Showing papers on "Audit published in 1983"

Agency problems, auditing, and the theory of the firm: some evidence*

Abstract: Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14

Auditor Credibility and Auditor Changes

Abstract: In 1976, the U. S. Senate Subcommittee on Reports, Accounting, and Management (Metcalf Committee) provided data indicating that the eight largest auditing firms in the country (the "Big Eight") are overwhelmingly the major suppliers of audit services to the largest corporations in the United States. The Subcommittee concluded from these data that monopolistic practices by the Big Eight have led to a two-tier structure in the audit industry-one tier consisting of the eight largest auditors and the second tier consisting of all other auditors, with the Big Eight dominating the industry. In the light of these findings, the committee suggested that more activist regulation of the audit industry was needed by the Securities and Exchange Commission. Dopuch and Simunic [1980] examined a wide variety of evidence that might tend to support or refute allegations of a lack of competition in the auditing profession. They (D-S) concluded that the industry was competitive, and in a subsequent paper [1982] they argued that many of the apparent monopolistic characteristics of the industry could be explained by a product-differentiation hypothesis. More specifically, they hypothesized that different auditing firms provide auditing services which are perceived by investors to be different in quality, and in particular, that the Big Eight auditors are perceived as being more credible than non-Big Eight auditors. If this is the case, the Big Eight firms would be

Expert Judgment in the Audit Team: A Source Reliability Approach

Abstract: An audit is usually conducted by an audit team which is characterized by a hierarchical structure and division of labor. As a result, auditors frequently form judgments on audit evidence prepared by subordinate auditors (e.g., see Anderson [1977] and Watson [1975]). This decision context increases the complexity of the auditor's information-processing task, since the capabilities of subordinates must be assessed in order to determine the extent to which their work can be relied upon by the auditor in making his (her) own judgments. In effect, auditors must evaluate the reliability of their subordinates aso information sources (source reliability). Although this seems a natural subject for human information-processing studies, there have been few attempts to study this issue; moreover, the results are inconclusive. For example, Joyce and Biddle [1981a] examined auditors' sensitivity to the reliability of an information source external to the audit team and found mixed evidence with respect to the attention given by auditors to the reliability of the source. Similarly, in the only study to consider interactions in the audit team, Mock and Turner [1981] found that the review of the auditor's work by a superior did not reduce the significant variation between auditors' sample-size recommendations. In this study I examined the sensitivity of audit managers' judgments to the reliability of the audit senior. This allowed me to focus on a more

Independent Auditor Judgment in the Evaluation of Internal Audit Functions

Abstract: Independent auditors often rely on other professional opinions in examining financial statements of a client (e.g., those of attorneys, actuaries, appraisers, and computer specialists) and more generally of clients' internal auditors. Reliance on the work of internal auditors results in cost savings to the client and/or a wider mix of services provided for the same cost. Generally, auditors will rely on the clients' internal auditors only to the extent that they can assess the competence, objectivity, and performance of those internal audit personnel. Standards for relying on internal auditors are covered in SAS No. 9 (AICPA [1975]), but the guidelines are general and are not easily implemented by independent auditors. At present, little is known about the factors used by auditors to evaluate clients' internal audit functions. Only a limited set of empirical papers has addressed internal audit function evaluation since issuance of SAS No. 9 in 1975. Gibbs and Schroeder [1979] studied the competency dimension of internal audit functions, and then with Clark [1981a; 1981b] they studied the performance and objectivity dimensions of reliability assessment. They developed a list of factors, or indicators, for evaluating these three dimensions of an internal audit function discussed in SAS No. 9. Unfortunately, the

A behavioral investigation of supplier differentiation in the market for audit services

Abstract: The degree of competition within the public accounting profession has received increasing attention from researchers and practitioners in recent years, stimulated first by the Metcalf Staff Report (U.S. Senate [1976]) and later by the Cohen Commission Report (AICPA [1978]). The former argued that there was insufficient competition, whereas the latter believed it to be excessive. In order for competition to exist, there must be a basis for differentiating the services of different CPA firms. However, in its final report, the Cohen Commission stated its belief that there is little or no product differentiation in the audit profession: "Public accounting firms go to considerable lengths to develop superior services for their clients, but there is little effective product differentiation from the viewpoint of the present buyer of the service, that is, the management of the corporation A 'clean opinion' obtained from one reputable firm is about as valuable to the competent, honest financial manager as one from another reputable firm" (AICPA [1978, p. 111]). The purpose of our study was to determine whether this assertion accurately describes the market for audit services. To do so we used multidimensional scaling to examine bankers' comparisons and ratings of Big Eight CPA firms. More specifically, our study addressed two

