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  • Jennifer M Mueller-Phillips
    The Effects of Using the Internal Audit Function as a...
    research summary posted July 27, 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:
    The Effects of Using the Internal Audit Function as a Management Training Ground or as a Consulting Services Provider in Enhancing the Recruitment of Internal Auditors.
    Practical Implications:

    The results suggest that the profession of internal auditing faces a challenge in attracting talent, since college-graduate job applicants with some work experience are deterred from applying to positions labeled as internal audit. These individuals believe that other professionals have negative perceptions of the internal audit profession. Furthermore, the only condition that improved the likelihood that experienced job candidates would apply for an internal audit position is when the job candidates expected to spend little time in internal auditing before moving into positions outside of the IAF and the position performed primarily consulting tasks a deviation from the traditional internal audit role of performing primarily assurance services. If the IAF cannot attract a sufficient number of high-quality applicants, then its ability to serve as an effective cornerstone of high-quality corporate governance will likely be compromised.

    Citation:

    Burton, F. G., Starliper, M. W., Summers, S. L., & Wood, D. A. 2015. The Effects of Using the Internal Audit Function as a Management Training Ground or as a Consulting Services Provider in Enhancing the Recruitment of Internal Auditors. Accounting Horizons 29 (1): 115-140.

    Keywords:
    assurance services, consulting services, hiring decisions, internal audit, management training ground, recruiting
    Purpose of the Study:

    A critical component of high-quality corporate governance is having a high-quality internal audit function (IAF). The purpose of this research is first, to empirically examine the degree to which student job applicants are dissuaded from working in internal auditing positions, and second, to investigate how different job structure factors, namely using the IAF as a management training ground and/or using the IAF to perform consulting versus assurance work, affect the desirability of internal audit positions. Understanding how the type of work the IAF performs impacts job applicants is important for developing a respected and desirable profession.

    In addition to the type of work internal audit performs, a significant number of companies use the IAF as a management training ground (MTG)rotating employees, either new or experienced, into the IAF for a short stint before placing them into management positions outside the IAF. Although popular in practice, prior research shows this staffing model is associated with significant negative outcomes such as higher external audit fees, greater risk of misstated financial statements, and larger internal audit. Given these significant negative consequences, it is important to understand if positive factors exist to explain why so many companies use these rotational staffing arrangements. In this study, the authors specifically examine whether increased interest in internal audit positions is one of these positive factors of using the IAF as a MTG.

    Design/Method/ Approach:

    The authors conduct two experiments to test their hypotheses. All participants in the experiments were senior students or graduate accounting students. Experiment 1 was fully completed by 100 students, and Experiment 2 was fully completed by 169 students. Professors from six different universities emailed their students to encourage participation in the experiment. The sampled universities included both public and private institution across the United States. The evidence was collected prior to January 2014. 

    Findings:

    Responses show that participants are less likely to apply to job positions labeled as “internal audit” as opposed to those that have an “accounting” label. Additional analyses reveal that these results are driven by participants with business experience (regardless of the type and amount of experience). Twenty percent (Experiment 1) and 33 percent (Experiment 2) fewer participants with business experience would apply for a job described as internal auditing than a job described as accounting. For participants with no business experience, there was no difference in willingness to apply for the job based on the internal audit or accounting job labels.

    While participants believe internal auditors are highly respected, have excellent compensation and benefits, perform meaningful and satisfying work, have excellent promotion opportunities, and have excellent work-life balance, experienced participants believe that other business professionals have negative stereotypes of internal auditing. Altering internal audit job descriptions to include both consulting activities and management development only moderately increases applicant interest. Almost twice as many experienced participants are likely to apply to work in internal auditing when the IAF both performs consulting work and is used as a MTG, while inexperienced applicants are indifferent toward the manipulations.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Behind the Numbers: Insights into Large Audit Firm Sampling...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Behind the Numbers: Insights into Large Audit Firm Sampling Policies.
    Practical Implications:

    Given the limited evidence on firms’ sampling policies after Sarbanes-Oxley, these findings contribute to the current literature on audit sampling and provide insights into sampling policies and procedures that are important for researchers, educators, regulators, and practitioners to better understand the application of audit sampling in the current audit environment. This study provides evidence on current sampling practices and identifies important differences in sampling policy among the largest audit firms. Responses represent firm policy, and although the sampling experts indicate that they believe that firm guidance is followed in the field, actual sampling practices may vary.

