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  • Jennifer M Mueller-Phillips
    The Effects of Employer and Client Identification on...
    research summary posted September 12, 2013 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 Employer and Client Identification on Internal and External Auditors' Evaluation of Control Deficiencies
    Practical Implications:

    The Primary implication of this study is that reliance on the work of internal auditors may improve audit quality. AS5 recommends reliance on the work of internal auditors for lower-risk areas because it is presumed to improve efficiency. This paper, however, suggests that quality will be improved as well. Therefore, auditors may want to evaluate policies regarding regarding using the work of internal auditors and do so more heavily in the future.
     

    For more information on this study, please contact C.M. Stefaniak.

    Citation:

    Stefaniak, C., R. Houston, and R. Cornell. 2012. The Effects of Employer and Client Identification on Internal and External Auditors' Evaluations of Internal Control Deficiencies. Auditing: A Journal of Practice and Theory. (31)1:39 –56.

    Keywords:
    Auditor judgment, organizational identification, internal auditor, external auditor
    Purpose of the Study:

    Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations. This study uses experimental data to determine whether internal auditors or external auditors are more lenient and by extension, which auditors perform higher quality audits.

    Design/Method/ Approach:

    In the post-Sarbanes Oxley period, the authors conducted an experiment with 40 internal auditors and 48 external auditors. Participants were given a hypothetical scenario, and were asked to evaluate the internal controls of the hypothetical firm.

    Findings:

    The main differences between internal and external auditors are as follows:

    • Internal auditors perceive a greater level employer identification when compared to external auditors
    • Internal auditors are less lenient than external auditors
       
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    The Effects of Internal Audit Report Type and Reporting...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors' Risk Judgments.
    Practical Implications:

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

    Citation:

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

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

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

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

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

    Design/Method/ Approach:

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

    Findings:
    • Compared to their non-reporting peers, internal auditors who provide descriptive internal audit reports do not make more conservative fraud risk or control risk assessments.
    • Compared to their non-reporting peers, internal auditors providing assurance internal audit reports make (do not make) more conservative fraud (control) risk assessments.
    • Internal auditors providing assurance internal audit reports do not make more conservative fraud risk or controls risk assessments than peers providing descriptive internal audit reports.
    • Internal auditors reporting mainly to the audit committee make more conservative fraud risk or control risk assessments than peers reporting mainly to management.
    • Internal auditors providing assurance internal audit reports who report mainly to management (the audit committee) have the least (most) conservative control risk assessments. 
    • Of internal auditors not providing assurance internal audit reports, those reporting mainly to management or mainly to the audit committee make equally conservative control risk assessments.
    • Both public and nonpublic internal auditors show moderate support for descriptive internal audit reports, with support from nonpublic internal auditors marginally higher than from public internal auditors. Participants believe that while descriptive internal audit reports may enhance the prestige of the internal audit function and enhance corporate governance, they not be relevant to external stakeholders and may interfere with internal audits’ true role.
    • Compared to support for descriptive internal audit reports, support for assurance internal audit reports is lower. Participants believe that although assurance internal audit reports may enhance corporate governance, they may open internal audit to scapegoating, interfere with internal audits’ true role, lead to replication of external auditors’ work, and take away the flexibility that lets internal audit focus on important areas that the external auditors consider out of scope.
    • Internal auditors expect descriptive (assurance) internal audit reports to cost about 17.5% (59.3%) of an internal audit department’s current budget.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    The Effects of Professional Role, Decision Context, and...
    research summary posted 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
    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
    The Impact of Initial Information Ambiguity on the Accuracy...
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of Initial Information Ambiguity on the Accuracy of Analytical Review Judgments
    Practical Implications:

    The practical implication of this research for auditors is that it is best to avoid making initial hypotheses until after they obtain a comprehensive perspective of the data. Auditors should instead treat early stages of the decision process as a fact-finding exercise.

    Citation:

    Luippold, B.L. and T.E. Kida. 2012.  The Impact of Initial Information Ambiguity on the Accuracy of Analytical Review Judgments.  Auditing: A Journal of Practice and Theory. (31) 2:113–129.

    Keywords:
    analytical review, hypothesis testing, initial information ambiguity, auditing
    Purpose of the Study:

    This study seeks to determine the extent to which initial information ambiguity affects analytical review judgments. That is, this paper examines whether the impact of initial information ambiguity persist even after the ambiguity is gone.

    Design/Method/ Approach:

    Around 2010 94 participants, who were mainly staff level auditors, participated in an experiment with a seeded error wherein they were required to perform preliminary analytical procedures. The participants were separated by condition into different levels of information ambiguity to perform preliminary analytical procedures and all were then given the full data to make a final judgment.

