenceas you would traditional audit evidenceso that more weight is given to the more sufficient, reliable, and relevant evidence.
    • Information Transfer: Access to data provides benefits which may be leveraged based on economies of scale, however clients may restrict access to proprietary data. The authors suggest specifically contracting for use of internal data.
    • Information Privacy: A common fear of releasing information is that it may be used for a secondary purpose. The authors acknowledge this and suggest that auditors should cooperate with information providers and ensure that information is anonymized.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • The Auditing Section
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? T...
    research summary last edited September 10, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Why Do Auditor’s Over-Rely on Weak Analytical Procedures? The Role of Outcome and Precision
    Practical Implications:

    Analytical procedures are used frequently and increasingly are relied upon as substantive evidence. Based on this study, auditors are insensitive to the impreciseness of the analytical procedure when the results are favorable and may be a cause for over-reliance on weak evidence.  Performing a stronger, more precise analytical procedure caused participants in the favorable outcome situation to become more aware of the weakness of the initial procedure and re-evaluate their evidence strength rating. Further, evidence suggests that having auditors consider the possible weaknesses of an analytical procedure prior to performing the procedure will cause them to rate the strength of the evidence from a weak analytical procedure lower. Overall, this suggests a need to better train auditors in performing and interpreting analytical procedures.

    In a discussion of Glover et al.’s paper, McDaniel asks whether the findings may indicate that auditors in the unfavorable outcome (i.e. there is a material difference) are under-relying on the evidence rather than that auditors in the favorable outcome (no material difference) are over-relying on the evidence. Glover et al. respond that the over-relying of the evidence is of concern to regulators and the alternative does not explain all of the results.  McDaniel also notes that the case study was of a company in the financial industry but that the participants were not required to have any financial industry experience. Glover et al. note that the interest income item is the issue which is not specific to the industry or complicated.  McDaniel also notes concerns about a potential “anchoring” effect as the participants performed their analytical procedures based on prior year working paper results.  In response, Glover et al. discuss this feature of an audit. 

    Citation:

    Glover, S. M., D. F. Prawitt, and T. J. Wilks. 2005.  Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  197-220.  

    McDaniel, L. 2005.  DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  221-228. 

    Glover, S. M., D. F. Prawlitt, and T. J. Wilks. 2005. REPLY TO DISCUSSION OF Why Do Auditor’s Over-Rely on Weak Analytical Procedures?  The Role of Outcome and Precision.  Auditing: A Journal of Practice & Theory 24 (Supplement):  229-232.

    Keywords:
    outcome; evidence quality; substantive analytical procedures; evidence assessment;
    Purpose of the Study:

    In 2000, a Public Oversight Board panel viewed audit work papers and determined that 20% of the time substantive analytical procedures were weak and provided insufficient evidence to support the conclusion. This study aims to look at one of the possible reasons why auditors’ over-rely on weak, unreliable analytical procedures.  The authors hypothesize that auditors do not consider their existing knowledge about the quality of the procedure when the outcome indicates that the balance is “fairly stated.”

    Design/Method/ Approach:

    The authors performed two experiments prior to 2005 where a material misstatement exists and a “weak, unreliable” (highly aggregated) analytical procedure is used.  In experiment 1, senior associates from one Big 4 accounting firm were asked to perform an interest revenue analytical procedure at the annual grand total level and compare the results to the client’s unaudited balance.  The balance is manipulated so that some participants’ results indicate there is no significant difference (i.e. favorable outcome) and the other participants’ results indicate that there is a significant difference (i.e. unfavorable outcome).  Participants evaluated the strength of the analytical procedure and concluded regarding a misstatement.  Additional disaggregated computations (interest revenue calculations broken down by type of loan and performed quarterly vs. annual basis) were then provided. Participants responded to the procedure strength of the aggregated analytical procedure.  In experiment 2, different senior associates from one Big 4 accounting firm were asked to document the weaknesses of the analytical procedure prior to performing the procedure.

    Findings:

    Experiment 1

    • Auditors attribute more evidential strength to the results of weak analytical procedures if the results indicate no material difference than the identical procedure where the results indicate a material difference.  In addition, auditors in the  avorable outcome are more likely to assign a lower risk of material misstatement and assess the balance as fairly stated, than those in the unfavorable outcome.
    •  After viewing the stronger, disaggregated analysis, auditors in the favorable outcome were more likely to revise their prior conclusion but auditors in the unfavorable outcome did not. Further, auditors in the favorable outcome were also more likely to downgrade their evidential strength assessment of the initial analytical procedure.
    • Altogether, the authors believe this indicates a potential for over-reliance on weak high level analytical procedures and that in situations where analytical procedures indicate no significant difference, auditors are less likely to realize their procedure may produce imprecise expectations and deem it to be a stronger procedure than it really is.

