Audit Risk Assessment Research Articles

Трансформація моделі ризику аудиту в умовах перевірки інтегрованої звітності

The article describes the features of risk of integrated reporting audit identification and assessment. It is determined that the audit risk model should take into account the circumstances affecting the generation, evaluation and application of integrated reporting data in relation to the transformation of information users’ requests, modification of the reporting interpretation of relevant data, and the extension of the audit scope as an assurance task. In this regard, the purpose of the study is to formalize methodological approaches to audit risk modeling in the context of integrated reporting audit tasks. The financial and non-financial data that could be disclosed in the integrated reporting are characterized. It is established that the circumstances of the formation of information to be identified by the auditor to assess the audit risk are determined by users’ requests, organizational and methodological approaches to its processing, availability of appropriate technical facilities and personnel. It is defined that the audit risk is the auditor's ability expected to express an inappropriate opinion on the audit results, which will include the misplacement or incorrect accounting of the deviations existing in the information or their incorrect identification. The article substantiates the model of the integrated reporting audit risk assessment, and the model provides the identification and determination of the level of such elements as: information risk, the risk of information preparing, the risk of information evaluation and the risk of changes in the influence of factors due to determination of preliminary assessment. The main advantage of the proposed audit risk assessment model is the definition of its elements, based on the main aspects of formulating and evaluating the information contained in the integrated reporting. In doing so, these aspects should be examined during the audit of the historical, forecast and hypothetical information contained in the integrated reporting.

How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership

AbstractUsing a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.

Analysis the relationship between tone of financial report and audit risk

Nowadays, in the competitive environment, to conduct a high-quality audit, auditors try to use anyavailable information. The audit quality depends on the amount of audit risk that determines the effortsof the audit company. In this regard, the task of finding additional factors that have a significant impacton the audit risk evaluation comes to the fore. One of the factors that influence on audit risk evaluationand risk management is the tone of financial reports. Based on the use of content analysis, regressionanalysis, this article checks whether the linguistic tone used for corporate annual reports is related to thelevel of audit risk. The model is based on previous studies factors determining audit risk, with the inclusionof new variable characterizing an optimistic or negative report tone. We find that annual reportswith positive tone are associated with a lower audit risk, suggesting that the tone of the annual reportmay be considered as a factor to assess audit risk. In general, the data obtained indicate that auditorscan improve their methods of assessing audit risks by systematically taking into account the linguisticqualitative characteristics of financial statement disclosures.

Big Data Audit of Banks Based on Fuzzy Set Theory to Evaluate Risk Level

The arrival of big data era has brought new opportunities and challenges to the development of various industries in China. The explosive growth of commercial bank data has brought great pressure on internal audit. The key audit of key products limited to key business areas can no longer meet the needs. It is difficult to find abnormal and exceptional risks only by sampling analysis and static analysis. Exploring the organic integration and business processing methods between big data and bank internal audit, Internal audit work can protect the stable and sustainable development of banks under the new situation. Therefore, based on fuzzy set theory, this paper determines the membership degree of audit data through membership function, and judges the risk level of audit data, and builds a risk level evaluation system. The main features of this paper are as follows. First, it analyzes the necessity of transformation of the bank auditing in the big data environment. The second is to combine the determination of the membership function in the fuzzy set theory with the bank audit analysis, and use the model to calculate the corresponding parameters, thus establishing a risk level assessment system. The third is to propose audit risk assessment recommendations, hoping to help bank audit risk management in the big data environment. There are some shortcomings in this paper. First, the amount of data acquired is not large enough. Second, due to the lack of author’ knowledge, there are still some deficiencies in the analysis of audit risk of commercial banks.