    Citation:

    Christensen, B. E., Elder, R. J., & Glover, S. M. 2015. Behind the Numbers: Insights into Large Audit Firm Sampling Policies. Accounting Horizons 29 (1): 61-81.

    Keywords:
    audit misstatements, audit sampling, materiality, statistical sampling
    Purpose of the Study:

    This study addresses a number of research questions regarding the current state of audit sampling. Audit sampling is a fundamental audit testing procedure. Over the last two decades there have been significant changes in audit approaches, including strategic systems auditing in the 1990s and federally mandated audits of internal control over financial reporting for large public companies as a result of the Sarbanes-Oxley Act of 2002 (SOX). Revisions to audit approaches have the potential to change the nature and extent of audit sampling techniques used by accounting firms. For instance, the requirement to audit internal control over financial reporting has necessarily increased the extent and importance of tests of controls, many of which are performed using sampling. Additionally, the Public Company Accounting Oversight Board (PCAOB) has identified sampling as an area needing more emphasis, and inspection reports have identified multiple issues regarding audit sampling, including small and non-representative samples and incorrect or lack of error projection, among others.

    The study focuses on the policies in place at the firms and not necessarily how these policies are implemented in the field. However, due in part to internal firm and federal oversight, discussions with firm experts indicate that audit teams are expected to comply with firm sampling guidance. 

    Design/Method/ Approach:

    The survey asked respondents a number of open-ended questions regarding sampling policies and practices currently in place at the Big 4 and two other international accounting firms. The authors worked in coordination with the participating firms. A version was sent by email in Spring 2013 to one of the Big 4 firms for completion and feedback, after which some additional clarifications were made before distributing electronically to the other firms.

    Findings:
    • The sampling methods differ significantly among the largest auditing firms; while some emphasize statistical methods, others use nonstatistical methods.
    • Firms frequently use different inputs to these sampling models, thus resulting in relatively different sample sizes.
    • The authors find variation in the planned level of expected error, and they also find differences in error projection methods used and how firms respond to identified errors and misstatements.
    • Sampling approaches and parameters within most firms are identical for large public and smaller private companies despite the likely differences in business and engagement risk.
    • Some firms have significantly changed their approach to revenue testing due to PCAOB inspections, relying more heavily on substantive testing using sampling than other substantive testing such as analytical procedures.
    • Some firms have significantly changed their approach to revenue testing due to PCAOB inspections, relying more heavily on substantive testing using sampling than other substantive testing such as analytical procedures.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Sample Selection – use of statistical sampling
  • Jennifer M Mueller-Phillips
    The Impact of Internal Audit Function Quality and...
    research summary posted July 24, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 11.0 Audit Quality and Quality Control in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of Internal Audit Function Quality and Contribution on Audit Delay.
    Practical Implications:

    This research should be of interest to regulators who are concerned with the timeliness of financial reports, practitioners who are responsible for preparing and auditing financial statements, and standard setters who provide auditing guidance. In particular, the findings indicate that firms’ decisions regarding the structure of the IAF and their role in the financial statement audit can significantly affect audit completion times. Reducing audit delay from current levels back to pre- SOX 404 levels could potentially reverse the decline in the reliability of earnings announcements. The results are useful to external auditors in determining whether and how IAF work can be incorporated into the financial statement audit. This study also provides support for recent PCAOB guidance contending that external auditors can improve audit efficiency by making more extensive use of work performed by others.

    Citation:

     Pizzini, M., Lin, S., & Ziegenfuss, D. E. 2015. The Impact of Internal Audit Function Quality and Contribution on Audit Delay. Auditing: A Journal Of Practice & Theory 34 (1): 25-58.

    Keywords:
    audit delay, audit report timeliness, internal audit contribution, internal audit quality
    Purpose of the Study:

    This study investigates the internal audit function’s (IAF’s) role in the financial statement audit by examining whether measures of IAF quality and the IAF’s contribution to the financial statement audit affect audit delay. Audit delay, measured as the number of days between a firm’s fiscal year-end and the audit report date, generally captures the time required to complete fieldwork. Current interest in audit delay stems from recent accelerations in reporting deadlines and the implementation of Section 404 of the Sarbanes-Oxley Act (SOX), which together require preparers and external auditors to do more work in less time. Given the increased attestation requirements created by SOX, it is important to investigate ways in which the IAF can influence audit delay. In this study, the authors argue that the IAF can significantly affect audit completion times by helping management establish and maintain a strong system of internal control over financial reporting (ICFR) and by assisting the external auditor in the financial statement audit. The authors investigate whether IAF quality and the IAF’s contribution to financial statement audits affect audit delay in a sample of 292 firm-year observations drawn from the pre-SOX 404 period. 

    Design/Method/ Approach:

    The authors use firm-level data collected by the IIA through their 2003 and 2004 GAIN surveys. They then collect firm financial data from Compustat and audit fee and restatement data from Audit Analytics. The resulting sample contains 293 firm-year observations from 216 firms with fiscal years ending on or after December 31, 2000 and prior to November 15, 2004.

    Findings:
    • A one standard deviation increase in the comprehensive quality measure corresponds to audit delay reductions of 3.1 to 3.9 days, which are primarily driven by the competence of the internal audit staff and the quality of their fieldwork.
    • Objectivity and investment in the IAF are also associated with reductions in audit delay, but significance levels vary with time period and model specification.
    • Audit delay is significantly shorter (4.1 to 6.6 days) when the IAF contributes to the financial statement audit by independently performing relevant work, but not when the IAF works under the direction of the external auditor.
    • The mean delay is 41.9 days, and earnings are announced an average of 9.8 days prior to the audit report date.
    • High-quality IAFs are more likely to assist the external auditor by independently performing relevant work, while low-quality IAFs are more likely to be used as direct assistants.
    • The authors expect the impact of IAF quality and contribution would be even larger in the current period. The more rigorous attestation requirements of SOX 404 expanded the IAF’s potential to contribute to the financial reporting process and, therefore, should increase the impact of IAF quality and contribution on audit delay.
       
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Standard Setting
    Sub-category:
    Impact of 404, Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Auditor Mindsets and Audits of Complex Estimates.
    research summary posted July 22, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 11.0 Audit Quality and Quality Control in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditor Mindsets and Audits of Complex Estimates.
    Practical Implications:

    The study provides new direction for improving audits of complex estimates, and it adds to growing evidence that improved critical thinking, rather than increased doubt or increased demand for evidence, is key to improving audit quality. The authors show that changing auditors’ mindsets through a brief intervention allows them to make better use of the evidence that they have. The study demonstrated how a simple mindset intervention can improve audit quality, and thus, potentially improve financial reporting quality, when complex estimates are important to the financial statements. The authors expect that a deliberative mindset can help other decision makers, including investors and managers, make higher quality decisions by improving their critical analysis of a complete set of information.

    Citation:

    Griffith, E. E., Hammersley, J. S., Kadous, K., & Young, D. 2015. Auditor Mindsets and Audits of Complex Estimates. Journal Of Accounting Research 53 (1): 49-77.

    Keywords:
    accounting estimates, audit quality, fair value, professional skepticism, mindset
    Purpose of the Study:

    Complex accounting estimates, including fair values, impairments, and valuation allowances, are increasingly important to financial statements. However, auditors experience significant difficulty in auditing complex estimates, suggesting that audit quality may be low in this area. Some of these difficulties can be attributed to high levels of uncertainty about valuations given volatile financial markets and innovative securities. However, others arise from problems with auditor judgment and the audit process. Analysis of PCAOB inspection reports for the largest accounting firms reveals that fair value measurements, including impairments and other estimates, are among the most frequently cited accounts for auditor errors and that, while other audit deficiencies have decreased over time, deficiencies involving fair values and impairments have not. Chief among auditors’ judgment problems associated with auditing complex estimates are that auditors fail to adequately test the data and assumptions underlying management’s estimates and fail to notice and incorporate into their analyses inconsistencies among the assumptions, other internal data, and external conditions.

    In this paper, the authors examine whether and how changing auditors’ mindsets can improve audits of estimates, thereby enhancing audit quality in this important area. Mindsets are the set of judgment criteria and cognitive processes and procedures that produce a disposition or readiness to respond in a certain manner. Mindsets are not merely a template or framework for approaching a particular type of task; they represent a more global readiness to respond in a particular way.

    Design/Method/ Approach:

    The authors test their hypotheses in an experiment in which they manipulate mindset between participants at three levels (deliberative mindset, implemental mindset, and control). They obtained 94 usable responses from experienced audit seniors who participated while attending national or local training sessions sponsored by their firms. Participants come from three Big 4 firms and their audit experience ranges from 30 to 72 months. Seventy-eight percent are CPAs. The evidence was gathered prior to February 2014.

    Findings:
    • Auditors in the deliberative mindset condition assess the client’s biased fair value as less reasonable than do auditors in the control and implemental mindset conditions.
    • Auditors in the deliberative mindset condition are also more likely to choose a next action step that reflects more urgent concern that the fair value is unreasonable.
    • Deliberative mindset condition auditors’ explanations for their decisions are more likely to include the seeded issues and more valid issues with the estimate, generally, than are those of other auditors.
    • Additional analyses demonstrate that auditors in the deliberative mindset condition are not less trusting of management in general; rather, they target the specific assumptions with seeded errors. They also evaluate evidence about the appropriateness of the aggressive discount rate more critically than do auditors in other conditions.
    • Identification of the seeded inconsistencies and more critical evaluations of the appropriateness of the discount rate jointly fully mediate the relationship between the deliberative mindset condition and the assessed reasonableness of the fair value.
    • The deliberative mindset facilitates identification of the seeded issues and critical analysis of the discount rate, which increase concern about the reasonableness of the fair value.
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    Fair value accounting, fragile bank balance sheets and...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.06 Earnings Management – Detection and Response in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Fair value accounting, fragile bank balance sheets and crisis: A model.
    Practical Implications:

    The model offers a simple explanation of why the world, for so long after the height of the global financial crisis, is still mired in slow growth. During a prolonged and excessive boom bank profits and capital were materially increased by unrealized FVA profits. These profits justified the pay-out of liquid assets weakening the financial system. The additional capital further justified more debt financed asset expansion. With the crisis bank management realized that these unrealized capital items were not permanent. Management was able to postpone the recognition of FVA losses by using the flexibility inherent in FVA regulations, but lending was slowed to a point reflective of “safe” capital levels. Lending activity will stay subdued until all of these marked-up items have been worked off banks’ balance sheets.

    Citation:

    de Jager, P. 2014. Fair value accounting, fragile bank balance sheets and crisis: A model. Accounting, Organizations & Society 39 (2): 97-116.

    Keywords:
    fair value accounting, financial crises, financial statements, transmission mechanism, earnings management
    Purpose of the Study:

    The primary objective of this paper is to provide a reasonable alternative perspective on the relationship between fair value accounting (FVA) and the global financial crisis; a perspective that focuses on finding the link before the crisis (during the upswing) and one that reminds accountants that in banking, accounting is more than just a messenger: when bank deposits are created by accounting entries, accounting is money. To this end, a model will be developed in this paper that demonstrates the link between accounting and bank capital regulations and helps to aid understanding of the global financial crisis.

    The nexus of the model to be developed will be the impact of FVA on the regulatory capital of banks. Not all FVA entries impact banks’ regulatory capital. Thus, only FVA entries related to trading instruments or instruments designated at fair value are relevant for the model when values increase. FVA increases in the value of available-for-sale instruments are not covered because those increases would be excluded from regulatory capital. When values decrease, other-than-temporary-impairments of available-for-sale instruments become relevant as these are posted through profit and loss.

    Design/Method/ Approach:

     The author uses analytical modeling to conclude on the questions of interest.

    Findings:

    The model demonstrates the expansionary impulse generated when FVA increases bank regulatory capital. It can be argued that the same expansionary impulse will result from other accounting entries that also increase regulatory capital. FVA’s impact differs in two important aspects. First, FVA impacts regulatory capital much faster and more materially than other accounting entries that need time to impact retained earnings. It is the speed of the feedback process that matters. The second way in which the capital increase from FVA differs from increases caused by other accounting entries is that these alternatives will not result in the replacement of liquid assets in bank capital with riskier FVA gains; FVA profits do not provide liquidity that can fund dividends and remuneration payments.