    Experiment 2

    • Auditors who were told to consider the potential weaknesses of the analytical procedure before performing the analysis were more likely to rate the strength of the evidence as lower than those who were not.
    • The prompt to consider potential weaknesses did not reduce the evidential strength assessment as much as requiring the additional analytical procedure in Experiment 1.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness
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  • Jennifer M Mueller-Phillips
    Welcome to the day-to-day of internal auditors: How do they...
    research summary posted July 30, 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:
    Welcome to the day-to-day of internal auditors: How do they cope with conflict?
    Practical Implications:

    This study makes an original contribution to the development of new knowledge on internal auditing. It concludes that internal auditors tend to lack independence and audit committee members often exercise disturbingly weak power (on the internal audit function), as compared to the top managers. This points to the difficulty of applying an idealized conception of independence and purist governance principles to practice. That is, it encourages auditors to consider the appropriateness of internal auditing as a meaningful independent assurance device in operating the corporate governance "mosaic."

    Citation:

    Roussy, M. 2015. Welcome to the day-to-day of internal auditors: How do they cope with conflict? Auditing: A Journal of Practice and Theory 34 (2): 237-264.

    Keywords:
    audit committee, conflicts, coping, independence, internal audit
    Purpose of the Study:

    The internal audit function (IAF) was made mandatory in both private and public companies in North America in the early 2000s. This paper proposes a ''micro-level'' analysis of the way in which internal auditors express role conflicts in their day-to-day practice and how they perceive, manage, and resolve them. The study seeks to show that the independence of the internal auditor is often not up to the standards that are expected of the internal audit function (IAF), and therefore unlikely to play an effective governance oversight role compatible with the ideal of the new public management governance reform.

    Design/Method/ Approach:

    A field study was conducted involving semi-structured interviews with 42 internal auditors working in 13 public sector organizations. Interviews were conducted between May and October 2010. Each interviewee had 10-15 years of experience in internal auditing, with 20-25 years of professional experience total. Data was interpreted in the light of a theoretical analysis framework designed especially for this study. Organizational and social context was taken into consideration for each interview.

    Findings:

    Overall, the results indicate that internal auditors have a relative lack of independence (as compared with the Institute of Internal Auditors’ standards.) More specifically:

    • While internal auditors are strategic in managing conflicts, they do not consider the cumulative effect that their coping behavior has on their lack of independence.
    • The audit committee does not greatly influence internal auditors’ coping tactics at any stage in the audit process.
    • Auditors use “pragmatic” behavior because they are embedded in a specific organizational and social context that they are ‘‘forced’’ to take into account.
    • The analysis casts doubt on the audit committee’s ability and commitment to consolidate and ensure internal auditor independence.

    Ultimately, the study concludes that internal auditors behave as if the IAF were a means for managerial control, instead of a governance mechanism.

    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
    A Big 4 Firm’s Use of Information Technology to Control t...
    research summary last edited July 29, 2015 by Judy Cothern, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.07 Interim Testing Procedures – Nature, Timing and Extent in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    A Big 4 Firm’s Use of Information Technology to Control the Audit Process: How an Audit Support System is Changing Auditor Behavior.
    Practical Implications:

    The findings have important implications for audit firms that use information technology to facilitate engagement monitoring. The system improves audit review effectiveness and increases the frequency and timeliness of auditor interaction. The design of an audit support system can impact reviewer effectiveness. When used as a process control, audit support systems can have unintended consequences for auditor behavior and audit team interaction.

    Citation:

    Dowling, C., & Leech, S. A. 2014. A Big 4 Firm's Use of Information Technology to Control the Audit Process: How an Audit Support System is Changing Auditor Behavior. Contemporary Accounting Research, 31 (1): 230-252. 

    Keywords:
    process control, information technology, performance support systems
    Purpose of the Study:

    When audit support systems are used as a process control, audit firms are faced with the challenge of designing a system that balances features that ensure compliance with features that enable auditor autonomy and reduce overreliance on the system. An electronic workpaper system is an information technology that is an important component of an audit firm’s risk management process. When used as a process control, the system promotes the effective and efficient delivery of audits.