The Effect of Experience and Firm Type on Materiality/Disclosure Judgments

Abstract: The effect of experience on audit judgment has been examined in several recent research studies. The basic objective of this research is to assess whether experience in an audit task improves the quality of professional judgment where quality is measured by the standard judgment criteria (consensus, cue weighting, self-insight, and stability). The research results that have emerged are somewhat mixed. Ashton [1974a; 1974b], Ashton and Kramer [1980], and Ashton and Brown [1980] found that both judgment consensus and self-insight increased with levels of auditing experience. Hamilton and Wright [1982] also found a positive association between experience and self-insight but found a negative association between experience and judgment consensus. They "suggest that the benefits of experience will become apparent in situations that are not well structured" and that future research should address the generalizability of their results to other audit tasks. In this paper I report the results of a study which provide further insight into this issue. The study is of interest because it examines a judgment task, the materiality/disclosure decision, which at least on the surface seems less structured than the payroll tasks used in the previously mentioned studies. The task is also one which does not occur as often

Effects of Audit Report Wording Changes on the Perceived Message

Abstract: The Commission on Auditors' Responsibilities (CAR) (AICPA [1978]) concluded that existing audit reports are misunderstood by many readers. CAR identified miscommunication of the character of the audit and the auditor's responsibility in conducting it as major problems, arising because all of the reports' intended messages are not explicitly stated. In consideration of CAR's conclusion, the Auditing Standards Board (ASB) (AICPA [1980]) issued, and subsequently withdrew seven months later (Journal of Accountancy [April 1981]: 3), an exposure draft proposing seven specific wording changes to the standard audit reports. The ASB's decision to withdraw the exposure draft was based on comment letters arguing that the proposed wording changes were not a costeffective improvement over the existing reports. Subsequently, the ASB (AICPA [1982]) implemented an educational program to explain the intended meaning of audit reports. An implication of this educational program is that readers' knowledge about audit reports influences the messages they receive. It is important to examine empirically whether either wording changes such as proposed by the ASB or audit report knowledge can cause material differences in the perceived messages of the audit reports. The issue is important in order to determine whether individuals, when

Audit Reports: Their Impact on the Loan Decision Process and Outcome: An Experiment

Abstract: (1983). Audit Reports: Their Impact on the Loan Decision Process and Outcome: An Experiment. Accounting and Business Research: Vol. 14, No. 53, pp. 15-20.

The effect on cost of medical care for patients treated with an automated clinical audit system.

Abstract: An automated clinical medical record and audit system was developed to evaluate the effect of modifying physician behavior at the control points in the ambulatory care process and to determine if this change was reflected in patient care cost outcomes This study compared clinical and cost results of patients in an experimental group, who had the automated record and audit system, to a control group, who had a traditional clinic record without chart audit Physicians responded to the automated audit suggestions at a rate of 5025 in the experimental group and 373 in the control group No major differences were observed in clinical outcomes, with the exception of the number of days of hospitalizations and, consequently, the cost of hospitalizations The experimental group cost for hospitalizations was one-third of the control group and accounted for a majority of the differences in the total annual cost for the two groups

Audits of antibiotic prescribing in a Bristol hospital.

Abstract: Audits of antibiotic prescribing were done for periods of up to eight weeks in two successive years on medical, surgical, orthopaedic, gynaecology, obstetric, and urology wards and in an accident and emergency department Clinical details were matched with antibiotic prescribing, and the appropriateness of the latter was judged independently by two medical microbiologists Only when they agreed was an individual prescription included in the analysis Overall, 28% of prescriptions in 1979 and 35% in 1980 were judged as unnecessary, with 17% and 16%, respectively, being for inappropriate choices of antibiotic An educational programme about antibiotic prescribing carried out between the audits had no beneficial effect overall Though the results compared favourably with those of audits published, prescribing could still be much improved To judge by the failure of education, however, this might be difficult to achieve Most prescriptions were written by junior staff, who in the absence of guidance from their seniors and because of their frequent moves would require a widespread and continual education programme Published concern about the quality of antibiotic prescribing appears to be justified

Audit considerations in distributed processing systems

Abstract: Applications of distributed processing networks are proliferating rapidly. It is expected that by the year 2000, distributed networks will be one of the most significant developments to evolve from the computer revolution.Distributed networks are unique in that they bring together concepts of communication, engineering, and computing. From an audit standpoint, the complexities involved in control design and testing are challenging. The auditor needs to be knowledgeable concerning these complexities in order to apply the proper audit tools, particularly since some of these tools are in need of improvement or development. This paper provides a summary of important areas of audit concern in distributed processing systems.

A Fuzzy Set Approach to Aggregating Internal Control Judgments

Abstract: Internal control evaluation traditionally has been an integral part of an audit to provide an opinion on an entity's financial statements. Essentially, internal control evaluation is used to determine the substantive testing necessary to render an opinion on the financial statements. With the passage of the Foreign Corrupt Practices Act FCPA and recent proposals of the SEC, internal control evaluation has gained new impetus. These events may lead to the independent auditor being required to provide an internal control opinion separate from a financial statement audit. Consequently, the auditor may be required to aggregate the evaluation of system parts into a statement as to the performance of the system or major subsystem as a whole in addition to the reports currently made to management on the adequacy of internal control. Although mathematical models for internal control evaluation have been proposed, these have failed to receive acceptance by auditors. As an alternative to these models, this paper proposes the use of a procedure for aggregating the evaluation of parts of an internal control system employing the linguistic values commonly in use by auditors such as "strong," "weak," and "adequate." The linguistic model 1 uses the theory of fuzzy sets to aggregate these common linguistic values and 2 returns a linguistic aggregate evaluation of the control system under review. A cash receipts and shipping control system is used in a numerical illustration and future research directions are proposed.

A HISTORICAL PERSPECTIVE ON THE AUDITOR'S ROLE: THE EARLY EXPERlENCE OF THE AMERICAN RAILROADS

Abstract: The paper explores the origins of the auditing profession in the United States. It is suggested that the development of the audit function in this country can be traced to reporting by internal and shareholder auditors in the American railroads during the middle of the nineteenth century. Evidence is presented that a recognition of the need for audit independence existed, and that the provision of advisory services and reports on internal control by American auditors have been an inherent part of the auditor's role from that time.

A Warehouse Location Model Helps Texas Comptroller Select Out-of-State Audit Offices

Abstract: To enhance the collection of sales and other taxes due the State of Texas, the Comptroller uses tax audits of companies doing business in Texas. Auditors make frequent trips to company headquarters in New York, Chicago, Tulsa, Los Angeles, and other cities. To find out how much out-of-state offices would cost and where they should be located, a location-allocation network model developed for warehouse location distribution system design was used. Six cities were agreed upon for locations.

Evaluation of general and traditional internal medicine residencies utilizing a medical records audit based on educational objectives.

Abstract: Residency programs in general internal medicine must ensure that skills relevant to the care of both ambulatory and hospitalized patients are taught effectively. The authors evaluated both a general and a traditional internal medicine training program at the same institution. They employed a medical records audit technique based on educational objectives that assessed the approach of residents in each program in dealing with five inpatient and five outpatient problems. Inpatient performance also was assessed by subjective faculty evaluations. Resident physicians in the general program more closely reflected the educational objectives in two of five outpatient audits. There were no differences between the programs for inpatient audits or subjective evaluations. These findings support the argument that the emphasis on teaching ambulatory medicine need not jeopardize inpatient training, and they demonstrate the feasibility of a medical records audit based on educational objectives for program evaluation.

Planning for program effectiveness in quality assurance.

Abstract: Quality assurance programs are now a fact of life in health care institutions, yet the effectiveness of these programs in improving care is unproven. Reports of quality assurance activities rarely discuss "remedy implementation" or the outcome of such attempts. Effectiveness does not flow naturally from sound methodology or documentation but is the most challenging part of the program. This article examines reasons for this difficulty, and the authors recommend strategies for improving problem resolution and increasing the influence of the program in the organization. They urge attention to program design from the earliest stages of program implementation and emphasize active participation by clinicians, patients, administration, and staff This broad representation promotes examination of a wide range of patient care issues as well as medical audits, allows the program to enlist support for change, and enables the program to anticipate and make timely contributions to the decisions of policymaking groups.

Can't audit? Won't audit!

Abstract: By coincidence several articles appeared in the weekly press of 8 January 1983 that pointed to the need for clinical audit. The BMJ reported that in an area of general practice only one third of men had had their blood pressure recorded, though there was no information on the percentage of general practitioners who failed to carry out this simple procedure.' A survey of the prescriptions for antibiotics in a city hospital claimed to show evidence of both unnecessary (350o) and inappropriate (160o) prescribing and that an educational programme had had no beneficial effect; it concluded that "much might be achieved by audit if this desire for improvement emanated from the clinicians themselves."2 In the Lancet a review sponsored by the King Edward's Hospital Fund for London on the American system of hospital accreditation3 concluded, "There is a place for the independent voluntary assessment of quality in our own health services," and also, "the method of interdisciplinary peer review can work well." Following its pioneer survey,4 the Nuffield Provincial Hospitals Trust published an important collection of essays derived from a meeting where a group of doctors described what was or might be done if audit were undertaken in a number of specialties, particularly if the royal colleges directed such audits.' The trust has also recently issued a well publicised book on anaesthetic deaths.6 The main functions of audit are monitoring and upgrading standards of health care. The concept may be broadened to include identifying doctors who have a poor performance and monitoring their improvement. But most doctors in Britain are reluctant to admit, in public, that a small number of their colleagues might be offering a low standard of care, due to ill health, ignorance, or idleness-which is completely different from making the occasional mistake or having an off day, usually due to overwork. They are equally reluctant to look into the methods (such as peer review) by which the profession may identify and monitor those who have a persistently substandard performance. We are led to believe that in the United States doctors are more willing to cooperate in peer review and similar such procedures, whether as assessors or assessed. Certainly the (American) Joint Commission on Accreditation of Hospitals publishes a quarterly Quality Review Bulletin which documents the results of audit and peer review procedures.