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  • The Auditing Section
    Auditors’ Assessment and Incorporation of Expectation P...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditors’ Assessment and Incorporation of Expectation Precision in Evidential Analytical Procedures
    Practical Implications:

    The results of this study suggest that auditors’ precision assessments may not be well calibrated for relevant precision factors. Thus, auditors may benefit from additional guidance indicating the factors that should be considered for assessing the precision of analytical
    procedures.  Furthermore, audit firms might want to consider integrating some of the findings of this study into future training sessions and/or decision aids that would assist auditors in improving their precision calibration. An insensitivity to important precision factors may lead to over-reliance on analytical procedures, negatively affecting audit effectiveness. Because the allowance for loan losses is an estimate, the results of this study provide insight into factors that could influence the potential effectiveness of audits of estimates. Understanding how auditors evaluate analytical procedure precision for estimates is particularly critical in that analytical procedures may be the only source of assurance for testing these accounts.

    Citation:

    McDaniel, L.S. and L.E. Simmons. 2007. Auditors’ assessment and incorporation of expectation precision in evidential analytical procedures. Auditing: A Journal of Practice & Theory 26(1): 1-18.

    Keywords:
    Analytical procedures, precision, expectations, substantive test, audit evidence
    Purpose of the Study:

    The precision with which auditors form expectations during analytical procedures is important. The precision of an expectation is a measure of the closeness of the developed expectation to the actual amount and refers to the quality of the expectation, and thus, the quality of the analytical procedure. Professional standards clearly indicate that auditors should be able to form more precise expectations for accounts that are more predictable (income statement relationships generally are more predictable than balance sheet relationships) and when the information related to the account is more disaggregated (i.e., detailed). However, the Public Oversight Board’s (POB) Panel on Audit Effectiveness has found evidence that auditors rely on analytical procedures that do not provide the desired level of assurance, suggesting possible difficulty in assessing precision. To address this finding by the POB, this study investigates auditors’ abilities to assess expectation precision and incorporate their assessments into judgments related to substantive analytical procedures, as required by professional standards. A first step toward developing more effective guidance is obtaining a better understanding of why auditors sometimes fail to effectively apply analytical procedures. As such, the authors aim to answer the following two questions: 

    • To what extent do auditors’ precision assessments reflect the level of account predictability and the level of detail of the data used to form expectations? 
    • To what extent are auditors’ judgments consistent with their precision assessments? According to professional standards, the following judgments should be consistent with auditors’ precision assessments:

    (1)   The level of assurance expected by auditors to be provided by the analytical procedure.

    (2)   The range of the difference between the expected and recorded amount.

    (3)   The likelihood that the difference between the expected and recorded amount is due to misstatement versus nonmisstatement causes.

    Design/Method/ Approach:

    The authors gathered their data experimentally at a firm training event for audit seniors and above (the training event occurred sometime during or prior to 2005). The participants were asked to review workpapers which included analytical procedures for two different accounts – the allowance for loan losses (a less predictable account) and interest income (a more predictable account). The expectations for the analytical procedures documented in the workpapers were either based on more or less detailed information. After reviewing the analytical procedures, auditors were asked to assess the precision and the level of assurance provided, provide an expectation range for the account balance, and judge the amount of difference between the expected and recorded amount due to misstatement.

    Findings:
    • Overall, auditors assess precision higher when the data forming the expectation are disaggregated (i.e., more detailed) versus
      aggregated (i.e., less detailed). 
    • Auditors also assess precision higher for the more predictable account (interest income) versus the less predictable account (the allowance for loan losses). 
    • Auditors’ precision assessments for the allowance for loan losses are not significantly different between the disaggregated and aggregated analytical procedures. This finding suggests that in assessing the precision of analytical procedures for less predictable accounts, auditors do not consider the effects of data aggregation. 
    • The results also show that for both accounts auditors judge the level of assurance obtained from the analytical procedures consistent with their precision assessments (i.e., higher assessed precision corresponds with a higher level of assurance). 
    • Counter to the authors’ expectations, auditors’ precision assessments were not related to their judgments of the range of differences between the expected and recorded amounts or the likelihood of misstatement.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence
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  • The Auditing Section
    Attention to Evidence of Aggressive Financial Reporting and...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Attention to Evidence of Aggressive Financial Reporting and Intentional Misstatement Judgments: Effects of Experience and Trust
    Practical Implications:

    The results of this study are important for audit firms to consider when making audit personnel assignments in order to take advantage of individual traits and experiences.  Audit firms may benefit from audit team structures that include members with varying levels of trust and varying levels of prior fraud experience.  Diversifying audit team composition may improve fraud detection while maintaining audit efficiency. 

