Showing papers on "Audit published in 1999"

The audit society : rituals of verification

Abstract: Introduction Preface 1: The Audit Society: General Themes 2: The Rise of Audit 3: The Audit Explosion 4: Audit and the Dialectic of Regulatory Failure 5: Audit Knowledge and the Construction of Auditees 6: Beyond Audit, Towards Trust Notes Bibliography

Accounting Accruals and Auditor Reporting Conservatism

Abstract: Accounting accruals are managers' subjective estimates of future outcomes and cannot, by definition, be objectively verified by auditors prior to occurrence. This causes audits of high-accrual firms to pose more uncertainty than audits of low-accrual firms because of potential estimation error and a greater chance that high-accrual firms have undetected asset realization and/or going concern problems that are related to the high level of accruals. One way that auditors can compensate for this risk exposure is to lower their threshold for issuing modified audit reports, an action that will increase modified reports and, therefore, lessen the likelihood of failing to issue a modified report when appropriate. We call this auditor reporting conservatism and test if high-accrual firms in the United States, are more likely to receive modified audit reports for asset realization uncertainties and going concern problems. Empirical results for a large sample of U.S. publicly listed companies support the hypothesis that auditors are more conservative, that is, more likely to issue both types of modified audit reports for high-accrual firms. Further analyses show that income-increasing accruals are somewhat more likely to result in reporting conservatism than income-decreasing accruals, and that only the Big Six group of auditors show evidence of reporting conservatism. These findings add to our understanding of the audit report formation process and the potentially important role played by accounting accruals in that process.

Corporate Reporting on the Internet

Abstract: In this paper, we examine firms' use of the Internet to enhance the relevance of their financial reporting. We define a firm as practicing Internet Financial Reporting (IFR) when it provides in its web site either (1) a comprehensive set of financial statements (including footnotes and the auditors' report), (2) a link to its annual report elsewhere on the Internet or (3) a link to the U.S. Security and Exchange Commission's (SEC) Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. While 70 percent of the firms in our sample engage in IFR, we find substantial variation in the quality of firms' IFR practices. Specifically, the variations in quality pertain to the timeliness and therefore, the usefulness of firms' financial reporting on the Internet. We find that some firms provide more timely financial disclosures via the Internet (e.g., monthly sales) while other firms report outdated financial data (e.g., two‐year old annual reports). We also observe that the usefulness of firms' financial ...

Industry Specialization by Auditors

Abstract: Dramatic changes in recent years in the audit market suggest the timeliness of an investigation of trends in auditor concentration and an extension of prior research (e.g., Danos and Eichenseher 1982). In recent press, large audit firms have claimed that specialization is a goal of increasing importance. Peat Marwick, for example, has restructured along industry lines, claiming to be recruiting professionals for national teams of multidisciplinary experts organized to “focus on the same industry to serve clients optimally.” On the other hand, litigation concerns might prompt auditors to diversify their risks by diversifying their clientele. In this study, we examine trends in industry specialization from 1976 to 1993 and the industry factors which may affect specialization; whether market share increases are greater for audit firms classified as specialists; and whether the nation's largest audit firms have increased their market share in the industries which they have identified as their focus industries...

Empirical Analysis of the Economic Demand for Auditing in the Initial Public Offerings Market

Abstract: This paper examines the demand for auditing in the initial public offerings (IPO) market where informational asymmetries abound. Because these asymmetries create a demand for information to help establish equity values and for market signaling to mitigate adverse selection, IPOs offer a natural setting for studying the importance of auditing. Consistent with Dye?s [1993] dual characterization of the audit as both enhancing resource allocation (an informational role) and providing investors with a claim on the auditor in the event of an audit failure (an insurance role), I test the demand for auditing arising from both informational signaling and insurance signaling. The results support both roles for auditing, though the evidence in support of an insurance signaling role seems particularly strong.

Fraud Type and Auditor Litigation: An Analysis of Sec Accounting and Auditing Enforcement Releases

Abstract: This study examines whether certain types of financial reporting fraud result in a higher likelihood of litigation against independent auditors. We expect that auditors are more likely to be judged responsible for failing to detect commonly occurring frauds or those that stem from fictitious transactions. We examine companies with SEC Accounting and Auditing Enforcement Releases and designate whether each fraud present in their financial statements is common and/or arises from fictitious transactions. We then examine whether these types of fraud are related to auditor litigation in analyses that control for various client, auditor and case characteristics. Our results provide some support for our two primary hypotheses-auditors are more likely to be sued when the financial statement frauds are of a common variety or when the frauds arise from fictitious transactions.

