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  • Jennifer M Mueller-Phillips
    Does Earnings Quality Affect Information Asymmetry? Evidence...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.05 Evaluating Accruals/Detection of Abnormal Accruals, 14.0 Corporate Matters, 14.05 Earnings Targets and Management Behavior in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Earnings Quality Affect Information Asymmetry? Evidence from Trading Costs
    Practical Implications:

    The quality of reported in earnings is influenced by a firm’s fundamentals. To the extent investors differ in their ability to process this information, poor earnings quality can lead to information asymmetry, which can be costly. For these reasons, standard-setters and regulators are concerned about the quality of accounting information and its consequences for capital markets. This study provides empirical support for the concerns articulated by regulators that an important adverse consequence of poor earnings quality is increased information asymmetry and reduced liquidity.

    For more information on this study, please contact Nilabhra Bhattacharya.
     

    Citation:

    Bhattacharya, N., H. Desai, and K. Venkataraman. 2013. Does Earnings Quality Affect Information Asymmetry? Evidence from Trading Costs. Contemporary Accounting Research 30 (2).

    Keywords:
    financial reporting; earnings quality; information asymmetry
    Purpose of the Study:

    An important attribute of the quality of accounting information is the extent to which earnings (accruals) map into cash flows. Poor mapping of accruals into cash flows reduces the information content of reported earnings and results in lower-quality earnings. If investors differ in their ability to process earnings related information, then poor earnings quality can result in differently informed investors and thereby exacerbate the information asymmetry in financial markets. Regulators and standard-setters view a reduction in information asymmetry to be an important benefit of improved earnings quality. This study examines whether poor earnings quality is associated with higher information asymmetry in capital markets.

    Design/Method/ Approach:

    The authors examined the association between earnings quality and information asymmetry during non-earnings announcement periods. Additionally, they tested whether earnings quality is associated with the increase in adverse selection risk around earnings release. The initial sample of firms tested included all NSYE and NASDAQ firms with available data on the CRSP, COMPUSTAT, and Trades and Quotes (TAQ) databases. The firm data was measured for the years 1997 through 2006. Information asymmetry was measured as reflected in the adverse selection component of the trading cost.  Descriptive statistics were used to gather empirical results.

    Findings:
    • The inverse relation between earnings quality and the increase in information asymmetry around earnings releases is observed for all measures of earnings quality.
    • The association between earnings quality and the increase in information asymmetry is more pronounced for smaller firms.
    • Managerial choices that cause accruals volatility to be too high or too low relative to industry norms increase information asymmetry.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Corporate Matters
    Sub-category:
    Earnings Targets & Management Behavior, Evaluating Accruals/Detection of Abnormal Accruals
  • Jennifer M Mueller-Phillips
    Drivers of the Use and Facilitators and Obstacles of the...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Drivers of the Use and Facilitators and Obstacles of the Evolution of Big Data by the Audit Profession.
    Practical Implications:

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

    Citation:

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

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

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

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

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

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

    Category:
    Auditing Procedures - Nature - Timing and Extent
  • 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
  • The Auditing Section
    Exploring Trust and the Auditor-Client Relationship: Factors...
    research summary posted May 3, 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, 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative
    Practical Implications:

    The findings provide evidence that auditors do hold a level of trust in client representatives and that the level of trust is associated with commonplace behaviors of client representative that attract trust.  The results of this study are important to make auditors and auditing standards setters aware of factors that may lead to greater auditor trust of client management and perhaps consider whether there may be a potential for excessive trust to overwhelm the auditor’s professional skepticism. Note that the study was unable to determine whether the levels of trust that the auditors had for the client were such that auditor judgment would be compromised.