    Findings:

    The main finding of this paper is that initial information ambiguity affects an auditor's ability to detect financial statement errors at the end of the analytical review process. Specifically, if auditors develop initial hypotheses using ambiguous information sets, they are less likely to identify errors causing fluctuations in financial data even after they search through all of the client's relevant information

    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Substantive Analytical Review – Effectiveness
  • 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
  • The Auditing Section
    The Importance of Account Relations when Responding to...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.01 Substantive Analytical Review – Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Importance of Account Relations when Responding to Interim Audit Testing Results
    Practical Implications:

    The results of the study are important, as they demonstrate that relations among different financial statement accounts should be considered when examining how auditors respond to changes in risk of misstatements.  Specifically, auditors do appear to respond to increases in the risk of material misstatement of one account by also increasing planned audit hours in related accounts.  The results also highlight the fact that auditors’ responses to changes in audit risk are insensitive to fee pressure; specifically, the increase in budgeted audit hours when encountering a serious misstatement is similar whether fee pressure is low or high.  Moreover, the author suggests that the concept of relatedness of accounts explored in this paper could be extended to tests of internal controls – for example, information about the effectiveness of one internal control could be informative about strength or importance of related internal controls

    Citation:

    Vandervelde, S. 2006. The Importance of Account Relations when Responding to Interim Audit Testing Results. Contemporary Accounting Research. 23(3): 789 – 821.

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

    Both U.S. and international auditing standards mandate auditors to adapt audit procedures as the risk of the audit engagement changes.  As many financial statement accounts are interrelated (e.g., accounts payable and inventory), it is important for auditors to consider the relations between accounts when engaging in audit planning procedures and adjusting audit procedures for changes in risk.  This study tests auditors’ responses to risk changes discovered during interim testing (potential fraud, error, or no problem).  The study also explores the following two potential reasons why prior research has generally concluded that auditors are not very responsive to risk changes:

    • Profit pressures may cause auditors to avoid increasing audit testing, in order to keep the engagement audit fees at the level initially agreed upon.  To address this potential explanation in the experiment, the author examines whether auditors’ still increase planned audit hours in the presence of more severe misstatements even when audit profit pressure is high.
    • An auditor’s response to risk changes may not be detected when accounts are analyzed in isolation rather than considering the relations between accounts (that are inherent in the double-entry format of recording transactions). For example, an auditor may address an increase in risk of accounts payable by performing additional testing of inventory receipts. To address this potential explanation in the experiment, the author examines how auditors’ responses to risk increases in an account differ, depending on whether the accounts are related vs. unrelated. 
    Design/Method/ Approach:

    The research evidence was collected prior to 2004. The author uses a group of audit senior associates from both Big 4 and non-Big 4 audit firms to complete a simulated audit budgeting task from a website. Participants are first asked to read background information on the audit client, including the prior year audit budget and realized audit hours.  Then, participants are asked to prepare an
    initial budget for audit hours allocated to five financial statement accounts.  Next, participants view the results from interim testing procedures (where the potential fraud, error, or no problem arises) and are then asked to indicate the amount of audit hours they would budget for the year-end audit work, representing their response to the change (or no change) in risk. 

    Findings:
    • Auditors’ planned audit hours for an account increase as the interim audit procedure results indicate that the account has more serious problems (i.e., potential fraud is the most serious, error is moderately serious, and no problem is least serious).
    • As the severity of a potential account misstatement increases, the associated increase in budgeted audit hours is greater when relatedness between accounts is high than when relatedness is low. 
    • The increase in budgeted audit hours in response to the interim testing results indicating a serious misstatement is the same under both low and high fee pressure, indicating that auditors’ response to increased risk is insensitive to high fee pressure.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Assessing Risk of Material Misstatement, Substantive Analytical Review – Effectiveness
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  • Jennifer M Mueller-Phillips
    The Outcome Effect and Professional Skepticism
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Outcome Effect and Professional Skepticism
    Practical Implications:

    These findings demonstrate that, although the profession is calling for more skepticism, the underlying culture may inhibit such behavior if auditors are punished for being skeptical when it turns out there is no misstatement. In relation to consultation prior to skeptical behavior, an internal firm-level training that makes evaluators more aware of outcome bias may be more effective than a subordinate-driven solution if encouraging skeptical behavior. 

    Citation:

    Brazel, J. F., S. B. Jackson, T. J. Schaefer, and B. W. Stewart. 2016. The Outcome Effect and Professional Skepticism. The Accounting Review 91 (6): 1577 – 1599. 

    Keywords:
    audit, evaluation, hindsight bias, outcome effect, and professional skepticism.
    Purpose of the Study:

    The level of audit quality on audit engagements hinges on the amount of professional skepticism exercised by auditors. This viewpoint has led to a renewed focus on addressing auditors’ failure to exercise sufficient levels of skepticism.  Highly skeptical auditors increase the likelihood that material misstatements are detected, but exercising skepticism may also come at a cost when additional work is performed to obtain sufficient and appropriate evidence. The authors experimentally test whether outcome effects exist in supervisors’ evaluations of skeptical behavior. Specifically, does outcome information affect the evaluation of an auditor’s decision to investigate a matter as though the auditor should have “known all along” whether a misstatement existed? 