Auditors’ Perceptions of and Competencies in Big Data and Data Analytics: An Empirical Investigation

<p>This study presents evidence on practicing auditors’ perceptions of and competencies in applying big data and data analytics to audit engagements. An electronic questionnaire distributed to accountants shows that auditors have good information technology skills and are well-acquainted with big data and data analytics. However, they lack relevant technical skills and are unfamiliar with related data analysis tools, excluding Excel. The results reveal 64.71% of accountants have not attended any training on big data and data analytics, while 31.37% plan to enhance related knowledge. Auditors need to obtain training on substantive audit risk assessments using big data and data analytics.</p> <p> </p>

Gender‐diverse boards and audit fees: What difference does gender quota legislation make?

AbstractWe investigate the effect of board (audit committee) gender diversity on audit fees in the French context. We also examine whether the relationship between the proportion of female directors and audit fees is moderated by the enactment of the gender quota law in 2011. We use the system GMM estimation approach on a matched sample of French firms listed in the SBF 120 index between 2002 and 2017. Consistent with the supply‐side perspective, we contend that female independent directors and female audit committee members, by improving board monitoring effectiveness, affect the auditor's assessment of audit risk, resulting in lower audit fees. Our findings also document that, by breaking the glass ceiling, the effectiveness of the gender quota law lies not in increasing the proportion of female insider directors, but in boosting the appointment of female independent directors and female audit committee members. Using the difference‐in‐difference approach, our results reveal that female independent directors and female audit committee members are more willing to assert their monitoring skills after the quota law, leading to lower audit fees. Moving beyond tokenism, we show that, after the quota law, the negative impact on non‐audit fees is strengthened only for female independent directors.

Internal Auditor Turnover, Financial Reporting Quality, and Audit Risk Assessment

We understand relatively little about factors that affect the internal audit function’s ability to serve as an important monitor of financial reporting quality. We therefore study how turnover of the chief audit executive (CAE) influences financial reporting quality and stakeholders’ perceptions. Using data from Taiwan where companies are required to disclose when CAEs change position, we study how investors react to the announcement of a CAE turnover event, whether financial statements are of higher or lower quality after the turnover event, and how external auditors change their pricing behavior after the turnover event. We find that a CAE turnover event is associated negative stock mark reactions, a reduction in financial reporting quality, and higher external audit fees. Combined, the results provide evidence of the important monitoring role of internal auditing and especially of the critical role of the CAE.

Audit Firm Assessments of Cyber-Security Risk: Evidence from Audit Fees and SEC Comment Letters

This study investigates the impact of cyber-security incidents on audit fees. Using a sample of 5,687 firms, we find that (i) breached firms are charged 12% higher audit fees, and (ii) firms operating in the same industry of a breached firm are charged 5% higher fees. Finally, using a difference-in-difference regression on a propensity score matched sample, we provide evidence suggesting that auditors do not revise their audit risk assessment following a breach. Overall, these results suggest that the increase in audit fees in the year of a breach is only temporary, and that auditors include cyber-security risk in their audit risk assessment even before an incident occurs. Higher cyber-security risk is ultimately reflected in higher audit fees paid by auditees.

Optimistic tone and audit fees: Some Australian evidence

We examine whether the tone of corporate annual reports is associated with audit pricing decisions. A unique dataset drawn from annual reports of nonfinancial firms listed on the Australian Stock Exchange for the period from 2002 to 2014 is generated using textual analysis. We find that annual reports that convey optimistic tone are associated with lower audit fees, suggesting that annual report tone reflects factors that auditors consider in assessing audit risk. Consistent with the inverse association between tone and audit fees, results of additional analysis show that annual report tone is positively associated with earnings quality. Our results hold after controlling for firm characteristics that influence audit pricing decisions and remain robust to alternative variable measurement and test of endogeneity. Overall, the findings suggest that auditors could enhance their audit risk assessment practices by systematically considering linguistic attributes of qualitative corporate disclosures.