    Citation:

    Rennie, M. D., L. S. Kopp, and W. M. Lemon. 2010. Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative. Auditing: A Journal of Practice and Theory 29 (1): 279-293

    Keywords:
    Trust, Professional Skepticism, Auditor-Client Relationship
    Purpose of the Study:

    A financial statement audit cannot be conducted in the absence of the auditor’s trust of client management.  The auditor needs information provide by management and the cooperation of management to carry out the audit.  Thus, the auditor has no option but to bestow some degree of trust upon client management.  Yet, if trust is too strong, professional skepticism could be impaired.  Below are the objectives of this descriptive, exploratory study: 

    • To shed light on auditors’ trust of client management using the context of an auditor-client disagreement.
    • To learn about client behaviors (e.g. openness of communication and demonstration of concern) that may influence the auditor’s trust of a client.
    • To learn about aspects of the auditor-client relationship (length of association and frequency of past disagreements) that may influence the auditor’s trust of a client.
    • To gather auditors’ opinions about the importance of trust and about managing the balance between trust and professional skepticism.
    Design/Method/ Approach:

    The authors collected their evidence via a survey questionnaire prior to June 2007. Participants surveyed include 71 experienced auditors (48 partners, 2 principals, 20 senior managers, and 3 managers) from Canadian international accounting firms. Participants were asked to briefly describe a disagreement they had previously had with a client and were asked specific questions about that disagreement.

    Findings:
    • A disagreement experience with the client is relevant to the auditor’s trust of that client.
    • A client’s openness of communication during the course of a disagreement is positively associated with the auditors’ trust of that client representative.
    • A client’s demonstration of concern toward the auditor appears to be trust-relevant.
    • The frequency of disagreements with the client is negatively associated with the auditor’s trust of the client.
    • The length of the auditor-client relationship is positively associated with the auditor’s trust.
    • An auditor’s satisfaction with the outcome of the disagreement is positively associated with the auditor’s trust. 
    • The auditor’s predisposition to trust is not associated with the auditor’s trust of the client.
    • Auditors believe it is important to trust their clients but they also attempt to ensure that trust does not impede professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Engagement Management
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
    Home:
    home button
  • Jennifer M Mueller-Phillips
    External Auditors’ Involvement in the Internal Audit F...
    research summary posted January 17, 2017 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:
    External Auditors’ Involvement in the Internal Audit Function’s Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery
    Practical Implications:

    These findings provide insight into the decision-making process of external auditors as they make IAF reliance decisions. In particular, the results show how IAF objectivity interacts with external auditor involvement to have an impact on external auditors’ reliance decisions and how subsequent reliance decisions are affected by negative evidence about the quality of the IAF’s work.        

    Citation:

    Pike, B. J., L. Chui, K. A. Martin, and R. M. Olvera. 2016. External Auditors’ Involvement in the Internal Audit Function’s Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery. Auditing: A Journal of Practice and Theory 35 (4): 159 – 173.

    Keywords:
    auditor judgment, internal audit function, audit coordination, and belief-adjustment model.
    Purpose of the Study:

    The purpose of this study is to experimentally examine how external auditors’ involvement in the internal audit function’s (IAF’s) work plan influences their decisions to rely on the work of the IAF and how that involvement affects their audit response in terms of re-performance of the IAF’s work and adjustment to budgeted hours. Furthermore, the authors go beyond the focus on external auditors’ initial reliance/re-performance decisions and evaluate how involvement influences their subsequent reliance and re-performance decisions after the discovery of a negative audit finding. 

    Design/Method/ Approach:

    The authors conduct an experiment with senior-level auditors from a large public accounting firm to investigate how involvement in the IAF’s work plan influences external auditors’ reliance on the IAF both before and after a negative audit finding.

    Findings:
    • The authors find that involvement increases the perceived objectivity of the IAF and that both involvement and objectivity influence external auditors’ initial reliance decisions, whereby involved auditors report greater reliance on the work of IAF. This greater reliance translates into re-performing less of the IAF’s work and reducing the audit budget to a greater extent as compared to external auditors with no involvement.
    • The authors find that external auditors in the involvement condition continue to exhibit a greater propensity to rely on the IAF and re-perform less of the IAF’s work when compared to those in the no-involvement condition, even after a negative audit finding. 
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Reliance on Internal Auditors
  • 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
    Field Data on Accounting Error Rates and Audit Sampling
    research summary posted February 19, 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
    Firm-Level Formalization and Auditor Performance on Complex...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Firm-Level Formalization and Auditor Performance on Complex Tasks.
    Practical Implications:

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

    Citation:

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

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

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

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

    Design/Method/ Approach:

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

    Findings:

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

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
  • Jennifer M Mueller-Phillips
    Gathering Evidence through Enquiry: A Process Improvement...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Gathering Evidence through Enquiry: A Process Improvement Focus
    Practical Implications:

    Given the results, the study provides evidence that there may need to be some additional guidance or tools used by auditors to stimulate the planning of client inquiries in order enhance the reliability of audit evidence obtained from client inquiry.  Auditors may benefit from having some high-level guidelines and framework to prepare and plan for meetings where they will be inquiring of management.  There would be benefits to providing a loose framework of items to consider before making an inquiry of management. This could increase the reliability of the inquiries as a form of evidence.  If the information obtained through inquiry is more reliable, the judgments and decisions that an auditor makes based on the inquiries may achieve a higher level of audit quality.

    For more information on this study, please contact Guoping Liu.
     

    Citation:

    Liu, Guoping. 2012. Gathering Evidence through Enquiry:  A Process Improvement Focus.   Behavior Research in Accounting 24 (2): 153-175.

    Keywords:
    Audit enquiry, cognitive planning, decision aids, experiment
    Purpose of the Study:

    As the accounting guidance continues to implement standards that require client management to make even more estimates in their financial statements, auditors have to rely on inquiries of client management as means of obtaining of audit evidence.  The critical aspect of this notion is how to make information obtained from management inquiries a more reliable form of audit evidence.  In order to make the evidence more reliable, it is important to determine what improvements in the inquiry process need to be made. 

    Audit inquiries are a key aspect of seeking information regarding the company’s financial and non-financial information.  Inquiries could include obtaining information regarding significant fluctuations in financial information, changes in the business, assumptions made in estimates, the rationale behind complex business transaction as well as other aspects about a client.

    The authors develop two types of decision aids and examine how these aids impact the inquiry process in which auditors engage with management.  The author believes that these decision aids may help improve how auditors plan for inquiries of client management as opposed to explicitly indicating how the inquiry process should occur.   The two types of decision aids are:

     

    • Theory-based decision aid:    This is based on psychology-based theory that someone who plans for the inquiry procedure by creating a mental simulation of its conversation with management will be better prepared to successfully completes the inquiry process.  Cognitive planning could ultimately improve the task performance (but not by prescribing specific behavior) by providing only simple task instructions to assist in planning for an inquiry. 
    • Practice-based decision aid:  This is based on the CICA 360 model that focuses on providing a basis for developing a practice-aid for the planning of client management inquiry,  This model focuses on the reliability of the evidence obtained through the inquiry including the reliability of the interviewee, the effectiveness of the interviewer, the quality of the information, the credibility of the findings noted, and how the information is integrated and synthesized by the auditor into the audit evidence.  The author develops a list of matters to consider in preparing for the client management inquiry.  Using a practice-based planning tool, the auditors will improve how auditors plan for the inquiries as compared to performing a checklist of required steps in carrying the inquiry task.


     

    Design/Method/ Approach:

    The participants consisted of 150 Master-level students (from two Canadian universities) who have approximately 6-24 months of audit experience.  The experiment was a 1x3 between-subject research design.  The participants were divided into one of three groups:  base, cognitive planning and practice aid groups.  The base group was provided the background information and then given the instruction to describe how they would perform the inquiry of management.  The cognitive planning group was given more instruction than the base group and was instructed to consider the information the auditor would like to obtain, how to obtain such information during the inquiry, and sequence of steps to carry out the inquiry.  The group is then asked to describe how they would perform the inquiry of management.  The practice group was given the practice-aid that listed the matters to consider in planning the inquiry in detail