Pricing Initial Audit Engagements: A Test of Competing Theories

Abstract: Two competing theories of initial engagement audit pricing are examined empirically. DeAngelo's (1981a) model predicts initial engagement discounts in all settings, while Dye's (1991) model specifically predicts discounting will not occur in settings where audit fees are publicly disclosed. Unlike the United States and most countries, audit fees are publicly disclosed in Australia. Our study examines initial engagement pricing in Australia during a time period when comparable U.S. studies report discounts of 25 percent (Ettredge and Greenberg 1990; Simon and Francis 1988). The Australian evidence finds initial engagement discounting only for upgrades from non‐Big 8 to Big 8 auditors. Discounting for upgrades to Big 8 auditors is consistent with economic theories of discount pricing by sellers of higher‐priced, higher‐quality experience goods as an inducement to purchase when uncertainty about product quality is resolved through buying (experiencing) the goods. The evidence in our study is generally consis...

Auditing and Assurance Services : A Systematic Approach

Abstract: Part 1 Introduction to Assurance and Financial Statement Auditing Chapter 1 An Introduction to Assurance and Financial Statement Auditing Chapter 2 The Financial Statement Auditing Environment Part 2 Audit Planning and Basic Auditing Concepts Chapter 3 Audit Planning, Types of Audit Tests, and Materiality Chapter 4 Risk Assessment Chapter 5 Evidence and Documentation Part 3 Understanding and Auditing Internal Control Chapter 6 Internal Control in a Financial Statement Audit Chapter 7 Auditing Internal Control over Financial Reporting Part 4 Statistical and Nonstatistical Sampling Tools for Auditing Chapter 8 Audit Sampling: An Overview and Application to Tests of Controls Chapter 9 Audit Sampling: An Application to Substantive Tests of Account Balances Part 5 Auditing Business Processes Chapter 10 Auditing the Revenue Process Chapter 11 Auditing the Purchasing Process Chapter 12 Auditing the Human Resource Management Process Chapter 13 Auditing the Inventory Management Process Chapter 14 Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment Chapter 15 Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts Chapter 16 Auditing the Financing/Investing Process: Cash and Investments Part 6 Completing the Audit and Reporting Responsiblities Chapter 17 Completing the Audit Engagement Chapter 18 Reports on Audited Financial Statements Part 7 Professional Responsibilities Chapter 19 Professsional Conduct, Independence, and Quality Control Chapter 20 Legal Liability Part 8 Assurance, Attestation, and Internal Auditing Services Chapter 21 Assurance, Attestation, amd Internal Auditing Services Professional Judgement Module (avaliable online on the text website www.mhhe.com/messier8e) Index

Empirical Analysis of the Economic Demand for Auditing in the Initial Public Offerings Market

Abstract: This paper examines the demand for auditing in the initial public offerings (IPO) market where informational asymmetries abound. Because these asymmetries create a demand for information to help establish equity values and for market signaling to mitigate adverse selection, IPOs offer a natural setting for studying the importance of auditing. Consistent with Dye's [1993] dual characterization of the audit as both enhancing resource allocation (an informational role) and providing investors with a claim on the auditor in the event of an audit failure (an insurance role), I test the demand for auditing arising from both informational signaling and insurance signaling. The results support both roles for auditing, though the evidence in support of an insurance signaling role seems particularly strong. I study the demand for auditing from the combined perspectives of investors (auditors and IPO underpricing), entrepreneurs (IPO auditor

The Impact of Improved Auditor Independence on Audit Market Concentration in China

Abstract: In an effort to increase the credibility of financial information in its emerging capital markets, China recently adopted rigorous new auditing standards designed to increase auditor independence. Consistent with increased auditor independence, we find that the frequency of modified opinions increases nine-fold subsequent to the adoption of the new standards. However, the increase in modified reports is immediately followed by a large decline in audit market share among the largest auditors -- those with the greatest propensity to issue modified reports. We conjecture that this "flight from audit quality" results from the absence of market-based incentives for Chinese managers to demand independent auditors. Our findings suggest that government regulation alone is not sufficient to create financial markets that foster auditor independence.

The Audit Risk Model, Business Risk and Audit‐Planning Decisions

Abstract: This study identifies conditions under which the audit risk model does, and does not, describe audit‐planning (investment and pricing) decisions. In an experiment, audit partners and managers examined one of two cases where a material misstatement—error or irregularity—was discovered. The auditors assessed the elements of the audit risk model, assessed business risk and provided recommendations for the audit investment and fee. When the likelihood of an error was high, the audit risk model dominated business risk in the explanation of the audit investment, and the fee did not contain a risk premium. When the likelihood of an irregularity was high, business risk dominated the audit risk model in the explanation of the audit investment, and the fee contained a risk premium. These results suggest that the ability of the audit risk model to describe auditor behavior and the inclination of auditors to charge a risk premium depend upon the nature of the risks present in the audit. In the presence of errors, the...

