Showing papers on "Audit published in 2001"

Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence

Abstract: This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm-level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.

The Effects of Corporate Governance Experience and Financial‐Reporting and Audit Knowledge on Audit Committee Members' Judgments

Abstract: Interest in audit committees as part of overall corporate governance has increased dramatically in recent years, with a specific emphasis on member independence, experience, and knowledge. This paper reports the results of a study investigating whether audit committee members' corporate governance experience and financial‐reporting and audit knowledge affect their judgments in auditor‐corporate management conflict situations. A sample of 68 audit committee members completed an accounting policy dispute case and several knowledge and ability tests. The results indicate that, as expected, greater independent director experience and greater audit knowledge was associated with higher audit committee member support for an auditor who advocated a “substance over form” approach in the dispute with client management. Conversely, concurrent experience as a board director and a senior member of management was associated with increased support for management. Collectively, these findings have a number of implication...

Thirty years of social accounting, reporting and auditing: what (if anything) have we learnt?

Abstract: In an increasingly complex world with increasingly powerful organisations it seems inevitable that society – or groups in society – would become anxious about whether these organisations could be encouraged to match that power with an appropriate responsibility. This is the function of accountability – to require individuals and organisations to present an account of those actions for which society holds them – or would wish to hold them – responsible. And the history of social accounting, at its most fundamental, is a history of attempts to develop this accountability. It seems to me that the widespread and systematic practice of social and environmental accounting is a deeply essential element in any well-functioning, complex democracy. The corollary is that the absence of such mechanisms raises fundamental questions about the nature of modern democracies. This article briefly outlines what I believe to be the three strands of social accounting. It then identifies a few of the lessons that we may be able to learn from current experience and, in particular, how social accounting is related to accountability, democracy and sustainability. The central issue of the tension between accountability and control is touched upon: I then illustrate how the stakeholder model can be used to help define the social account, and conclude with a few words on attestation.

Audit Committee Composition, “Gray Directors,” and Interaction with Internal Auditing

Abstract: The functioning of corporate audit committees was criticized in recent years by the Treadway Commission, the Public Oversight Board, the Kirk Panel, and the SEC Chairman. In response, the NYSE and NASD sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report includes recommendations aimed at strengthening director independence and qualifications, and highlights the role of internal auditors in assisting audit committees in the corporate governance process. Moreover, the first three recommendations of the BRC relate to audit committee composition: absence of inside or “gray” directors, and presence of a member with financial expertise. This study examines the association between audit committee composition and the committee's interaction with internal auditing. Our results, based on responses from chief internal auditors of 114 public companies, indicate that committees comprised solely of independent directors and with at least one member havin...

Additional Evidence on Audit Report Lag

Abstract: The process for providing accounting information to the public has not changed much in the last century even though the extent of disclosure has increased signifi‐cantly. Sundem et al. (1996) suggest that the primary benefit of audited financial statements may not be decision usefulness but the discipline imposed by timely confirmation of previously available information. In general, the value of information from the audited financial statement will decline as the audit report lag (the time period between a company's fiscal year end and the date of the audit report) increases since competitively oriented users may obtain substitute sources of information. Furthermore, the literature on earnings quality and earnings management suggests that unexpected reporting delays may be associated with lower quality information. The purpose of this paper is to extend our understanding about the determinants of audit report lag using a proprietary database containing 226 audit engagements from an international public a...

Evidence About Auditor–Client Management Negotiation Concerning Client’s Financial Reporting

Abstract: We develop a model of auditor-client accounting negotiation, using the elements of negotiation examined in the behavioral negotiation literature, elaborated to include accounting contextual features indicated in the accounting literature and suggested by interviews with senior practitioners. We use a questionnaire structured according to the model to describe the elements, contextual features and associations between the two groups in a sample of real negotiations chosen by 93 experienced audit partners. The paper demonstrates important aspects of the sampled accounting negotiations and makes suggestions for further empirical and model development research.

A Corporate Social Responsibility Audit within a Quality Management Framework

Abstract: In this paper a corporate social responsibility audit is developed following the underlying methodology of the quality award/excellence models. Firstly the extent to which the quality awards already incorporate the development of social responsibility is examined by looking at the Malcolm Baldrige National Quality Award and the European Quality Award. It will be shown that the quality awards do not yet include ethical aspects in relation to social responsibility. Both a clear definition of social responsibility and an improved audit instrument are required. A definition and an audit instrument are developed which stimulate movement in that direction and help organisations to reflect on their position in relation to social responsibility.