    Findings:
    • Comparing the results of the cognitive planning group to the base group, the author finds that the cognitive planning group planned to pose more questions of a larger and more diverse group of the client.  This group also planned to extend their audit procedures beyond inquiry to corroborate the information obtained from management during the inquiry. 
    • When comparing the results of the cognitive planning group to the practice aid group, the results are similar with regard to their planned questions and number of interviewees; however, there was less focus on corroboration outside of inquiring of management
       
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    Haphazard Sampling: Selection Biases Induced by Control...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Haphazard Sampling: Selection Biases Induced by Control Listing Properties and the Estimation Consequences of these Biases
    Practical Implications:

    These findings suggest that the properties of haphazard samples chosen from control listings are likely to differ from those of random samples.  Subconscious effort minimization and diversification behaviors, coupled with visual perception artifacts, yield samples that violate requirements for independence and equal selection probability.  These violations, in turn, are likely to produce biased error projections with difficult to discern risk properties.  Although widely used and specifically identified in audit standards as a sampling technique that can be employed to obtain a representative sample, haphazard sampling may not be a reliable substitute for random sampling.

     

    For more information on this study, please contact Thomas W. Hall

    Citation:

    Hall, T. W., A. W. Higson, B. J. Pierce, K. H. Price, and C. J. Skousen. 2012. Haphazard sampling: Selection biases induced by control listing properties and the estimation consequences of these biases. Behavioral Research in Accounting 24 (2):101-132.

    Keywords:
    nonstatistical sampling, haphazard sampling, sample selection bias
    Purpose of the Study:

    Audit samples represent an important type of evidence used to assess the error status of accounting populations.  As a result of its professional acceptance and lower cost, nonstatistical sampling historically has played a prominent role in audit sampling.  Haphazard sampling is a nonstatistical technique commonly used to emulate random sampling and consequently when used no explicit selection strategy should be employed.  However, a number of sampling experts have expressed doubts about whether haphazard sampling is a reliable substitute for random sampling.

     

    We hypothesized that haphazard samples differ from random samples because the haphazard selection process is influenced by: (1) auditor behaviors intended to minimize sample selection effort and to ensure a diversified sample composition, and (2) variations in the appearance of control listing entries.

    Design/Method/ Approach:

    We created two control listings representing a population of accounts receivable and a population of inventory items.  The accounts receivable control listing consisted of 22 pages with 792 customer accounts, while the inventory control listing consisted of 26 pages with 1,404 inventory items.

     

    We conducted three experiments in which participants were instructed to select haphazard samples from the control listings.  Participants in the first experiment were 75 students enrolled in either senior or master’s-level accounting courses at a public university located in the southwestern United States.  The second experiment utilized 40 university students in the United Kingdom who were enrolled in either senior or master’s-level accounting courses.  These students serve as effective proxies for entry-level auditors, who select most samples.  The third experiment utilized 53 audit seniors from two offices of a Big 4 audit firm located in the southwestern United States.  Because of time constraints, the audit seniors sampled only from the inventory control listing.  Upon completion of the sample selection process, all participants completed an exit survey.  The data collection was completed by the middle of 2009.

    Findings:

    As expected, we observed unequal page selection rates.  Most participants began the sample selection process on the first page of control listings.  Also, sample selections exhibited a high positive correlation with listing serial position, indicating that participants tended to proceed through the control listings in serial fashion.  Statistical analyses confirmed that participants exhibited higher selection rates for early pages, followed by declining selection rates for middle pages, with an upturn in selection rates for ending pages.  All of these results are inconsistent with the properties of random samples.

     

    Line selection rates also were unequal and consistent with expectations that visual perception biases influence sample selections.  Line entries with a low level of visual crowding tended to have higher selection rates than line entries with a high level of visual crowding.  Similarly, line entries with a high level of luminance contrast were selected more often than line entries with lower levels of luminance contrast.  Statistical tests confirmed that lines at the top and bottom of pages were overrepresented in each participant group’s samples. As with page selection, these results are inconsistent with the properties of random samples.

    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Evaluation of Evidence, Sample Selection – use of statistical sampling