    Design/Method/ Approach:

    The authors utilize an experiment in which practicing audit seniors were asked to evaluate the performance of a hypothetical staff auditor on his or her engagement. They also administered a survey to investigate auditors’ perceptions of how the outcome of investigating an inconsistency affects how they are evaluated. 

    Findings:
    • The authors find strong support for the prediction that the outcome of an investigation will affect auditors’ performance evaluations. Despite the fact that the staff auditors exhibited the same skeptical judgments and actions, the outcome effect causes their evaluations to provide lower performance evaluations to staff who do not identify a misstatement versus staff who do identify a misstatement.
    • The authors observe that the outcome of the investigation influences the perceived benefit of the investigation, which, in turn, influences whether the evaluator frames the cost of the investigation as lost time or a normal cost of the audit.
    • The authors’ survey results suggest that the participants anticipate that outcome effects will be present in the evaluations of auditors who engage in skeptical behavior.
    • In addition, although one might think that consultation could provide an easy fix for outcome bias in evaluations, the authors find that even when subordinates consult with their supervisors prior to engaging in skeptical behavior and receive permission to proceed, supervisors are unable to purge outcome bias from their evaluations of audit staff.  
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism
  • Jennifer M Mueller-Phillips
    The Role of Account Subjectivity and Risk of Material...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Role of Account Subjectivity and Risk of Material Misstatement on Auditors’ Internal Audit Reliance Judgments
    Practical Implications:

    This paper suggests that the relationship between account subjectivity and usage of internal audit depends on the relative risk of misstatement.  This complex relationship has not been shown in academic literature, nor is it highlighted in audit standards.  More specifically, at lower levels of risk of misstatement, increases in subjectivity have no influence on the reliance of internal audit.  At moderate risk levels the extent of internal audit reliance increases with subjectivity of the account.  At high levels of misstatement internal audit reliance decreases with account subjectivity.  This study provides insight into the decision criteria for internal audit reliance and highlight where internal audit usage maybe more prevalent, as well as were further audit guidance may be beneficial.

    Citation:

    Bhattacharjee, S., M.J. Maletta, K.K. Moreno. 2016. The Role of Account Subjectivity and Risk of Material Misstatement on Auditors’ Internal Audit Reliance Judgments. Accounting Horizons 30 (2): 225-238.

    Keywords:
    Internal audit; account subjectivity; material misstatement risk
    Purpose of the Study:

    Reliance on Internal Audit has become an important element of the external audit.  Use of Internal Audit can play a significant role in reducing audit costs without sacrificing audit quality.  However, the extent of usage of Internal Audit has been shown to be influenced by inherent risk, control risk, and the subjectivity of audit tasks.  This paper looks at the interaction between risk assessment and subjectivity to provide insight into the complexities associated with the usage of internal audit.  The authors aim to dive deeper into the analysis of internal audit usage, expanding on the dichotomous “low or high risk” assessment by investigating moderate risk scenarios.  By analyzing these relationships with a field-based questionnaire, the authors present documentation of how real decisions are based on a complex assessment of the role of internal auditors.

    Design/Method/ Approach:

    The authors conducted a field-based questionnaire using 68 auditors from a Big 4 firm.  These auditors were located in the U.S., but came from different geographic areas.  They have an average experience of 46 months and represented 15 different industry specializations.  The auditors were asked to choose one public company client and respond to questions regarding demographic information, client characteristics, external audit team characteristics, client misstatement risk, account subjectivity, client internal audit structure, and external audit assessment of internal audit usage.

    Findings:
    • The authors find that auditors’ reliance decisions involve an interaction between material misstatement risk and account area subjectivity. 
    • The authors find that incremental increases in account subjectivity have no effect on extent of internal audit reliance when misstatement risk is assessed at lower levels.  At moderate levels of misstatement risk, however, account subjectivity is positively associated with use of internal auditors.  This suggests that moderate misstatement risk creates opportunities for auditors to benefit from increasing internal audit utilization without offsetting impairments to audit effectiveness.  At higher levels of misstatement risk, incremental increases in account subjectivity have a negative association with external audit usage.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Reliance on Internal Auditors
  • Jennifer M Mueller-Phillips
    Toward Effective Big Data Analysis in Continuous Auditing.
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Toward Effective Big Data Analysis in Continuous Auditing.
    Practical Implications:

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

    Citation:

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

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

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

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

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

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

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

    The authors identify the nine CA Challenges:

    • Audit on data with different formats
    • Audit on asynchronous data
    • Audit on conflicting data
    • Audit on illegally tampered data
    • Audit on incomplete data
    • Audit on data with various identifiers
    • Audit on aggregated data
    • Search encrypted data
    • Audit on encrypted data
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses