An Experimental Examination of Factors That Influence Auditor Assessments of a Deficiency in Internal Control over Financial Reporting

Abstract

SYNOPSISWhen assessing the effectiveness of internal control over financial reporting (ICFR), auditors evaluate design effectiveness, gather evidence on operating effectiveness, assess operating effectiveness, and conclude whether control deficiencies are material weaknesses. We experimentally examine audit managers' and partners' assessments of ICFR operating effectiveness and judgments of whether a control deficiency is a material weakness to determine the influence of the presence of: (1) a material weakness unrelated to the deficiency being assessed, and (2) a known misstatement associated with the identified control deficiency. Results suggest that the presence of either an unrelated material weakness or a known misstatement influences the assessed operating effectiveness of an internal control and the likelihood of a material weakness assessment. We also provide supplemental survey results from practicing audit managers and partners on their experiences in assessing potential material weaknesses to gain insights into their interpretations of the professional guidance.