Audit Risk Assessment Model

Purpose: The purpose of this study is the development of an audit risk model based on the decomposition of classical Audit Risk Model (ARM) with the addition of elements to assess the risks associated with various aspects of the task. Design/Methodology/Approach: The classical ARM is the basis of our model. The factors of the first and second order in the proposed model are the same as in the classical ARM, namely, the risk of significant distortion and the risk of non-detection. The risk of material misstatement is disaggregated into inherent and control risks. We included in the list of second-order factors that affect the value of risk of significant distortion, the risk of material misstatement of financial statements due to unfair acts. Findings: The paper contains the classic ARM's development analysis and the current researches in audit risk modeling review. We formulated the requirements to desired ARM's characteristics based on analysis we made. The ARM modification by classical conceptual model decomposition to the level of simple binary statements is presented. We describe the main structural elements of the developed model and their interrelations. Practical Implications. The presented disaggregated ARM can be used as a methodological basis for assessing audit risk in the course of fulfilling assignments for the audit of financial statements. Originality/Value: The classical ARM author's modification has been developed with the aim to its adapting to a practical risk assessment through logical-probabilistic modeling.

Auditor Risk Assessment and Disclosure of Fair Value Measurement in Goodwill Impairment Test

Recent increases in the occurrence and magnitude of goodwill impairment charges highlight the increasing importance of the role of the auditor in goodwill accounting. This study examines the association between disclosures about the fair value measurement of goodwill and audit fees. We find that goodwill-related disclosures are positively related to audit fees, consistent with the idea that auditors increase their audit efforts to mitigate potential reputational and litigation losses (“audit risk effect”). Additionally, our results indicate that the information asymmetry and investor scrutiny moderate the association between goodwill-related disclosures and audit fees. One possible explanation is that auditors take goodwill-related disclosures as a signal of truthful goodwill accounting and this “signaling effect” partially offsets the “audit risk effect” of goodwill-related disclosures when information asymmetry or investor scrutiny is perceived as high.

Increasing Risk Sensitivity in Group Audits: the Role of Decomposed Processing

Audits of reporting groups are increasingly common, yet inspection findings indicate that auditors often do not sufficiently respond to the risks of material misstatement on these engagements. In this study, we draw on unpacking and decomposition theory to examine whether separating auditors’ assessments of component-level qualitative and quantitative risks will improve auditors’ ability to consider component-level qualitative risk. In an experiment with 88 audit partners and managers, we find that restructuring the auditor’s qualitative and quantitative risk assessment process leads experienced auditors to make more effective but equally efficient group audit planning decisions. In particular, we find that auditors are able to more effectively identify component-level qualitative risk and plan procedures to address such risk without compromising their consideration of component-level quantitative risk. Our findings should inform standard-setters as they revise the group audit standards to improve group audit risk assessment.

Assessment of the Risks of the Continuity, Related with Business Environment of a Business Entity

The article contains research and further development of approaches to the assessment of the risks of continuity of business-related business activities of an entity. Particular attention is devoted to the assessment of the size of audit risk for groups of events or conditions that, individually or collectively, can potentially challenge the ability to assume continuity of activities.
 The peculiarities of the business environment and the accounting system of business entities impose a certain imprint on the methodology of carrying out the audit procedures for assessing the risk of material distortion of financial data in accounting, in terms of determining the correct application of the principle of continuity by management personnel. Thus, it should be noted that enough attention should be paid to the auditor’s actions in obtaining an understanding of the nature and main features of accounting processes related to their presentation in accounting registers and reporting, including the system of internal control, to the extent that is sufficient for identification and evaluation risks of termination of activities caused by management policies, fraud or mistake.
 Actuality in this sense is being acquired by research aimed at further development and adaptation of the general scientific approaches, elucidated in the works of domestic and foreign scientists to assess the risks of continuity of the enterprise related to the business environment of the entity.
 The purpose of the article is to study and further develop approaches to the assessment of the risks of continuity of business-related business environment of the entity.
 Taking into account the results of the conducted research of the application of the standard method of assessment of audit risk, it was concluded that differentiation of the influence of the factors of changes in the level of audit risk is made. When conducting audit procedures to determine the level of risk of unreasonable use of the assumption of continuity of activities in the preparation of financial statements by management personnel, use standard procedures for the allocation of accounting areas that are subject to an increased level of audit risk and developed recommendations for improving the distribution of components of audit risk according to events or conditions that, individually or collectively, may result in the termination of the entity's activities.