    To be an effective process control, a system needs to actively restrict auditors’ independent behavior. This creates an operational risk because auditors could respond positively or negatively to a system. Auditors could respond negatively if they perceive the audit firm is using the system to coerce their effort and compliance with firm policies. Auditors who react negatively could disengage with their audit tasks because they perceive their tasks as routine or reject the system and work around it, thereby reducing the effectiveness of the system as a control. Conversely, auditors may respond positively to a structured system if they perceive that the structure clarifies their tasks and responsibilities. But, even if they respond positively, they may over rely on the system and not sufficiently assess the applicability of the system’s recommendations for a specific client. The authors use internal documents and interviews with auditors at a Big 4 firm to analyze auditors’ reactions to the firm’s new audit support system. 

    Design/Method/ Approach:

    The authors conducted 17 group interviews from three large Australian cities of the Big 4 firm. In total, the authors interviewed 51 auditors and one ex-regulator. The average audit experience of the participants was seven years (ranging from 2 to 37 years). Each group interview lasted approximately one hour (the range was from 50 to 90 minutes). The audit firm provided internal documents for analysis as well. The evidence was collected prior to the summer of 2014.

    Findings:

    Although many of the system’s features could have been used as a coercive control, this was not the case. Two primary factors explain their reaction:

    1. Management’s interventions during system deployment
    2. How the system’s design ensures compliance by providing audit teams with constrained choices in applying the system’s recommendations.

    These factors developed an auditor’s sense of empowerment by leveraging their skills and knowledge. Empowerment became stronger following management interventions that encouraged audit teams to challenge the system’s recommendations. 

    • The authors find that many of the system’s features that enable monitoring and force reviewer involvement also increase the frequency and timeliness of preparer and reviewer interaction.
    • System features that enable monitoring can inadvertently reduce preparer and reviewer independence, which may decrease the effectiveness of the audit review as an independent control mechanism.
    • The auditors viewed the system positively and reported that it enables the effective delivery of audit engagements.
    • Although the auditors reported that this was improving audit effectiveness and efficiency, they did not appear to have considered how this may reduce the independence of preparers’ judgments. Increased interaction between preparers and reviewers increases the risk that preparers stylize their workpapers or align their judgments with reviewers’ beliefs.
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Interim Testing Procedures – Nature - Timing & Extent
  • Jennifer M Mueller-Phillips
    Auditors’ Professional Skepticism: Neutrality versus P...
    research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditors’ Professional Skepticism: Neutrality versus Presumptive Doubt.
    Practical Implications:

    Presumptive doubt has a greater effect on auditors’ skeptical judgments when client risks are higher than does neutrality. In particular, auditors with higher levels of presumptive doubt exhibit pronounced skeptical judgments and decisions in the higher control environment risk setting.

    Since the findings indicate inversed RIT is a better predictor of desired auditor skeptical judgments, this measure warrants further consideration in practice to develop adequate recruitment, staffing, and training guidance. Also a consideration for practice and future research is whether quality control processes, such as audit reviews, mitigate cases where auditors lack sufficient individual skepticism.

    Citation:

    Quadackers, L., Groot, T., & Wright, A. 2014. Auditors' Professional Skepticism: Neutrality versus Presumptive Doubt. Contemporary Accounting Research 31 (3): 639-657.

    Keywords:
    auditor independence, professional ethics, neutrality, professional skepticism
    Purpose of the Study:

    Professional skepticism is considered to be an essential element of the financial statement audit, as reflected in professional auditing standards and the audit methodologies of international audit firms. Analyses of fraud-related U.S. Securities and Exchange Commission (SEC) cases conclude that a lack of sufficient professional skepticism is often cited as the reason that auditors fail to detect material misstatements. While there is no universally accepted definition of professional skepticism, two perspectives have emerged in the current literature and auditing standards: neutrality and presumptive doubt.

    • Neutrality refers to a perspective in which the auditor assumes no bias in management’s representations.
    • Presumptive doubt represents an auditor’s attitude in which some level of dishonesty or bias by management is assumed, unless evidence indicates otherwise.

    Importantly, there is a lack of consensus on which of these two perspectives of skepticism is most appropriate for audit practice. The purpose of this study is to examine the relationship between auditors’ skeptical perspective (neutrality and presumptive doubt) and auditor skeptical judgments and decisions across client risk settings (higher versus lower control environment risk). Neutrality is measured by the Hurtt Professional Skepticism Scale (HPSS; Hurtt 2010), and presumptive doubt is measured by the inverse of the Rotter Interpersonal Trust Scale.

    Design/Method/ Approach:

    All of the participants come from one Big 4 firm. There were 96 participants in the experiment: 25 partners, 41 managers, and 27 seniors (3 participants did not provide staff-level information). On average, the auditors had 15.36 years general auditing experience and 14.75 years of experience with conducting analytical procedures. The number of participants was relatively balanced across the two control environment risk conditions. The evidence was collected prior to September of 2014.

    Findings:

    The results of this study show that inversed RIT (Rotter’s Interpersonal Trust Scale), a trait measure of presumptive doubt, is more closely associated with auditors skeptical judgments than HPSS (Hurtt Professional Skepticism Scale), a trait measure of neutrality. This relationship particularly holds when control environment risks are higher and, thus, the risk of material misstatement is of particular concern. Since auditing standards direct greater skepticism in a higher-risk setting than in a lower-risk setting, this finding suggests that inversed RIT is more likely to reflect the desired skepticism than HPSS. This result suggests that the presumptive doubt perspective of professional skepticism is more predictive than neutrality of auditor skeptical judgments and decisions in higher-risk situations.

    There is no normative solution to the case, so it is not possible to determine which skepticism measure is more closely related to optimal judgments and decisions.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    How Do Auditors Address Control Deficiencies that Bias...
    research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.01 Scope of Testing, 07.02 Assessing Material Weaknesses, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    How Do Auditors Address Control Deficiencies that Bias Accounting Estimates?
    Practical Implications:

    For practice, the authors provide evidence about the relation between control deficiencies and substantive tests in the integrated audit. A significant minority of senior auditors attempt to identify bias in an accounting estimate with increased sampling from the biased estimation process, though they have been told that the estimation process is biased. The authors provide theory consistent empirical evidence that auditors often reach questionable, optimistic judgments about the capability of audit evidence to address control deficiencies. Auditors will often revert to what they know best, and it is difficult to get people to look beyond the familiar, regardless of experience level.

    Citation:

    Mauldin, E. G., & Wolfe, C. J. 2014. How Do Auditors Address Control Deficiencies that Bias Accounting Estimates? Contemporary Accounting Research 31 (3): 658-680.

    Keywords:
    accounting estimates, scarcity, control deficiencies, internal control
    Purpose of the Study:

    According to professional standards, auditors must integrate the internal control and financial statement audits. Revised risk assessment standards were issued, in part, to improve the integration of controls into the financial statement audit. However, PCAOB inspections find that auditors sometimes do not appropriately change the nature, timing, and/or extent of their substantive tests in response to clients’ internal controls. Auditors often have difficulty modifying substantive tests when responding to identified control deficiencies.

    To shed light on the underlying reasons for this difficulty, the authors of this design a contextually rich experimental case and examine how auditors map a control deficiency into modifications of substantive tests. The authors examine control deficiencies that cause errors of omission in an estimation process, resulting in an incomplete and biased estimation process. The focus is on whether auditors recognize the insufficiency of reviewing the biased estimation process and how they select alternative tests to replace or supplement such review.

    Design/Method/ Approach:

    Eighty-seven auditors attending one Big 4 firm’s national training for experienced audit seniors participated in the study. The authors employ a between-participants experimental design with two treatments. The authors describe the treatments in sequence within the experimental task. They then randomly assign participants to experimental treatments and ask them to complete a case study. The evidence was collected prior to September of 2014.

    Findings:
    • A significant minority of senior auditors (33 percent) attempt to identify bias in an accounting estimate with increased sampling from the biased estimation process. Further, they do this after being told that the estimation process is biased.
    • Seeing the falsely favorable substantive test results, on average, does not influence auditors’ tendency to increase sample size.
    • A supplemental sample of 14 managers produces a pattern of responses similar to the main results.
    • When the bias is from externally prepared documents, the authors find that about one-half the auditors (54 percent) choose the more efficient alternative test, adjusting the estimate using documents.
    • When the bias is from management judgment inputs, the authors find that most auditors (63 percent) choose to adjust the estimate using documents, even though this alternative is less effective than developing an auditor-generated estimate.
    • The observed results are not driven by lack of experience with percentage-of-completion accounting.
    • Together, the results suggest that auditors often make inefficient or ineffective alternative test choices depending on the source of omission caused by the control deficiency.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Internal Control
    Sub-category:
    Assessing Material Weaknesses, Scope of Testing, Substantive Analytical Review – Effectiveness