Introduction to the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

Abstract: In February 1999, the Blue Ribbon Committee on Improving the Effectiveness of Corporate Auditing Committees released its Report which advances practical recommendations for enhancing audit committee oversight of corporate financial reporting. As Co-Chair of the Committee, the author introduces a reprint of the Report by reviewing its focus on "process." Since Generally Accepted Accounting Principles leave wide areas of discretion, "quality" financial reporting cannot be dictated by precise accounting rules and strictures. Therefore the recommendations focus on ways to improve the process by which the audit committee monitors how this unavoidable discretion is exercised by management and viewed and reviewed by the independent auditors. The author also addresses the issue of how to define "quality" financial reporting and the misconception that the Report may lead to increased audit committee liability.

City Markets as a Unit of Analysis in Audit Research and the Re‐Examination of Big 6 Market Shares

Abstract: Big 6 market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city-specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city-specific market leader the vast majority of time. Usefulness of the city-level unit of analysis is further demonstrated by re-examining the 1989 mergers creating Ernst & Young and Deloitte Touche. The primary effect of the Ernst & Young merger was to increase market shares in cities in which the pre-merger firms already had significant market shares, resulting in an increase in the number of cities in which the merged firm achieved top ranking. In contrast, the primary effect of the Deloitte Touche merger was an expansionof the number of city-level markets in which the merged firm had significant (though not leading) market shares. The findings of this study suggest that, in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor–client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city-level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city.

Performance or Compliance?: Performance Audit and Public Management in Five Countries

Abstract: Performance audit, as practised by national audit offices, is a relatively recent and rapidly developing set of activities. Auditors claim to have moved beyond issues of compliance and regularity and to be able directly to investigate the efficiency and effectiveness of public programmes, projects, and institutions. These are developments with considerable implications for both democratic accountablility and managerial efficiency. Until now they have received little independent scrutiny, but in this book an international team of researchers analyses the growth of performance audit in five countries: France, Finland, The Netherlands, Sweden, and the UK. It is argued that audit offices face a series of strategic choices, and that in different countries they have thus far chosen somewhat different trajectories.

The Effect of Experience on the Use of Irrelevant Evidence in Auditor Judgment

Abstract: Auditors encounter both relevant and irrelevant information during the performance of audit tasks. Prior studies have shown that the presence of irrelevant information weakens the impact of relevant information on auditors' judgments. Such studies, however, have not considered whether experience moderates the diluting effect of irrelevant information on auditors' judgments. This study reports the results of an experiment in which the effect of irrelevant information on the going‐concern judgments of less‐experienced auditors—audit seniors—is compared to the effect of irrelevant information on the going‐concern judgments of more‐experienced auditors—audit managers and partners. The experiment reaffirms that irrelevant information does have a diluting effect on the judgments of audit seniors but provides new evidence that irrelevant information does not have a diluting effect on the judgments of audit managers and partners.

The Effects of Fee Pressure and Client Risk on Audit Seniors' Time Budget Decisions

Abstract: In the current competitive and litigious audit environment, auditors must appropriately balance cost control and effectiveness when planning audits. This study experimentally examines the joint effects of fee pressure and client risk on audit seniors' planning judgments and decisions. Consistent with predictions, seniors' budgeted audit hours and inherent risk assessments suggest that seniors are less responsive to increased risk in the presence of fee pressure. Fewer budgeted audit hours in the presence of fee pressure may improve short‐term profitability but may not be in accordance with professional standards and the firm's interest if audit effectiveness is compromised. Further analyses suggest that, in the presence of increased client risk, seniors planned fewer audit procedures when fee pressure was present than when it was absent, with decreases most likely for less reliable audit procedures and low‐risk audit areas. Finally, in the presence of increased client risk, seniors expected to work more h...

Continuous Online Auditing: A Program of Research

Abstract: The progressive computerization of business processes and widespread availability of computer networking make it possible to dramatically increase the frequency of periodic audits by redesigning the auditing architecture around Continuous Online Auditing (COA). Continuous auditing is viewed here as a type of auditing that produces audit results simultaneously with, or a short period of time after, the occurrence of relevant events. It is arguable that continuous auditing can be implemented only as an online system, i.e., a system that is permanently connected through computer networking to both auditees and auditors. This article proposes a research agenda for the emerging field of COA. First, the history, institutional background, feasibility of and some experiences in COA are briefly reviewed. Thereafter, a number of research issues relating to the architecture of COA, factors affecting the use of COA, and the major consequences of COA are presented. Finally, a selected number of research issues are hig...