    Another characteristic of the model is that it is incomplete. Banks do not just lend money due to the interaction between FVA and their capital ratios. The real economy has a need for credit before the supply of credit is considered. In the same way it is not argued in this paper that FVA is the primary or sole reason behind the cyclicality of financial capitalism.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Earnings Management – Detection and Response
  • Jennifer M Mueller-Phillips
    Internal auditors’ use of interpersonal likability, a...
    research summary posted July 20, 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:
    Internal auditors’ use of interpersonal likability, arguments, and accounting information in a corporate governance setting.
    Practical Implications:

    The findings illustrate how and when internal auditors can achieve agreement from managers using tactics that can be effective even when the underlying information supporting their position is not particularly strong. The findings should also be informative to external auditors, managers, researchers, and others interested in influencing managers’ judgments and corporate governance. The study can help develop a theory about day-to-day behavioral factors that drive variance in internal auditors’ influence over managers’ judgments.

    Citation:

    Fanning, K., & David Piercey, M. 2014. Internal auditors’ use of interpersonal likability, arguments, and accounting information in a corporate governance setting. Accounting, Organizations & Society 39 (8): 575-589.

    Keywords:
    internal auditors, interpersonal relations, corporate governance, disclosure of information
    Purpose of the Study:

    In this study, the authors examine how three variables, each fundamental to internal auditors’ interactions with managers, explain internal auditors’ influence on managers’ judgments:

    1. Internal auditors’ interpersonal likability,
       
    2. The underlying information supporting their positions, and
       
    3. Their use of thematically organized arguments to present that information to managers.

    Internal auditors tend to interact with managers frequently, and are “often the party primarily responsible for the day-to-day monitoring of management’s actions, including those related to external financial reporting.” Internal audit lacks the client services incentives of external audit, allowing internal auditors to adopt a “policeman approach,” which places little emphasis on positive interpersonal interactions with managers as clients, compared to external audit. The “police” approach to internal audit can harm the managerinternal auditor relationship. A dysfunctional relationship between managers and internal auditors is a contributing cause, and in some cases, a primary cause of a variety of accounting problems, including material weaknesses, financial restatement, regulatory compliance, and the like. 

    Design/Method/ Approach:

    The experimental case within places participants into the role of a mid-level manager who provides input to a controller about whether the value of inventory should be written down in the financial statements as obsolete. The authors recruited managers, executives, and other professionals in management training programs to participate in the study. The 133 participants averaged 8.5 years of professional business experience and 4.4 years of managerial experience. The evidence was gather prior to 2014.

    Findings:

    The authors found that because people find the thematically structured flow of an argument appealing, and because positive affective states lead to heuristic processing, managers will heuristically agree more with an internal auditor who is both likable and uses an argument structure, beyond the effects of how supportive or unsupportive the internal auditor’s information is of his position.

    • Managers agree more with an auditor who uses more supportive information than one who uses less supportive information.
    • However, beyond that, they also agree more with an internal auditor who is both likable and uses a thematically organized argument structure, regardless of whether the information presented is relatively supportive or unsupportive of the internal auditor’s
      position.
    • The results demonstrate that an internal auditor can achieve (on average) agreement from managers simply because he is likable and uses a flowing argument structure, even when the underlying information is relatively unsupportive and managers otherwise (on average) do not to agree with the internal auditor.

    Overall, the findings suggest that internal auditors can achieve additional agreement from managers on important corporate governance issues, above and beyond how supportive or unsupportive their information is, by using an argument structure and likability jointly, as a fairly straightforward presentation tactic.

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Field Data on Accounting Error Rates and Audit Sampling
    research summary last edited July 20, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.08 Evaluation of Errors – Statistical and Non-statistical in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Field Data on Accounting Error Rates and Audit Sampling
    Practical Implications:

    This study provides several important practice implications. First, prior research on audit sampling that relied on the assumption of relatively large error rates may not provide useful guidance for post-SOX audit sampling populations. Second, auditing educators, regulators, and standard setters benefit from an updated understanding of how auditors apply audit sampling guidance in auditing standards when using audit sampling in the field. For example, knowing the relatively high compliance (compared with prior periods) with requirements in auditing standards should impact the way audit sampling is taught in universities and firm trainings, how peer and federal inspectors address audit sampling issues, as well as the need for further clarity of auditing standards. Auditors also benefit as they consider the sampling techniques and input assumptions that will produce the most effective and efficient sampling plans. Specifically, an important implication of our study is related to the impact of standardized sampling templates. The firm in this study mandated the use of such templates, which contributed to levels of explicit consideration of error projection, sufficiency of sample sizes, and of sampling risk in planning and evaluating sample testing.

    For more information on this study, please contact Steve Glover.

    Citation:

    Durney, M., R. J. Elder, and S. M. Glover. 2014. Field data on accounting error rates and audit sampling. Auditing: A Journal of Practice and Theory 33 (2): 79-110

    Keywords:
    Sampling, error rates, error projection, sampling risk
    Purpose of the Study:

    Prior research has examined error characteristics of accounting populations. Many studies investigating audit sampling techniques rely on assumptions concerning the error characteristics of accounting populations. Prior research studies examining auditor performance when using audit sampling have reported:

    • Decreasing sample sizes for tests of details.
    • Auditors frequently fail to project sample errors.
    • Auditors do not consider sampling risk when projecting sample errors.

    These studies involve data from periods preceding the events resulting in the Sarbanes–Oxley Act (hereafter, SOX). Much has happened since SOX, including a renewed focus on audit quality, new auditing and accounting standards, and the creation of the PCAOB. Using proprietary post-SOX data from a large accounting firm, the authors report on:

    • Error rates in populations subject to audit sampling.
    • Auditor compliance with auditing standards with regards to error projection, sample size, and consideration of sampling risk.
    Design/Method/ Approach:

    Data for the study is comprised of the results of 160 different sampling applications from a large auditing firm in 2005 and 2006. The sampling applications were applied across a range of financial statement accounts including accounts receivable, inventory, loans, expenses, plant additions, and revenues. All the tests were substantive tests of details and meant to be representative of the population.

    Findings:

    The authors find the following:

    • Error rates in populations subject to audit sampling are significantly lower in magnitude and frequency than researchers have traditionally assumed.
    • Significantly larger sample sizes and higher error projection rates than reported in previous studies using pre-SOX data.
    • Explicit consideration of sampling risk by auditors.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Conclusions Based on Samples, Evaluation of Errors - Statistical and Non-statistical, Sample Selection – use of statistical sampling
  • Jennifer M Mueller-Phillips
    The Effects of Professional Role, Decision Context, and...
    research summary last edited July 16, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 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:
    The Effects of Professional Role, Decision Context, and Gender on the Ethical Decision Making of Public Accounting Professionals.
    Practical Implications:

    In the study, subjects who are less relativistic are less likely to concede to the client. This study identifies an interesting gender difference with respect to the ethical decision-making process between male and female accountants. Given that the lines dividing auditors and tax professionals are increasingly being blurred, firms’ training programs should take into consideration both differences in context and individual differences in experiences due to professional roles. With the increased emphasis on firms’ ethics training, these results add to the premise that one size fits all training programs are unlikely to achieve the desired results, and that firms’ ethics training may need to be tailored to account for different individual approaches to decision making.

    Citation:

    Bobek, D. D., Hageman, A. M., & Radtke, R. R. 2015. The Effects of Professional Role, Decision Context, and Gender on the Ethical Decision Making of Public Accounting Professionals. Behavioral Research in Accounting 27 1: 55-78.

    Keywords:
    ethical decision making, auditors, tax professionals, gender, context, professional role
    Purpose of the Study:

    The purpose of this study is to investigate how professional role (auditor or tax professional), decision context (an audit or tax issue), and gender influence public accounting professionals’ ethical decision making.

    U.S. auditors are bound by professional standards to function as independent, objective evaluators of evidence, and to operate as professional skeptics. In the past decade, auditors have been under increasing attack for abandoning their professional skepticism charge.  Unlike auditors, tax professionals, while also having an obligation to the tax system, face a unique professional position of being required to advocate for their clients. U.S. tax professionals have faced increasing oversight and stiffened penalties in response to the marketing of tax shelters by CPA firms and the provision of overly aggressive tax advice. Tax professionals in the U.S. have become increasingly involved in audits with respect to clients’ tax provisions and the requirements of FASB ASC 740, particularly because income taxes are one of the most frequent causes of the Securities and Exchange Commission’s (SEC) Comment Letters sent by the SEC to its registrants. Thus, while auditors and tax professionals face different environmental constraints, they have both been under increased scrutiny in recent years due to lapses in professional judgment. the marketing of tax shelters by CPA firms and the provision of overly aggressive tax advice. Thus, while auditors and tax professionals face different environmental constraints, they have both been under increased scrutiny in recent years due to lapses in professional judgment. 

    Design/Method/ Approach:

    This study investigates the effects of professional role, decision context, and gender in ethical decision making using an experiment with 134 public accounting professionals with a mixture of auditing and tax backgrounds as participants. Participants are from seven different public accounting firm offices in two different U.S. states. The sample contained 87 auditors and 47 tax professionals separately, and 76 males and 58 females separately.

    Findings:

    The results show that male participants’ professional experience influences their ethical decision making, as auditors are less likely than tax professionals to recommend conceding to the client and to indicate that they would concede when faced with a contentious client issue. The results also indicate that context plays an important role in ethical decision making, as male professional accountants are less likely to recommend that a third party concede to the client in an auditing context than in a tax context, and are less likely to indicate that they themselves would concede.

    Furthermore, the results highlight the importance of individual attributes in making ethical decisions; in particular, accountants’ ethical judgments are influenced by relativism and firm size. In addition, an interesting gender effect is identified in that females appear to use a different decision-making process than males with respect to ethical situations. Specifically, except for the effect of relativism on behavioral intentions, the results obtained for the full sample of 134 professionals appear to be driven by the male participants. When males and females are analyzed separately, professional role, context, firm size, and moral intensity are not significantly related to females’ ethical decision making.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Independence & Ethics
    Sub-category:
    Auditors’ Professional Skepticism, Moral Development and Individual Ethics Decisions
  • Jennifer M Mueller-Phillips
    Examining the Potential Benefits of Internal Control...
    research summary posted March 9, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 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:
    Examining the Potential Benefits of Internal Control Monitoring Technology
    Practical Implications:

    This study makes three primary contributions to the accounting and auditing communities of researchers, practitioners, and regulators. First, it is the first study to document economically significant benefits consistent with COSO’s assertions that formal ICM activities enhance the strength of internal control systems and the efficiency of external examinations of such internal control systems. Second, this study contributes to the literature in accounting information systems (AIS) by documenting specific benefits associated with strategically focused information technology. Finally, it enhances the IT-related auditing literature.

    However, there needs to be further research to examine the link between other types of ICM technology and specific outcomes. Similarly, it remains an open question as to how technology impacts other areas of internal control monitoring. COSO asserts the role of monitoring not only aids the financial reporting process, but also ultimately the organization’s overall system of governance, including operational decision-making. Though this study documents benefit-oriented assurance outcomes, the research area remains fruitful with respect to the impact of ICM technology on other audit quality measures.

    For more information on this study, please contact Adi Masli.

    Citation:

    Masli, A., G. F. Peters, V. J. Richardson, and J. M. Sanchez. 2010. Examining the Potential Benefits of Internal Control Monitoring Technology. The Accounting Review 85 (3): 1001-1034. 

    Keywords:
    internal control monitoring; material weakness; audit fees; audit delays
    Purpose of the Study:

    The Committee of Sponsoring Organizations of the Treadway Commission (COSO) asserts that improved ICM practices should enhance the efficiency, effectiveness, and assurance of internal control processes. In January 2009, COSO issued guidance on ICM and observed that firms often struggle with realizing the benefits of ICM-related activities. The purpose of the current study is to examine the potential benefits that firms can realize from implementing ICM technology specifically aimed at monitoring and supporting the effectiveness of their internal control systems.

    Design/Method/ Approach:

    The authors develop and test hypotheses for three explicit potential benefits associated with internal and external assurance outcomes: (1) more effective internal control systems, (2) enhanced audit efficiency, and (3) timely audit reporting. They identify 139 announcements of ICM technology purchases across the time period 2003–2006. The control group consists of all available observations listed in Audit Analytics SOX 404 Internal Controls database during the same periods.

    Findings:

    Consistent with the hypotheses, the study documents positive associations between ICM technology initiatives and subsequently stronger internal controls, enhanced audit efficiency, and timely audit reports. Collectively, the main results suggest that ICM technology yields important benefits in both internal and external assurance outcomes. In some of this research’s tests, the findings suggest transformative-oriented ICM technology initiatives yield greater assurance benefits compared to compliance-oriented ICM initiatives.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Internal Control
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Training Auditors to Perform Analytical Procedures Using...
    research summary posted February 24, 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:
    Training Auditors to Perform Analytical Procedures Using Metacognitive Skills
    Practical Implications:

    This research furthers the understanding of auditors’ judgment performance in four important ways. We show that

    • Effective training in metacognitive skills increases auditors’ diagnostic reasoning by enabling them to control and direct their thinking.
    • Training in both divergent and convergent thinking provides significantly better results than only learning to think divergently. Because the former are better able to piece together all necessary facts.
    • The key to performance improvement due to training in both divergent and convergent thinking is a reduction in a psychological mechanism called “consistency checking.” Auditors trained to use both tend to avoid premature elimination of explanations, instead subjecting explanations they generate to subsequent, explicit evaluation. An important implication of this is that for auditors who try to do both kinds of thinking simultaneously rather than sequentially the best explanation for a problem might not be generated or might be prematurely discarded.
    • In the same amount of time that participants in the other training conditions took to arrive at their inferior answers, auditors trained to use both divergent and convergent thinking chose one of the correct solutions more often, generated better explanations, and eliminated more potentially time-wasting invalid explanations.

    For more information on this study, please contact David Plumlee.

    Citation:

    Plumlee, R. D., B. Rixom, and A. Rosman. 2015. Training auditors to perform analytical procedures using metacognitive skills. The Accounting Review 90 (1): 351-369.

    Keywords:
    metacognition; divergent thinking; convergent thinking; training; analytical procedures; ill-structured tasks.
    Purpose of the Study:

    Auditors encounter many ill-structured tasks. Due, in part, to their greater technical knowledge, partners and managers perform these tasks better than less experienced auditors. Partners and managers also have in their memories a diverse set of problem solutions gained from their experience that they can retrieve as needed to organize and solve ill-structured problems. Less experienced auditors do not have access to these additional experiences and may benefit from a more structured approach to thinking while solving ill-structured tasks. We believe that training less experienced auditors in in metacognition—consciously thinking about one’s thought process—will help close the performance gap. We chose to train less experienced auditors to use a sequential thought process comprised of two metacognitive skills: divergent thinking, where they generate explanations for unusual evidence, followed by convergent thinking, where they evaluate explanations generated and eliminate those judged infeasible. Training less experienced auditors in the proper use of these skills was expected to provide them with the problem-structuring knowledge that managers and partners acquire through their frequent encounters with ill-structured situations. 

    Design/Method/ Approach:

    Auditors with approximately two years of experience were randomly assigned to receive training in either divergent and convergent thinking skills, only divergent, or neither (a control). The training included four separate self-paced online sessions over two weeks. At the end of each session, we measured participants’ comprehension of the training and their ability to apply the specific skills addressed in that session. The fourth session synthesized the previous sessions and included a comprehensive analytical review case to measure whether the training resulted in better performance.

    Findings:

    We found that

    • In response to evidence inconsistent with their expectation, auditors who completed both divergent and convergent thinking training increased both the number and quality of explanations for that evidence. They focus more on generating explanations when performing divergent thinking instead of trying to sort out which alternatives ‘‘make sense.”
    • Training in both skills resulted in a greater ability to generate and ultimately choose one of the two viable explanations in the final case. Auditors trained to use both types of thinking had a fourfold higher likelihood of identifying a logically viable explanation compared to those receiving divergent thinking training alone—and a vastly better likelihood than those having neither type.
    • In a supplemental study, we asked participants about the process they used when generating explanations in the final case. Training in only one of these metacognitive skills leads decision makers to eliminate explanations while they are being generated, possibly eliminating a correct explanation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Substantive Analytical Review – Effectiveness