An examination of auditor planning judgments in a complex accounting information system environment

Paper presented at the 2007 International Symposium on Audit Research, Shanghai, China

An examination of auditor planning judgements in a complex accounting information system environment

Contemporary Accounting Research, 24(4): pp. 1059-83This study investigates the effects of computer assurance specialist (CAS) competence and auditor accounting information system (AIS) expertise on auditor planning judgements in a complex AIS environment. Recent professional standards state that auditors need to change their audit strategies in reaction to the all-encompassing changes in their clients’ AIS (American Institute of Certified Public Accountants [AICPA] 2001, 2002). Information technology (IT) applications, such as enterprise resource planning (ERP) systems, are significantly changing the ways in which companies operate their businesses (e.g., business process reengineering) and auditors perform their duties (Helms 1999; Public Oversight Board [POB] 2000). For example, the implementation and utilization of ERP systems at many major corporations can increase audit-related risks such as business interruption, data base security, process interdependency, and overall control risk (Hunton, Wright, and Wright 2004). As technological developments continue, auditors must expand their AIS knowledge and skills in order to perform effective and efficient audits (POB 2000; Kinney 2001; AICPA 2002). Prior research suggests that expertise in the AIS domain may make auditors more cognizant of AIS-specific risks and provide them with the sophisticated audit skills required in such settings (Lilly 1997; Hunton et al. 2004). To our knowledge, our study is the first to examine whether auditors’ AIS expertise levels affect their risk assessments and subsequent testing decisions in a complex AIS setting

The effect of fraud assessment documentation structure on auditors’ ability to identify control weaknesses: The moderating role of reviewer experience

Paper presented at the 2006 American Accounting Association Annual Meeting, Washington, D.C.The current regulatory environment, brought on by recent high-profile audit failures, expands the auditor’s role in detecting fraud. For example, auditors must now provide an opinion on clients’ internal controls, addressing their effectiveness at preventing or detecting fraud. While the structure of workpaper documentation has been shown to affect audit workpaper preparers’ assessments of overall fraud risk, prior research has not addressed the role their reviewers’ experience plays in mitigating documentation structure effects. Our study matches audit workpaper preparers with reviewers to investigate whether reviewer task-specific experience moderates the effect of fraud assessment documentation structure on the audit review team’s ability to identify the presence of significant control weaknesses. Consistent with expectations, we find that preparers who are required to document components of their fraud assessments provided more favorable (and lower quality) assessments of significant control weaknesses than those using either a supporting or balanced documentation structure. More importantly, results indicate that reviewer task-specific experience moderated the effect of documentation structure on reviewers’ identification of control weaknesses such that experienced reviewers compensated more for the effect of component documentation than reviewers with less experience. Our results suggest that experienced reviewers are better able to overcome challenges presented by documentation structure and more effectively assess the impact of control weaknesses than their less experienced counterparts. These results provide support for new regulations emphasizing the role of experience during the control assessment process

The effect of client characteristics on the negotiation tactics of auditors

Paper presented at the 2006 American Accounting Association Auditing Section Mid-Year Meeting, Los Angeles, CA.Although the financial statements of an organization are considered a product of management, prior research suggests that a company’s financial statements may be affected by the negotiation strategy employed by the auditor when resolving audit differences with management. However, little subsequent research has discussed the potential strategies that auditors may employ during the negotiation process. Our study extends the literature by investigating, in a post-Sarbanes-Oxley environment, whether auditors will employ a reciprocitybased strategy for the resolution of audit differences and what client characteristics (client management’s negotiating style and client retention risk) will increase the extent to which it is utilized. Such a strategy involves bringing inconsequential items to management and subsequently waiving these items in an effort to encourage management to be more cooperative in the posting of significant income-decreasing adjustments. The results of our study indicate that client management’s negotiating style and retention risk have an interactive effect on auditors’ use of a reciprocity-based strategy. Specifically, auditors are more likely to utilize a reciprocitybased strategy when management’s negotiating style is competitive and client retention risk is high. Interestingly, the end result of the negotiation process is essentially identical (i.e., similar items are posted), regardless of client characteristics or the auditor’s utilization of a reciprocitybased strategy. Thus, it appears that use of a reciprocity-based strategy does not affect the quality of the financial statements, but simply facilitates the process of posting significant items

The effect of risk of misstatement and workload pressure on the choice of workpaper review format