Determinants of audit report lag: further evidence from Hong Kong

Abstract: This study examines whether the audit report lag (ARL) of Hong Kong companies is associated with auditor business risk and audit firm technology. The study is based on a sample of 393 Hong Kong companies for the 1991–1993 period. Financial condition and family ownership/control of a company are used as proxies for auditor business risk, and the structured/unstructured audit approach is used as a proxy for audit firm technology. Other variables, such as the number of subsidiaries, nature of client's business, company size, unexpected positive earnings news and nature of audit opinion, are included as control variables. Regression results show that there is a positive association between the audit report lag and the financial risk index for Hong Kong companies, suggesting that companies with a weak financial condition are associated with longer audit delays. The results also show that companies audited by audit firms using the structured audit approach have longer audit delays. The findings on the ...

Financial reporting and auditing under alternative damage apportionment rules

Abstract: This article analyzes the impacts that three alternative damage apportionment rules have on an owner's financial‐reporting decision, an auditor's audit‐quality choice, and investors' pricing decisions within the context of a perfectly competitive securities market and owner solvency constraints. The strategic interactions between the players' strategies are analyzed within a setting where payoffs are endogenously determined and vary with the damage apportionment rule. These comparisons speak to potential changes resulting from the Private Securities Litigation Reform Act of 1995 which replaced joint‐and‐several liability with a proportionate liability rule. The main finding is that the audit failure rate can decrease when there is a switch from a joint‐and‐several to a proportional liability rule despite the fact that audit quality has also declined. This result occurs when there are strategic interactions between the owner's reporting strategy and the auditor's quality decision.

Are Audit Program Plans Risk‐Adjusted?

Abstract: Prior archival and experimental studies provide conflicting results regarding the extent to which audit program plans are responsive to client risks, as prescribed by the Audit Risk Model. The purpose of this study is to corroborate and extend archival research on this issue by considering a broader set of client risks and incorporating a number of methodological improvements. Data were gathered on risk assessments and evidential plans in the accounts receivable area from the working papers of 74 randomly selected manufacturing clients (42 general manufacturing and 32 high‐technology manufacturing). The results indicate a statistical association between the level of and changes in a limited number of assessed client risks (e.g., management aggressiveness and the inherent risk of an existence misstatement) and evidential plans. In addition, audit programs were found to change little over time with many tests done across a broad array of engagements. Overall, the responsiveness of evidential plans to risks,...

Knowing efficiency: the enactment of efficiency in efficiency auditing

Abstract: This paper reports an ethnographic study of the activities of auditors in the field as they work to fulfil an efficiency auditing mandate; it analyses how auditors report on efficiency in practice. Miller and Rose's work on governmentality ( Miller & Rose (1990) . Governing economic Life. Economy and Society , 1–31; Rose & Miller (1992) . Political power beyond the state: problematics of government. British Journal of Sociology , 173–205) is developed as it applies to the technologies that Miller and Rose identify as providing the means to realise programmes such as efficiency auditing. The study explores the operationalisation of efficiency auditing through analysis of three audits as they were conducted in the field. It is argued that in the absence of detailed rules or standards practitioners themselves developed an agreed upon knowledge and sensibility that allowed them to make efficiency auditing tractable. The paper explicates these normative guides and discusses the consequences of an apparently socially constructed form of efficiency in guiding auditing practice.

The Accuracy and Incremental Information Content of Audit Reports in Predicting Bankruptcy

Abstract: A series of corporate failures in which auditors failed to warn about impending bankruptcy led to widespread criticism of the UK auditing profession during the last recession. For a sample of 976 quoted companies (1987–94), this paper shows that there are two reasons why audit reports were not accurate or informative indicators of bankruptcy. First, audit reports poorly reflected publicly available information about the probability of bankruptcy. Secondly, strong persistence in audit reporting reduced the accuracy of audit reports

Financial reporting on the Internet and the external audit

Abstract: Electronic dissemination of financial reports on the World Wide Web is becoming ubiquitous for larger corporations in developed market economies. This form of reporting presents many challenges for the financial statement audit. It is critical that the audit profession proactively addresses those challenges or they will be certainly addressed by government regulatory bodies and the courts of law. Most large listed public companies in France, Germany and the UK provide electronic versions of their printed annual reports on the web. A survey was made of fortyfive large listed UK, French and German corporations. A total of thirty-six of these corporations published their annual financial statements in HTML or Adobe Corporation's Acrobat. Ten of the seventeen corporations reporting in HTML included the auditors‘ report on their website. None of these reports linked back to the auditors‘ own site. A number of issues arise when corporations provide their financial statement audits on the web. These issues inclu...