    Citation:

    Rose, J.M. 2007. Attention to evidence of aggressive financial reporting and intentional misstatement judgments: Effects of experience and trust. Behavioral Research in Accounting 19(1): 215-229.

    Keywords:
    aggressive reporting; experience; fraud; skepticism; trust
    Purpose of the Study:

    Auditors face increased pressure to detect and prevent fraud and increased responsibilities to maintain professional skepticism as a result of SAS No. 99.  Yet their ability to do so may be constrained by their individual traits or experiences.  Previous research has not sufficiently addressed auditors’ ability to detect potentially fraudulent reporting or auditors’ judgment concerning misstatements and has not evaluated auditor characteristics that can influence attention to evidence of aggressive reporting. 
    This paper investigates the following factors:  

    • Whether professional skepticism increases auditors’ attention to evidence of aggressive reporting. 
    • Whether dispositional trust affects auditor’s critical evaluation of audit evidence.  Dispositional trust is a personality trait which affects professional behavior by influencing the degree to which an individual believes that people are typically trustworthy or that they will personally benefit by trusting others.
    • Whether fraud-specific audit experience results in the development of knowledge structures that are useful for the detection of potentially fraudulent and aggressive reporting practices. 
    Design/Method/ Approach:

    The authors collected their evidence using a simulated task completed by practicing auditors from Big 4 and national accounting firms with an average of 3.6 years of experience.  Participants were given background information along with 45 pieces of audit evidence for a hypothetical audit client, and told that they were performing workpaper reviews for the client. Then, participants were asked to perform a surprise free recall of the information. Finally, participants were asked to make a judgment on the likelihood that the client’s financial statements were intentionally misstated.  Participants were assigned to either a higher or lower level of client-related skepticism and aggressive or non aggressive individual audit evidence items.

    Findings:
    • The authors find that increased skepticism is associated with increased attention to aggressive reporting, and as a result, increased belief that intentional misstatement has occurred.
    • Less trusting auditors appear to pay more attention to evidence of aggressive reporting than do more trusting auditors.  
    • The authors find that prior fraud-specific experience positively influences auditor’s judgments of intentional misstatement.  Prior fraud experience may allow auditors to develop fraud-based explanations for aggressive reporting and develop knowledge structures that include potential indicators of fraud. 
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Fraud Risk Assessment, Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    Development of a Scale to Measure Professional Skepticism
    research summary last edited May 25, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Development of a Scale to Measure Professional Skepticism
    Practical Implications:

    This study provides accounting firms with the first instrument theoretically designed to measure professional skepticism in auditors.  Objective measures of professional skepticism may be helpful to firms looking to increase audit efficiency or effectiveness, specifically in critical areas such as hypothesis generation, risk identification and fraud detection.

    Citation:

    Hurtt, R. K. (2010). Development of a Scale to Measure Professional Skepticism. Auditing: A Journal of Practice & Theory 29(1): 149-171.

    Keywords:
    Professional skepticism, scale development, trait skepticism
    Purpose of the Study:

    Professional standards have stressed the importance of individual auditor professional skepticism from the earliest codification. Although the concept of professional skepticism is widely accepted, there has been little research on exactly what comprises skepticism and how it can be measured. Professional skepticism is a complex characteristic; scales previously used to measure skepticism were not developed with the multi-dimensionality of professional skepticism in mind.  It can therefore, become difficult to draw appropriate conclusions or make comparisons with these measures. The study identifies two distinct types of professional skepticism: 1) trait skepticism, (defined as: relatively stable, an enduring quality of an individual) and 2) state skepticism (defined as: a temporary condition aroused by a given situation).  This particular study focuses only on the former and further delineates six character components of trait skepticism.  These characteristics are drawn from a careful review of the auditing standards as well as research in auditing, psychology, philosophy, and consumer behavior. The six characteristics are as follows:

    • A questioning mind
    • A suspension of judgment
    • A search for knowledge
    • Interpersonal understanding
    • Self-esteem
    • Autonomy      

    The author considers each of these component characteristics and develops a scale to more adequately and appropriately measure the trait skepticism of auditors. 

