The Impact of Roles of the Board on Auditors' Risk Assessments and Program Planning Decisions

Abstract

Given governance breakdowns, an important issue is whether auditors are sensitive to a client's governance structure. The purpose of the study is to examine how the roles played by the board affect auditors' risk assessments and program planning decisions. An agency role of the board emphasizes monitoring corporate management while a resource dependence role focuses on helping a firm cope with environmental uncertainty, gain access to external resources, and establish sound business strategies. Sixty-eight audit partners and managers evaluated a case where the roles of the board were manipulated: agency role (stronger or weaker) and resource dependence role (stronger or weaker). Results indicate that auditors' inherent risk assessments were not significantly affected by the resource dependence role, but control risk assessments were higher when the board played either a weak agency or weak resource dependence role than for the parallel strong condition. Further, audit program planning judgments were significantly affected by both the agency and the resource dependence variables. Finally, exploratory analysis indicates that when the board was stronger on both the agency and resource dependence dimensions, control risk assessments were the lowest and auditors decreased planned audit effort, while audit effort was increased for all other conditions.