Experimental Research in Financial Accounting

Abstract: This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist?s comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information, (2) how users of financial information interpret those reports, (3) how individual decisions affect market behavior, and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the "behavioral" and "experimental economics" literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient.

Auditing and Assurance Services

Abstract: Chapter 1: Auditing and Assurance Services Chapter 2: Professional Standards Chapter 3: Management Fraud and Audit Risk Chapter 4: Engagement Planning Chapter 5: Internal Control Evaluation: Assessing Control Risk Chapter 6: Employee Fraud and the Audit of Cash Chapter 7: Revenue and Collection Cycle Chapter 8: Acquisition and Expenditure Cycle Chapter 9: Production and Payroll Cycle Chapter 10: Finance and Investment Cycle Chapter 11: Completing the Audit Chapter 12: Reports on Audited Financial Statements

The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Composition and Experience

Abstract: This study empirically examines the relation between certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. This study focuses on board characteristics because the board directly controls audit committee membership. Such staffing decisions can directly affect the ability of the audit committee to monitor management's financial reporting process on behalf of the board. Results suggest that Canadian firms that voluntarily include more outside directors on the audit committee than the mandated minimum have larger boards with more outsiders serving on those boards and are more likely to segregate the board chairperson position from the CEO/president positions. Additionally, firms that voluntarily create audit committees composed of outsider members with a breadth of relevant financial reporting and audit committee knowledge and experience have boards that are larger, have more outside members, and are less likely to be chaired by the CEO/president. Implications of these findings for auditors, institutional investors, regulators, and other interested parties are discussed.

The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution

Abstract: Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross-sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample includes all of the former “Big 6” international accounting firms and clients from twenty-nine different industries.

CEO Domination, Growth Opportunities, and their Impact on Audit Fees:

Abstract: This study examines the relationship between a firm's internal monitoring mechanism and its impact on the audit fee. The first hypothesis investigates whether firms with independent corporate boards (chief executive officer and chairman being separate individuals) provide a more effective internal monitoring mechanism and are thus associated with lower control risk, resulting in lower audit effort and fees as compared to nonindependent, CEO-dominated boards. The second hypothesis examines whether the effectiveness of the internal monitoring mechanism provided by independent corporate boards is independent of the firms' growth opportunities. High-growth firms are by nature more difficult to monitor due to the existence of discretionary investments and measurement problems associated with future assets. Thus, the negative association between independent corporate boards and audit fees is expected to be affected by a firm's growth. Results using 650 observations from Hong Kong companies provide support for b...

Profitability Regulation, Earnings Management, and Modified Audit Opinions: Evidence from China

Abstract: This study, using data from the Chinese stock market, investigates the relationship between earnings management induced by profitability regulation and modified audit opinions (MAOs). We review recent developments in the accounting profession and in independent auditing to foster an understanding of the environment in which Chinese auditing operates. Based on annual reports published by listed companies from 1995 to 1997, we analyze the underlying reasons for MAOs. Our test results show a significant association between receiving MAOs and reporting profits marginally above the target levels specified in stock de‐listing and rights offering regulations. Our findings are consistent with the notion that asymmetric profitability requirements exacerbate managers' propensity to engage in earnings management, which in turn is positively associated with receiving MAOs. Though based on Chinese data, our findings are of general interest because they address a fundamental issue of trade‐offs between expected costs a...

Auditors' and Investors' Perceptions of the "Expectation Gap"

Abstract: The auditing “expectation gap” refers to the difference between (1) what the public and other financial statement users perceive auditors' responsibilities to be and (2) what auditors believe their responsibilities entail. The notion of this divergence receives much attention in the accounting literature (i.e., Commission on Auditors' Responsibilities 1978; Guy and Sullivan 1988; AICPA 1993; U.S. Government Accounting Office 1996). Although prior empirical studies encompass certain expectations associated with a range of audit services, these papers often involve the opinions of bankers as the primary user group employed in the research (Nair and Rittenberg 1987; Lowe and Pany 1995). In contrast, this study extends the prior research by directly comparing audit partners' and investors' perceptions of auditors' responsibilities involving various dimensions of the attest function. We conducted the study to determine if an expectation gap currently exists and we find that it does; investors have higher expec...

Three questions can detect hazardous drinkers.

Abstract: OBJECTIVE The researchers evaluated the Alcohol Use Disorders Identification Test (AUDIT), the first 3 questions of the AUDIT (AUDIT-C), the third AUDIT question (AUDIT-3), and quantity-frequency questions for identifying hazardous drinkers in a large primary care sample. STUDY DESIGN Cross-sectional survey. POPULATION Patients waiting for care at 12 primary care sites in western Pennsylvania from October 1995 to December 1997. OUTCOMES MEASURED Sensitivity, specificity, likelihood ratios, and predictive values for the AUDIT, AUDIT-C, and AUDIT-3. RESULTS A total of 13,438 patients were surveyed. Compared with a quantity-frequency definition of hazardous drinking (> or =16 drinks/week for men and > or =12 drinks/week for women), the AUDIT, AUDIT-C, and AUDIT-3 had areas under the receiver-operating characteristic curves (AUROC) of 0.940, 0.949, and 0.871, respectively. The AUROCs of the AUDIT and AUDIT-C were significantly different (P=.004). The AUROCs of the AUDIT-C (P or =3) and the AUDIT-3 (score > or =1) were 94.9% and 99.6% sensitive and 68.8% and 51.1% specific in detecting individuals as hazardous drinkers. CONCLUSIONS In a large primary care sample, a 3-question version of the AUDIT identified hazardous drinkers as well as the full AUDIT when such drinkers were defined by quantity-frequency criterion. This version of the AUDIT may be useful as an initial screen for assessing hazardous drinking behavior.

The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures

Abstract: This paper reports the results of an experiment that examined the effects of audit experience and explicit fraud risk assessment instructions on the effectiveness of analytical procedures in detecting financial statement fraud. The results of this study suggest that audit managers are more effective than audit seniors in assessing the risk of fraud with analytical procedures. Additionally, explicit fraud risk assessment instructions resulted in more effective assessments of the presence of fraud. These results have implications for the assignment of auditors to tasks and the structuring of these tasks.

Software audit system

Abstract: A software audit system is provided in conjunction with an anti-virus system. A computer virus scan request received by the anti-virus system ( 16 ) is used to trigger an audit data generator ( 18 ) to generate audit data. The audit data generator ( 18 ) may also serve to ban certain computer programs from execution and monitor the concurrent usage of other computer programs.

Board independence and audit-firm type

Abstract: This paper investigates the role of outside members of the board of directors in the choice of external auditor for property‐liability insurance companies. Consistent with our hypothesis that we de...

In the name of accountability ‐State auditing, independence and new public management

Abstract: This article investigates the role of the state auditor in Alberta. An analysis of the Office of the Auditor General of Alberta’s annual reports shows that the role of the Office has significantly changed to promote and encourage the implementation in the public sector of a particular type of accountability informed by new public management. The authors argue that the Office has increased its power to influence politicians and public servants about the merits of its specific understanding of what accountability should be. However, as the Office becomes more powerful, it also becomes more vulnerable to complaints about a lack of independence from the executive. Indeed, the Office is now so closely associated with new public management that we believe that it is difficult for the Office to sustain the claim that it is able to provide independent assessments of public‐sector administration.

From brand vision to brand evaluation : strategically building and sustaining brands

Abstract: A balanced perspective on brands The diverse interpretations of 'brand' A strategic process for building integrated brands Brand visioning The importance of organizational culture on brands Setting brand objectives Auditing the brandsphere Synthesising the nature of a brand Implementing and resourcing brands Brand evaluation.

Theory and Experimentation in Studies of Audit Judgments and Decisions: Avoiding Common Research Traps

Abstract: In this article, we identify and discuss four research traps into which behavioral audit scholars sometimes fall: (1) The Rush to the Explanatory Research Stage Trap; (2) The Mundane Realism Trap; (3) The Measured Variable Trap; and (4) The Audit Practitioner as Participant Trap. Throughout our discussion of these traps, we emphasize the role of theory and highlight the comparative advantages of experiments. Our discussion is designed to help aspiring researchers carefully design and execute auditing research programs.

Effects of personal values on auditors’ ethical decisions

Abstract: This study investigates the effects of personal values on auditors’ ethical decision making. Previous accounting research has investigated the value profiles of practicing CPAs and accounting students, and the effects of values on accounting students’ ethical decisions. However, the current study is the first to empirically address the role of values in the ethical decision processes of professional auditors. We surveyed a random sample of AICPA members to assess their value preferences and reactions to an ethical dilemma involving client pressure for aggressive financial reporting. Contrary to our hypothesis, personal value preferences did not influence auditors’ perceptions of the moral intensity of the ethical dilemma. As hypothesized, perceptions of moral intensity influenced both ethical judgments and behavioral intentions.

An Examination of Auditors' Reporting Intentions When Another Auditor Is Offered Client Employment

Abstract: An AICPA ethics ruling prohibits auditors from considering employment with a client during the audit engagement in order to minimize the concerns that financial statement users may have regarding the auditor's independence, in fact or appearance. The objective of this study is to examine auditors' reporting intentions when it is discovered that another auditor is considering employment with the client and has failed to comply with the ethics ruling. We test a model that predicts that auditors' reporting intentions will be influenced by their perceptions of the seriousness of the act, the personal costs of reporting, their responsibility for reporting, and their commitment to the accounting profession. The results indicate that auditors' reporting intentions are stronger when personal costs of reporting are perceived to be lower or personal responsibility for reporting is perceived to be higher. Implications of the findings for audit practice are discussed.

Application of the Business Risk Audit Model: A Field Study

Abstract: After confronting unprecedented challenges in the last decade, accounting firms have undertaken extensive effort to improve the basic financial statement audit and to expand external assurance beyond the traditional audit. The re‐examination of audit methods has produced a new emphasis on assessing business and process risks in the conduct of an audit. This paper describes the fundamental changes in the audit process and examines their impact in an actual engagement. We first identify outcomes that we expect to observe in an audit based on the business risk model and then study an actual engagement to gather preliminary evidence about our expectations. The engagement used in this study is the 1997 audit of the Czech bank Cˇeskoslovenska´ Obchodni´ Banka (CˇSOB). Important observations about the new audit process included changes to the audit team structure, changes in administration and timing of the engagement, changes in the risks addressed during the audit and the evidence gathered, increased assurance...

A Research Note on the Effects of Gender and Task Complexity on an Audit Judgment

Abstract: This study examines the effects of gender and task complexity on the accuracy of audit judgments. Because research in cognitive psychology and marketing suggests that females may be more accurate decision makers in complex decision tasks, we hypothesize that there will be a significant interaction between gender and task complexity on the accuracy of an audit judgment. A 2×2 full factorial experiment (males/females by high‐/low‐task complexity) was carried out. The number and consistency of cues was manipulated to create the high‐ and low‐complexity conditions. Participants were required to judge whether an inventory balance was fairly presented based on case material that contained a material misstatement in the inventory account balance. The results support the hypothesis.

Improving Jurors' Evaluations of Auditors in Negligence Cases*

Abstract: Prior research indicates that individuals acting as jurors experience outcome effects in audit negligence litigation. That is, jurors evaluate auditors more harshly in light of negative outcomes, even when audit quality is constant. I posit that outcome effects in this setting are caused by jurors using their negative affect (i.e., feelings) resulting from learning about negative audit outcomes as information relevant to auditor blameworthiness. I tested this hypothesis in an experiment in which I manipulated audit quality, outcome information, and provision of an attribution instruction. The attribution instruction was designed to discredit negative affect as a cue to auditor blameworthiness. Consistent with expectations, attribution participants' evaluations of auditors exhibited less reliance on outcome information and more reliance on audit quality information than did evaluations made by control participants. In fact, outcome effects were eliminated for attribution participants. Courts may be able to improve the quality of jurors' decisions in such cases by employing an attribution instruction.

Agency costs and audit quality: evidence from France

Abstract: This paper examines the influence of agency conflicts on the demand for audit quality by French listed companies. The French environment is characterized by constraining regulations on independence and informational duties of statutory auditors, a weak contribution of financial markets in corporate financing as compared to Common Law countries, and correlatively a higher ownership concentration. Two agency costs hypotheses are tested: ownership diffusion as a proxy for shareholders managers conflicts, and leverage in high-Investment-Opportunity-Set companies, supposing an increased expropriation risk for debtholders. Audit quality is proxied with a triple distinction of auditors: Big Six, national Majors and Local audit firms. Empirical results do not support the ownership hypothesis and corroborate the debt-IOS one. This suggests that: (1) the Anglo-American principal-agent model has little explanatory power in the concentrated ownership framework of French corporate governance; (2) audit quality appears...

Audit quality, auditor behaviour and the psychological contract

Abstract: The quality of the opinion provided by audit firms is an important determinant of their long-term survival. However, audit quality is difficult to gauge, which makes it particularly sensitive to the behaviour of the individuals who carry on audit work. Differences of interest between partners and other firm members can then have adverse consequences on the work motivation of field auditors. In particular, audit quality reduction behaviours are defined as actions taken by an auditor during an engagement that reduce evidence-gathering effectiveness inappropriately. These acts can threaten audit quality or damage the reputation of the profession. This paper, which is based on a survey of 170 audit seniors working in large audit firms in France, uses a model based on 'psychological contract' assessment and affective commitment to account for audit quality reduction behaviours by the respondents. The results show that the psychological contract elements dealing with the professional aspect of auditing are the ...