Paper presented at the 2007 International Symposium on Audit Research, Shanghai, China.The advent of electronic communication and electronic workpapers at audit firms has provided workpaper reviewers with options of how to interact with their audit team. Concurrently, other review formats have developed that rely more on in-person communication (e.g., review-by-interview). Prior research indicates that in-person discussion during review results in qualitatively different workpapers and judgments than when the reviewer interacts with the workpaper preparer electronically. As reviewers typically have discretion over how to conduct their reviews, the choice of review format can be viewed as a controllable audit input. Thus, the reviewer’s choice of review format could impact the quality of the audit review team’s work. Our study extends the audit review process literature by examining reviewers’ choice of the form of their reviews and by considering factors that influence that choice. Specifically, we examine the effect of misstatement risk and workload pressure on this choice. We find that misstatement risk and workload pressure affect reviewers’ review mode choices, with both those facing low risk and those under high pressure more likely to perform their reviews electronically. Further, risk and workload pressure interact to affect reviewers’ likelihood of choosing to review electronically. Results indicate that misstatement risk moderates the effect of workload pressure such that, when risk is high, the effect of workload pressure is reduced. Our findings provide insight to firms and regulators regarding the impact of misstatement risk and workload pressure on how audit workpaper reviewers conduct their reviews. These issues are particularly relevant in light of recent changes in the regulatory environment that both emphasize the auditor’s role in detecting fraud/misstatements and exacerbate traditional workload pressures during busy times of the year

The effects of alternative justification techniques on judgment accuracy and information communicated in the review process

Auditors are often required to justify their judgments to more senior members of their firms. However, the documentation required to justify a judgment can differ. While it is possible that different justification requirements may produce different effects on judgment processes, little is known about the relative effectiveness of different justification techniques. This study uses a control environment assessment task to examine the effects of alternative justification techniques on auditors\u27 (reviewees\u27) judgments, on the information transferred from the reviewee to the reviewer, and on the resulting judgment of the reviewer. Professional auditors were given a detailed case concerning a client\u27s control environment which was based on an actual audit in which fraud was present. Auditors were assigned to be either a reviewee or reviewer based on their experience level. Reviewees were divided into three justification groups: supporting, balanced, or component. They were asked to make a series of assessments relating to the control environment\u27s ability to prevent fraud, and to justify those assessments using their respective justification requirements. Reviewers were paired with a reviewee and asked to review that individual\u27s work. Reviewers received the reviewee\u27s judgment and justification, along with the information contained in the detailed case, and made the same series of control environment assessments as reviewees. The main variables examined were decision accuracy and the amount and type of evidence documented in the reviewee\u27s justification. The results indicated that reviewees in the component group documented a larger evidence set in their justifications than did reviewees in the balanced and supporting groups, and that the component justification reviewees were the least accurate in their fraud risk assessments. Reviewer results tended to mirror those of reviewees, though comparisons between component and supporting reviewers were not as strong. One potential explanation for the underperformance of component group subjects concerns the dilution, effect. The substantial amount of evidence documented by component reviewees may have diluted the impact of key information that pointed to possible fraud problems. These results suggest that, when performing a reasonably complex evaluative task, the way in which reviewees are required to justify their assessments can affect both the accuracy of their assessments and the information they document as part of their justifications. Given that both the reviewee\u27s assessment and justification are later passed on for review, different justification techniques can affect the accuracy of reviewers\u27 assessments. Implications for audit practice and for decision making research are discussed

The effects of audit review format on the quality of workpaper documentation and reviewer judgments

Paper presented at the 2006 American Accounting Association Auditing Section Midyear Meeting, Los Angeles, CA.The promulgation of standards (such as PCAOB Auditing Standard No. 3) highlights the recent focus on workpaper documentation quality and its influence on audit quality. Our study matches audit workpaper preparers with reviewers to examine how the choice of workpaper review method ultimately affects sequential audit review team judgments through its impact on preparer workpaper documentation. While reviewers maintain the option of reviewing workpapers on site (“face-to-face review”), they can now also perform their reviews electronically from remote locations (“electronic review”) due to technological advancements such as e-mail and electronic workpapers. Recent research has found that review mode can affect the judgments of auditors preparing the workpapers. Our study extends the literature by examining the extent to which review mode (electronic versus face-to-face) affects the quality of documentation in the workpapers and whether reviewers are able to discern and compensate for these documentation quality issues. We propose a model which predicts that the relationship between the method of review and reviewer judgment quality is mediated by a documentation quality assessment gap (i.e., actual versus reviewer assessments of documentation quality). Such a mediation model provides insight into why the review format affects reviewer judgment quality. We find that reviewers’ judgments are affected by the form of review expected by their preparer. As predicted by our mediation model, we find that the effect of review mode on reviewer judgments is mediated by a documentation quality assessment gap. Specifically, when the mode of review was electronic, reviewers were unable to recognize and compensate for the generally lower quality documentation, resulting in lower quality reviewer judgments compared to when the mode of review was face-to-face. These results suggest that the effect of review mode persists to the reviewer’s judgment through its influence on preparer workpaper documentation and the resulting documentation quality assessment gap