A Quarter of a Century of Performance Auditing in the Australian Federal Public Sector: A Malleable Masque

Abstract: Utilizing Porter’s (1981) theoretical framework for historical narrative analysis, this article examines the history of performance auditing in the Australian federal public sector The analysis considers four crucial events in the period 1973-98 the Royal Commission on Australian Government Administration (1976), the Australian National Audit Office efficiency audit developments (1979), the Joint Committee of Public Accounts Inquiry (1989), and the struggles over the passage of the Audit Act 1997 The analysis supports the proposition that performance auditing is a malleable social construct rather than a definitive performance review technology The construction of its technological basis has been contested, with several concepts being included or excluded by various groups These have both reflected and influenced agendas and activities at individual, organizational, institutional, sociopolitical and socioeconomic levels in the Australian public sector Performance auditing is therefore revealed as a masque that ultimately may defy any universal technical definition

Non-audit fees, disclosure and audit quality

Abstract: This paper investigates the effect of non-audit services on audit quality. Following the announcement of the requirement to disclose non-audit fees, approximately one-third of UK quoted companies disclosed before the requirement became effective. Whilst distressed companies were more likely to disclose early, auditor size, directors' shareholdings and non-audit fees were not significantly correlated with early disclosure. These results cast doubt on the view that voluntary disclosure of non-audit fees was used to signal audit quality. The evidence also indicates a positive weakly significant relationship between disclosed non-audit fees and audit qualifications. This suggests that when non-audit fees are disclosed, the provision of non-audit services does not reduce audit quality.

An Empirical Examination of Factors Affecting the Timing of Environmental Accounting Standard Adoption and the Impact of Corporate Valuation

Abstract: This paper assesses factors associated with firms' adoption of a new Canadian accounting standard promulgated in 1990, which requires disclosure of future removal and site restoration costs. Empirical analysis shows that adoption of the new standard by mining and oil and gas companies was influenced by a variety of factors and that disclosure of provisions for future removal and site restoration costs is valuation-relevant. More specifically, firms with a strong environmental commitment and in better financial health and those with less inherent uncertainty regarding future removal and site restoration costs were more likely to voluntarily adopt the new standard early. In addition, firms that adopted the new standard by the mandatory adoption date were more likely to have been audited by a Big 6 audit firm and to have raised capital during the year. Valuation analysis based on Ohlson (1995) suggests that disclosure of the provisions is valuation-relevant as it may enable capital markets to proxy for future removal and site restoration liabilities.

The coupling of the symbolic and the technical in an institutionalized context : The negotiated order of the GAO's audit reporting process

Abstract: The relationship between the work an organization actually performs backstage and the image it presents to external parties has received continuing research attention but is as yet unresolved. Various organizational scholars have held that these two facets of organizations should remain disconnected from one another as they are fundamentally different and any link between them could contaminate one or the other. Other scholars have held that the two facets are indeed connected in a complex interrelationship. We examine this relationship through a qualitative field study of the U.S. General Accounting Office's (GAO) audit reporting process. We find that the GAO's internal work and the image it presents to such parties as the Congress, the press, and the federal agencies it audits are indeed complexly interconnected. We also find that the strength of these connections is influenced by the relative power of the various types of external parties with which the GAO interacts. We conclude by exploring implications for current theory and future research in various types of organizations

The effect of audit seniors’ decisions on working paper documentation and on partners’ decisions

Abstract: Prior research reports that the memories of working paper preparers may be biased toward evidence consistent with their prior decisions, but that reviewers exposed to the same set of evidence can mitigate the bias by evaluating inconsistent evidence. This study tests whether audit seniors’ decisions bias their ability to recognize evidence to document in working papers, and whether biased documentation affects the decisions of audit partners who are exposed only to the subset of evidence that seniors recognize and document. Experiment 1 confirms that audit seniors’ prior decisions bias their memories for evidence to document in working papers, and also creates materials for experiment 2. Experiment 2 offers a new insight: when exposed only to the evidence that seniors recognize and document, partners make decisions biased in the direction of the seniors’ decisions, since not all of the inconsistent evidence is documented. Experimental procedures controlled for four alternative interpretations: justification, evidence order, recency, and primacy.