Showing papers on "Audit published in 1996"

Enhancing Audit Committee Effectiveness

Abstract: What factors help companies avoid financial reporting problems? What makes the audit committee of a corporate board of directors effective? Looking at the reporting problems experienced in some financially troubled companies and examining the roles that audit committees play can provide valuable clues The National Commission on Fraudulent Financial Reporting, chaired by James Treadway (the Treadway commission), and the Public Oversight Board (POB) of the SEC practice section of the American Institute of CPAs have made recommendations on the attributes needed to enhance audit committee effectiveness and to improve the quality of financial reporting This article reports on a study examining differences in the composition and meeting habits of audit committees of companies with and without financial reporting problems By understanding the committees of problem companies, auditors should be able to anticipate and thus help companies avert financial reporting difficulties The US accounting profession is not alone in focusing on audit committees and their effectiveness They also have become issues of interest to US regulators and to professional accounting bodies in other countries For example, the Macdonald commission in Canada and the Cadbury committee in the United Kingdom have addressed the importance of audit committees in the corporate governance process The advisory panel on auditor independence appointed by the POB highlighted the role of audit committees in the financial reporting process (See "How Directors and Auditors Can Improve Corporate Governance," JofA, Jan96, page 53) Among other issues, the panel stressed the importance of informed dialogue between the independent auditors and the audit committee The panel also recommended that auditors be brought into the mainstream of corporate governance and suggested possible improvements in the interaction between auditors and audit committees Prompted by such calls, the AICPA auditing standards board is engaged in a project to determine whether communications between auditors and the audit committee can be improved Given such professional attention to audit committees, CPAs may be interested in the characteristics of the audit committees of companies with and without financial reporting problems For example, the Treadway commission found that a significant proportion of companies cited in actions by the Securities and Exchange Commission had audit committees Thus, simply having a committee is not enough--for it to perform effectively, it must be independent, informed and vigilant Why should auditors be concerned about audit committee composition and activities? In its 1993 special report, In the Public Interest, the POB noted that auditors "should assist the audit committee and the board in understanding their responsibilities and the best practices to follow The auditor shouldindicate the areas in which the committee's procedures could be strengthened" Such actions, the POB noted, also would serve to reduce the danger of litigation against the auditor SURVEY DATA BANK Our survey examined 51 companies with one or both of two types of financial reporting problems: (1) SEC enforcement actions and (2) material restatements of quarterly earnings For comparison purposes, we selected an initial random sample of 100 companies with no financial reporting problems; however, complete data were available for only 77 of them To enhance the power of our analysis, we concentrated on the four-year period before 1989 As of February 1, 1989, the national market system of the NASDAQ required audit committees for all registered companies (The New York Stock Exchange had required audit committees since 1978; the American Stock Exchange did not follow suit until 1992) DIFFERENCES BETWEEN COMPANIES Some variations were observed between companies that had problems and those that did not …

Theory of Accounting and Control

Abstract: Using Barnard and Simon's contract model of organizations, this is the ONLY theory text that truly integrates financial, managerial, tax, auditing, not-for-profit and governmental aspects of accounting into a single framework within the economic theory of the firm.

Audit Committee Activity and Agency Costs

Abstract: Menon and Williams indicate that many United States (US) over-the-counter (OTC) firms which form audit committees appear not to rely on them (cf. Menon, K., Williams, J.D. 1994. Journal of Accounting and Public Policy, 13(2), 121–139). Reliance on audit committees appears to depend upon board composition, while audit committee activity is associated with firm size. In this paper, we compare the US experience and evidence on audit committees and monitoring with the position in the United Kingdom (UK), where there has been a steady growth in the number of major companies voluntarily forming audit committees over the last 15 years (Collier, P.A. 1996. Accounting, Business and Financial History 6(2), 121–140). We contend that the dataset is best analyzed using the Heckman procedure (cf. Heckman, J.A. 1979. Econometrica 47(1), 153–161) which captures the two stages of the decision on audit committee activity. Our results show little support from the UK data for the findings of Menon and Williams (cf. Menon and Williams, 1994. Journal of Accounting and Public Policy 13(2), 121–139). However, consistent with their agency theoretic perspective of monitoring, we found that high quality (Big Six) auditors, and to some degree leverage have a positive relationship with audit committee activity. Contrary to an agency theoretic expectation, we found that audit committee activity is reduced in firms that combine the role of chairman and chief executive. On the basis of this result we explored the impact of insiders (executive directors) and found that their presence on an audit committee had a significant negative impact on audit committee activity. This result suggests that the emphasis placed by the US Securities and Exchange Commission (SEC) (Staff Report on Corporate Accountability, US Government Printing Office, Washington, DC, 1980, p. 491) and the Cadbury Committee (Committee on the Financial Aspects of Corporate Governance. 1992. Report of the Committee on the Financial Aspects of Corporate Governance. Gee, London) on the independence of audit committee members may be well founded. The reduction in audit committee activity that arises from the combination of the role of chairman and chief executive officer, and the presence of insiders on the audit committee, has important policy implications. Indeed, in the UK, both practices are the subject of recommendations in the Hampel Committee report Hampel Committee 1998. Committee on Corporate Governance. Gee, London.

An empirical test of the resource-based theory: strategic regulation in the dutch audit industry

Abstract: The resource-based view of the firm is a recent strategic management theory that seeks to identify the resources that may provide firms with a sustainable competitive advantage. This paper has two purposes. First, the paper relates strategic management arguments to parallel lines of reasoning in industrial organization theory and argues that strategic regulation is a major source of sustainable competitive advantage. The second purpose of the paper is to report the results of an empirical test of the resource-based theory on the basis of a longitudinal data set on the postwar history of the Dutch audit industry. A key determinant of this history proves to be strategic regulation, which stimulates demand for audit services and protects rent-producing resources.

Audit committee effectiveness and the audit fee

Abstract: The UK is the only major country within the European Union the majority of whose listed companies have formed audit committees composed of non-executive directors to monitor financial reporting, the external auditors, and internal control strength. The adoption of audit committees in contrast to the approach in Europe has arisen despite the lack of evidence on their effectiveness even in the USA and Canada, where they have been mandatory since the 1970s. This paper seeks to establish whether audit committees are effective in ensuring audit quality by protecting the auditors from fee cuts which might affect audit quality, and signal tighter internal controls which help to reduce audit time and hence audit fees. The problem is that the audit committee may be expected to exert a two-way pressure on audit fees. To the extent that audit committees should enhance audit quality, partly by ensuring that audit hours are not reduced, an audit committee may be expected to increase total audit fees. At the same time,...

Auditors' behaviour in an audit conflict situation: a research note on the role of locus of control and ethical reasoning

Abstract: This study investigates the interaction effects of locus of control, a personality variable, and ethical reasoning on the behaviour of auditors in an audit conflict situation. Eighty experienced auditors from a sample of Big Six and Non-Big Six CPA firms in Hong Kong were provided with a case study involving an audit conflict situation and were asked to state the extent to which they would accede to the client's request. Subjects were also administered Rotter's Locus of Control Scale and the Denning Issues Test (DIT) to measure ethical reasoning. Analyses of the data using multiple regression found that ethical reasoning moderated the relationship between locus of control and the auditors' responses to accede to client's request in an audit conflict situation. An implication of these results is that the explicit recognition of both locus of control and ethical reasoning provides a better explanation for differences in auditors' ethical decision making.

Costs and Benefits of Audit Quality in the IPO Market: A Self-Selection Analysis

Abstract: This study examines the tradeoffs that an entrepreneur makes in an initial public stock offering between the incremental costs and benefits of selecting a Big 6 audit firm. The benefit of hiring a Big 6 auditor is assumed to be reduced underpricing, consistent with Beatty (1989) and Balvers, et al. (1988). The cost of hiring a Big 6 auditor is higher auditor compensation. Evidence drawn from a sample of IPOs during the early 1990s is consistent with a differentiated market for audit services where owners select the type of auditor that minimizes the sum of underpricing and auditor compensation costs.

Some Empirical Evidence from Publicly Quoted UK Companies on the Relationship Between the Pricing of Audit and Non-audit Services

Abstract: Using data obtained from a sample of 314 UK quoted companies (excluding financial sector companies), this paper examines three aspects of the relationship between fees for audit and non-audit services: (a) the extent and nature of the provision of non-audit services to audit clients; (b) whether the positive association between the level of audit fees and non-audit services fees found in the majority of non-UK studies holds in the UK; and (c) whether it is possible to throw further light on the nature of the relationship between audit fees and non-audit services fees by exploring the interaction between non-audit services and other factors that appear to affect audit pricing. Our results suggest that: (i) income earned by audit firms from non-audit work for quoted clients averaged nearly 90% of the levels of audit fee earnings in 1992/93 (and more than a quarter of clients paid more for non-audit services than for the audit); (ii) the extent of voluntary disclosure of the breakdown of non-audit s...

Auditor time budget pressure: consequences and antecedents

Abstract: Research suggests that dysfunctional behaviour by auditors may be related to the perceived tightness of time budgets. Using data collected from practising auditors, examines the nature of such a relationship. Found that the frequency of dysfunctional behaviour increased sharply as budgets were seen to approach unattainable levels of performance. Recognizing the importance of auditors’ perceptions regarding the attainability of budgets, examines antecedent variables affecting budget attainability. Found that the influence of client fee expectations, the level of audit senior participation and the influence of the audit programme were significant influences. Discusses implications for practice and possibilities for future research.

Remote duplicate database facility with improved throughput and fault tolerance

Abstract: A local computer system has a local database, application programs that modify the database and a transaction manager that stores audit records in a local audit trail reflecting the application programs' modifications to the local database. A remote computer system has a backup database. A remote data duplication facility (RDF) is distributed in the local computer system and the remote computer for maintaining synchronization of the backup database with the local database. The RDF has an extractor process and a receiver process. The extractor process has multiple updater processes, extracts audit records from the local audit trail and transmits them to the receiver process, which distributes them to the updater processes which in tuna initiate redo operations of database modifications in at least a subset of the audit records against the backup database. Should the audit records not arrive in proper sequence, the receiver transmits an error message to the extractor process, which extracts audit records from a restart audit trail position value.

The Role of Economic Trade-Offs in the Audit Opinion Decision: An Empirical Analysis:

Abstract: We extend existing audit opinion models by incorporating economic tradeoffs that arise in the auditor's qualification (modification) decision. Prior qualification studies (e.g., Dopuch, Holthausen,...

Effective clinical practice

Abstract: Historical perspectives of audit, quality and research initiatives within health services audit, quality and research - similarities and differences improving the efficiency of health care improving the efficacy of health care improving the appropriateness of health care measuring the outcome of medical and clinical intervention creating a platform for delivering continuously improving quality of health care guaranteeing the success of audit, quality and research within health services the ethics and legalities involved with audit, quality and research general discussion and future perspectives.

A survey of time budget pressure and irregular auditing practices among newly qualified uk chartered accountants

Abstract: The paper reports a postal survey of successful finalists of the exams of the Institute of Chartered Accountants in England and Wales. The auditing profession has faced increasing cost pressure arising from competition and economic recession. Firms have striven to increase audit efficiency and reduce chargeable time. It was hypothesized that time budget pressure and other factors might produce irregular short cuts in audit procedures: i.e. that similar behaviour to that reported by Raghunathan (1991) and other studies would be found in the UK. Respondents were asked about the impact of time budget pressures on their work, about irregular auditing practices similar to premature sign off and certain contextual variables. An appreciable incidence of irregular auditing was discovered which was associated,inter alia, with perceptions of time budget pressure, perception of a firm culture of acceptance of irregular short cuts and areas of work which were felt to be unimportant. The implications of the findings for the auditing profession and individual firms are considered together with recommendations for future research.

Document management system and method for business quality modeling

Abstract: A computer implemented system and method and a computer readable medium for complying with the requirements of a quality standard known as ISO 9000. The areas covered include controlled documentation, training management, meetings and reports, process improvement requests, project management, and audit management. All controlled documents have a security and revision control portion that controls the access and approval capabilities of the documents. The system is form controlled. Certain individual fields of the forms require the entry of data, and field's control are controlled by certain fields of other forms, with the fields being updated by other fields in the system, operator entry of data, and a combination of control by both the system and operator entry. The system includes an ISO matrix relating each document to an ISO clause. The system has a controlling document for each delineated activity, and all other documents relating to such activity are linked as a child of the controlling document. An audit trail is created by storing and making available previous iterations of current documents as child documents, insuring that the first issue, subsequent changes to content, movement to draft status, reprieval, and reissue are available for auditing the activities of the business.

Audit fees and auditor change; an investigation of the persistence of fee reduction by type of change

Abstract: Despite concern expressed over ‘low-balling’ or competitive price reduction in the market for audit services, the only empirical investigation of the relationship between initial audit fees, fee recovery and auditor change which has been carried out is by Simon and Francis (1988) using US cross-sectional data, although Pong and Whittington (1994, forthcoming) examine the impact on first year fees. We investigate the impact of auditor change on cross-sectional UK data for 1991 with the aim of discovering whether there is any evidence of price cutting and subsequent price recovery in a European, rather than a US context. We find that there is evidence of such a phenomenon, and investigate further to see whether this effect is robust with respect to the definition used of ‘auditor change’, and whether the effect varies according to whether the old auditor was a ‘Big Six’ or ‘non-Big Six’ firm. We find that the largest reductions (controlling for auditor size) are experienced by firms changing to ‘Big Six’ firms. We further show that involuntary changes (by auditor acquisition) are associated with positive (although statistically insignificant) increases in fees, whereasvoluntary changesare associated with negative (andsignificant) feereductions. These effects are shown to be robust with respect to model specification. This suggests that fee reductions cannot be ascribed to economies of scale or scope, but is consistent with a ‘low-balling’ model of behaviour.

“Real-izing” the benefits of new technologies as a source of audit evidence: An interpretive field study☆

Abstract: The development of new audit technologies has been the focus of a great deal of attention by both auditing academics and CPA firm administrators during the past decade. Many resources have been devoted to the development and scientific validation of sophisticated new technologies with the anticipation that increased audit “efficiency”, as well as improved “effectiveness” and inter-auditor judgment “consensus”, would result. The primary focus of these efforts, and the related publications, have been on the technologies themselves, in the apparent belief that qualities such as “efficiency” exist objectively in the technologies. However, essentially no published research exists that has examined the use of these new technologies by audit practitioners. The study reported in this paper was conducted as an interpretive field study within several “Big 6” CPA firms, with a focus on proprietary audit technologies that had been recently implemented or discontinued. All of the technologies involved new audit approaches, rather than simply the automation of existing, established approaches to audit evidence generation and evaluation. The central finding reported in this paper is that benefits in the form of enhanced audit efficiency did not result directly from the adoption and use of these new technologies. Rather, where they were reported to have occurred, these benefits resulted from the concomitant reduction or elimination of other audit procedures that had been performed in the past. Based upon these findings, it is argued that the “benefits” of new audit technologies, as a source of audit evidence, do not exist objectively in the technologies themselves, and that these benefits are not automatically realized through the adoption and use of the technologies. Rather, the benefits attributed to the technologies are seen to be made real, or “real-ized”, through actions taken by the auditors concurrent with technology adoption.

The Scottish tonsillectomy audit

Abstract: Regional specialist societies offer a valuable mechanism for the conduct of medical audit. The experience of the audit sub-committee of The Scottish Otolaryngological Society in conducting an audit on laryngeal cancer encouraged us to undertake a larger audit of tonsillectomy practice in Scotland. Although the number of tonsillectomies performed has declined over the last 10 years, they still account for about 20 per cent of all operations performed by otolaryngologists and as such are a major consumer of resources (Personal communication-Directorate of Information Services, Information and Statistics Division. NHS in Scotland, Management Executive, Edinburgh). The Scottish tonsillectomy audit was devised to define current practice, review indications for surgery and recommend such modifications in practice as may be necessary to optimise patient care and the use of resources. Funding was obtained from the Clinical Resource and Audit Group (CRAG) of the Scottish Home and Health Department. Data on current practice was collected during the period February 1992 to January 1993. Proformas were completed by medical, administrative and secretarial staff in all participating hospitals, collected by an audit secretary and passed to the relevant data collection centre. Data was then entered into a specially designed database before being forwarded to the audit co-ordinator based in Dundee for collation. Six and 12 months following surgery, all inpatients were sent a questionnaire to obtain data on the efficacy of the operation. Data were obtained from a total of 9,773 patients. Two thousand and seventy-nine of these were seen as both outpatients and inpatients, 4,309 were outpatients only and 3,385 were inpatients only. Four thousand, one hundred and one patients returned at least one follow-up questionnaire. The topics audited included source and reason for referral, indications for surgery, grade of staff involved, type of surgery and length of stay in hospital. In agreement with previous studies (H.M.S.O., 1989), differences were found in the rates of tonsillectomy performed in different Health Boards. Although the highest referral and operation rates were found in the Highland region, referral and operation rates did not correlate in all other areas. Recurrent tonsillitis was the most frequent principal reason for the decision to operate although there were differences between Health Boards for other indications including obstructive symptoms. Most patients had symptoms for two to three years although some patients had been affected for 40 years prior to being listed for tonsillectomy. Some are ENT services were consultant-based while others involved more junior staff. The grade of staff involved did not appear to affect the decision made at the Outpatient Department (OPD) or the outcome of the operation. Ninety-eight per cent of patients who returned the questionnaire were glad that the operation had been performed. Recommendations regarding changes in tonsillectomy practice are given.

A Generalized Qualitative-Response Model and the Analysis of Management Fraud

Abstract: Management fraud has become a topic of increasing interest to the public accounting profession. Prior research indicates that management fraud is seldom experienced by audiGtors. As a result, it is doubtful that auditors have a well-developed cognitive model for making fraud risk assessments as part of the audit planning process. Early research studies attempted to identify factors that could be linked to the occurrence of management fraud, while more recent work has attempted to build models to predict the presence of management fraud. In this paper, we report on a study that uses a powerful generalized qualitative-response model, EGB2, to model and predict management fraud based on a set of data developed by an international public accounting firm. The EGB2 specification includes the probit and logit models and others as special cases. Moreover, EGB2 easily accommodates asymmetric costs of type I and type II errors. This is important for public accounting firms since failure to predict fraud when it is present a type II error is usually very costly to the firm in terms of litigation. The results demonstrate good predictive capability for both symmetric and asymmetric cost assumptions.

Auditors' ability to discern the presence of ethical problems

Abstract: Recently, society and the accounting profession have become increasingly concerned with ethics. Accounting researchers have responded by attempting to investigate and analyze the ethical behavior of accountants. While the current state of ethical behavior among practitioners is important, the ability of accountants to detect ethical problems that may not be obvious should also be studied and understood. This study addresses three questions: (1) are auditors alert to ethical issues; (2) if so, how important do they perceive them to be; and (3) what factors affect their sensitivity threshold and their perceptions of the importance of the issues? Most of the prior research in accounting ethics presents subjects with scenarios that contain an obvious ethical issue, and subjects realize that they are participating in an ethics study. In the present study, the ethical problems are integrated into general accounting situations in order to discover the sensitivity of accounting professionals to them. This study defines ethical sensitivity as the ability to interpret a given situation and to realize that a moral problem exists. CPAs responded to an experimental instrument comprised of three auditing scenarios taken from the 1989 Trueblood cases, adapted to deal with different ethical problems — tax evasion by a client, auditor independence, and a client's ethical problem which does not directly affect the audit. The accounting and/or auditing problems presented in the three cases were also different with the information relating to the possible ethical problem embedded in the situation. Multiway contingency tables were used to analyze the data. Factors useful in predicting whether a subject will mention an ethical issue include the nature of the ethical issue, the issue's severity, and the subject's age. Employment position, expertise (measured by two proxies), prior exposure to a similar ethical issue and education level (undergraduate versus graduate) were not significant. The ethical issue itself was also a significant factor in determining the absolute importance given to the ethical issue.

Cardiac rehabilitation in the United Kingdom: guidelines and audit standards. National Institute for Nursing, the British Cardiac Society and the Royal College of Physicians of London.

Abstract: This paper summarises a multidisciplinary workshop convened to prepare clinical guidelines and audit standards in cardiac rehabilitation in the United Kingdom. The workshop developed a three element model of the rehabilitation process and identified needs relating to medical and psychosocial care and the potential contributions of exercise, education, secondary prevention, and vocational advice. Draft clinical standards are proposed as a basis for locally developed guidelines and further research.

Errors in Accounting Estimates and Their Relation to Audit Firm Type

Abstract: In this paper we assess accuracy and bias in the accounting estimate of outstanding claim losses (i.e., claim loss reserves) reported in the audited statutory financial statements of 197 property-casualty insurers during 1979-83. We also investigate differences in the accuracy and bias of the insurers' estimates across clients of Big Eight audit firms and other audit firms. Accuracy and bias are analyzed over all insurers as well as for financially troubled insurers because audit effort and the likelihood of an audit adjustment are likely to be highest for the latter. Claim loss reserves provide an exceptionally good setting to analyze estimation errors, because errors in reported reserves are disclosed after all claims outstanding are settled.' Knowledge about the relation between errors in accounting estimates and auditor type adds to our understanding of how differences among audit firms influence auditor judgment. Auditors may differentiate themselves on several dimensions, including size, technology, physical facilities,

Recurring issues in auditing: back to the future?

Abstract: Explores the issues which concerned auditing practitioners more than 100 years ago and reexamines them in the present day context. These issues include: the role and scope of the audit, audit independence, the auditor’s report, competition between auditors, litigation against auditors, and governance and regulation of the profession. Many of these concerns remain unresolved. Develops an historical perspective which helps to explain the endurance of these issues and informs policy makers in their endeavour to devise permanent solutions. Examines the determination of the profession′s early leaders to discuss the problem and publicly notes the contrast with the deafening silence emanating from their counterparts today.

Remote duplicate database facility featuring safe master audit trail (safeMAT) checkpointing

Abstract: A local computer system has local database, application programs that modify the local database, an a transaction manager that stores audit records in a local audit trail reflecting those application program modifications to the local database. A remotely located computer system has a backup database. A remote data duplication facility (RDF) is partially located in the local computer system and partially in the remote computer for maintaining virtual synchronization of the backup database with the local database. The RDF includes an extractor process executed by said local computer system, and a receiver process and a plurality of updater processes executed by the remote computer system. The extractor process extracts audit records from a local audit trail and transmits those records to the receiver process. The receiver process distributes the audit records into one or more image trail files that are associated with a particular updater process. Each updater process reads the audit records in its assigned image trail file and initiates redo operations of database modifications denoted in at least a subset of the audit records against the backup database. Each image trail file has a corresponding image trail buffer that is used to accumulate a number of audit records before they are stored in the corresponding image trail file. Before an updater process applies an audit record against the backup database, it requests from the receiver process the status of the transaction associated with the audit record. Status audit records are stored in a transaction status table as well as in a master image trail file. The RDF system herein described provides a method and system for assuring that each audit record is preserved in the system in the event a failure occurs to any of the processes in the RDF.

The Simultaneous Relation Between Auditor Switching and Audit Opinion: An Empirical Analysis

Abstract: Previous studies examining the relation between the audit opinion and auditor switching assume a one-way causation, with the issuance of a qualified opinion triggering a switch. However, analytical studies dealing with auditor independence issues (e.g., Magee and Tseng, 1990; Dye, 1991; Teoh, 1992) suggest an opposite causation, in which the auditor is less likely to qualify the opinion for a client who may switch auditors. Some evidence of an opposite causation is provided by Krishnan (1994), who finds that auditors treat switchers more conservatively (relative to non-switchers) in issuing the audit opinion. The causation between switching and the audit opinion is clearly important for policy decisions regarding both opinion shopping and auditor independence. In this paper, we test the two-way causation hypothesis and find evidence in support of a two-way causation. Our simultaneity-adjusted estimates confirm previous findings of a positive effect of a qualified opinion on switching (Chow and Ri...