    Design/Method/ Approach:

    The author gathers 220 potential questions measuring each of the component characteristics identified. This large group of questions was further reduced based on several pre-tests performed on groups of varying size of undergraduate and graduate level business students. Once the scale had been reduced to a 30-item test, it was administered to 200 auditors from a major international accounting firm. To ensure that the scale was reliable, the test was re-administered to 88 auditors from the same international firm.  It is important to note that the scale was validated using auditors from only one major firm and was validated prior to the passage of the Sarbanes-Oxley Act of 2002.

    Findings:
    • The results provide preliminary evidence that the skepticism scale developed here is an instrument with appropriate reliability and validity.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    Discussion of: “The Importance of Account Relations when R...
    research summary last edited May 25, 2012 by The Auditing Section, 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, 08.01 Substantive Analytical Review – Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Discussion of: “The Importance of Account Relations when Responding to Interim Audit Testing Results”
    Practical Implications:

    Bedard’s (2006) discussion of Vandervelde (2006) reinforces the fact that auditors do incorporate the relationships among accounts in their responses to increases in misstatement risk.  He also suggests that it is important to consider how this pattern maps to auditors’ risk assessments at the financial statement assertion level.  His discussion emphasizes that in response to fee pressure, auditors may shift planned audit hours between accounts (i.e., from low risk areas to high risk areas), rather than increasing overall planned audit hours.  Finally, despite Bedard’s (2006) caveat that this result could be due to auditor self-presentation concerns or a change in the mix of audit procedures that does not result in increased hours, it is important to note that auditors do not appear to reduce planned audit hours in response to fee pressure – and that this could reflect auditors’ cognizance of the heightened importance that investors and the market currently placed on the role of auditing.

    Citation:

    Bedard, J. 2006. Discussion of: “The Importance of Account Relations when Responding to Interim Audit Testing Results”. Contemporary Accounting Research. 23(3): 823 – 831.

    Keywords:
    Account relations, audit planning, interim evidence, profit pressure, auditing procedures - nature, timing, and extent
    Purpose of the Study:

    This study is a conference discussion of Vandervelde (2006).  The purpose of the discussion is to critically analyze the motivation, hypotheses, experimental design, results, and implications of Vandervelde (2006).  Please see the summary of Vandervelde (2006) for further details.  

    The discussant first reviews research on risk-based auditing. The discussant believes that Vandervelde (2006) is studying an important aspect of the audit by examining how auditors incorporate relationships between accounts in their audit testing. Regarding Vandervelde’s (2006) predictions, the discussant believes that Vandervelde’s (2006) hypotheses could more accurately reflect the mathematical model’s predictions. The following points illustrate the primary differences between the expectations in Vandervelde (2006) and Bedard (2006).

    • In response to Vandervelde’s (2006) prediction that the increase in planned audit hours as the severity of the problem increases is greater for related vs. unrelated accounts, the discussant observes auditors may compensate for increased hours in higher risk areas of the audit with decreased hours in lower risk areas of the audit, which explains why prior studies find that auditors do not always respond to risk.  
    • Contrary to Vandervelde (2006), the discussant suggests that the increase in planned audit hours for low-relatedness accounts is not mitigated by fee pressure; rather there is a decline in planned audit hours, which is heightened by fee pressure.
    Design/Method/ Approach:

    The discussant reviews and provides suggestions for Vandervelde’s (2006) motivation, hypotheses, experimental design, and results.  The discussant also integrates Vandervelde (2006) in the context of prior research and suggests avenues for future research.

    Findings:
    • The discussant observes that Vandervelde’s (2006) findings suggest that auditors do consider the relationship between accounts, as planned audit hours increase for accounts related to the account where the problem was discovered and do not materially change for nonrelated accounts. 
    • The discussant states that Vandervelde’s (2006) finding that profit pressure does not influence auditors’ response to increases in risk is consistent with the market scrutiny on audit quality spurring audit firms to decrease emphasis on profit pressure.  However the discussant also observes that this finding could have been an artifact of the experimental design of the study, as auditors may have been reluctant to show that they are affected by profit pressure.  Further, this result suggests that auditors may change the mix of audit procedures for an account to address increases in risk, rather than changing the planned hours for that account.   
    • The discussant suggests that it could be informative to examine how auditors react to risks at the assertion level, rather than the account level. He suggests that accounts can be classified as “derived” vs. “generating transactions”, which can assist in mapping to assertions.  In Vandervelde’s (2006) context, the purchases account would be classified as “generating transactions”, while accounts payable and inventory are classified as “derived” (from purchases on account/disbursements and purchases/sales, respectively).  Thus, loss of documents would suggest issues with the completeness assertion for purchases, accounts payable and inventory.  The loss of documents should prompt an auditor to adjust audit procedures related to completeness, but not other assertions.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Assessing Risk of Material Misstatement, Substantive Analytical Review – Effectiveness
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  • The Auditing Section
    Auditors’ Assessment and Incorporation of Expectation P...
    research summary last edited May 25, 2012 by James L Fuehrmeyer, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditors’ Assessment and Incorporation of Expectation Precision in Evidential Analytical Procedures
    Practical Implications:

    The results of this study suggest that auditors’ precision assessments may not be well calibrated for relevant precision factors. Thus, auditors may benefit from additional guidance indicating the factors that should be considered for assessing the precision of analytical
    procedures.  Furthermore, audit firms might want to consider integrating some of the findings of this study into future training sessions and/or decision aids that would assist auditors in improving their precision calibration. An insensitivity to important precision factors may lead to over-reliance on analytical procedures, negatively affecting audit effectiveness. Because the allowance for loan losses is an estimate, the results of this study provide insight into factors that could influence the potential effectiveness of audits of estimates. Understanding how auditors evaluate analytical procedure precision for estimates is particularly critical in that analytical procedures may be the only source of assurance for testing these accounts.

    Citation:

    McDaniel, L.S. and L.E. Simmons. 2007. Auditors’ assessment and incorporation of expectation precision in evidential analytical
    procedures. Auditing: A Journal of Practice & Theory 26(1): 1-18.

    Keywords:
    Analytical procedures, precision, expectations, substantive test, audit evidence
    Purpose of the Study:

    The precision with which auditors form expectations during analytical procedures is important. The precision of an expectation is a measure of the closeness of the developed expectation to the actual amount and refers to the quality of the expectation, and thus, the quality of the analytical procedure. Professional standards clearly indicate that auditors should be able to form more precise expectations for accounts that are more predictable (income statement relationships generally are more predictable than balance sheet relationships) and when the information related to the account is more disaggregated (i.e., detailed). However, the Public Oversight Board’s (POB) Panel on Audit Effectiveness has found evidence that auditors rely on analytical procedures that do not provide the desired level of assurance, suggesting possible difficulty in assessing precision. To address this finding by the POB, this study investigates auditors’ abilities to assess expectation precision and incorporate their assessments into judgments related to substantive analytical procedures, as required by professional standards. A first step toward developing more effective guidance is obtaining a better understanding of why auditors sometimes fail to effectively apply analytical procedures. As such, the authors aim to answer the following two questions: 

    • To what extent do auditors’ precision assessments reflect the level of account predictability and the level of detail of the data used to form expectations? 
    • To what extent are auditors’ judgments consistent with their precision assessments? According to professional standards, the following judgments should be consistent with auditors’ precision assessments:

    (1)   The level of assurance expected by auditors to be provided by the analytical procedure.

    (2)   The range of the difference between the expected and recorded amount.

    (3)   The likelihood that the difference between the expected and recorded amount is due to misstatement versus non-isstatement causes.

    Design/Method/ Approach:

    The authors gathered their data experimentally at a firm training event for audit seniors and above (the training event occurred sometime during or prior to 2005). The participants were asked to review workpapers which included analytical procedures for two different accounts – the allowance for loan losses (a less predictable account) and interest income (a more predictable account). The expectations for the analytical procedures documented in the workpapers were either based on more or less detailed information. After reviewing the analytical procedures, auditors were asked to assess the precision and the level of assurance provided, provide an expectation range for the account balance, and judge the amount of difference between the expected and recorded amount due to misstatement.

    Findings:
    • Overall, auditors assess precision higher when the data forming the expectation are disaggregated (i.e., more detailed) versus aggregated (i.e., less detailed). 
    • Auditors also assess precision higher for the more predictable account (interest income) versus the less predictable account (the allowance for loan losses). 
    • Auditors’ precision assessments for the allowance for loan losses are not significantly different between the disaggregated and aggregated analytical procedures. This finding suggests that in assessing the precision of analytical procedures for less predictable accounts, auditors do not consider the effects of data aggregation. 
    • The results also show that for both accounts auditors judge the level of assurance obtained from the analytical procedures consistent with their precision assessments (i.e., higher assessed precision corresponds with a higher level of assurance).  
    • Counter to the authors’ expectations, auditors’ precision assessments were not related to their judgments of the range of differences between the expected and recorded amounts or the likelihood of misstatement.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence
    Home:
    home button