Įgimtos audito rizikos veiksnių kiekybinio vertinimo metodika

[only abstract in English; full article and abstract in Lithuanian]
 The purpose of this article is investigate factors the inherent risk and to create a methodic for quantifying the inherent audit risk. The article analyzes the inherent risk of audit essential features and its place in the overall audit risk system. It is shown that the inherent risk of audit is influenced by many factors, which can be divided into two groups: 1) the outside; 2) inside. All factors should be investigated early in the audit phase, in particular when developing an audit strategy and establishing an audit plan and programs. The assessment of these factors depends on the auditor’s competence.
 A quantitative assessment of the inherent risk of audit risk consisting four calculation steps: factors - indicator list formation; their assessment; determination of maximum assessment and determination the synthetic characteristics of the inherent audit risk and the determination of the level of risk.
 This methodology can be used in conjunction with other methods and models for audit risk assessment as a means of measuring as closely as possible the inherent audit risk and its determinants, and tracking its changes.
 Research methods: scientific literature analysis, grouping, comparing, detailing and aggregating information.

Methodological provision for the assessment of audit risk during the audit of tax reporting

The problematics and the goal of the research: The lack of theoretical foundations as well as the practical necessity for organizations to create a methodology for assessing the audit risk in carrying out the audit of tax reporting, determined the research objective: the development of theoretical and practical recommendations regarding the methodological provision for the assessment of audit risks as well as the methodology for establishing the relationship between the adequate tax reporting and the managerial decisions of owners on the basis of tax audit results. Methods used: a method based on the theory of fuzzy sets and the basics of the theory of information asymmetry. Results achieved: the development of a methodology for assessing an audit risk in carrying out the audit of tax reporting and establishment of relationship between the theory of information asymmetry and the effectiveness of the users' managerial decisions. The conclusions of the research: practical implementation of the methodology in organizations with different taxation systems has proved the relationship between the theory of information asymmetry and optimization of the users' managerial decisions. The practical benefits from the obtained results make it possible to increase the efficiency of organizations' activities and to confirm to the tax authorities the timeliness of the calculation and payment of taxes. These methods are the basis for the development of a theory for assessing audit risks in carrying out tax audits Keywords: methodological provision, qualitative assessment, audit risk, tax audit, tax reporting, asymmetric information.

Towards a more accurate audit assessment: can corporate social performance provide clues?

Regulators have been particularly concerned with the increased frequency of auditor's deficiencies related to material misstatement as reported in the 2017 Public Company Accounting Oversight Board (PCAOB) inspection brief. This research examines the relationship between auditor's risk of failing to capture material misstatement and the clients' social responsibility concerns. The findings indicate that clients with social performance concerns (human rights, environment, and governance) were associated with higher auditor's risk assessment, as indicated by higher audit fees. The results are consistent after controlling for various auditor and client variables. Implications of this study support the importance of incorporating social performance of clients in the auditor's evaluation since it can provide key insights into the client's underlying risk of future litigations which can arise due to socially irresponsive behaviours. In doing so, we seek to come closer to an accurate client assessment as well as respond to the call of PCAOB for minimising the deficiencies of the auditing process particular in the area of material misstatement.

Towards a more accurate audit assessment: can corporate social performance provide clues?

Regulators have been particularly concerned with the increased frequency of auditor's deficiencies related to material misstatement as reported in the 2017 Public Company Accounting Oversight Board (PCAOB) inspection brief. This research examines the relationship between auditor's risk of failing to capture material misstatement and the clients' social responsibility concerns. The findings indicate that clients with social performance concerns (human rights, environment, and governance) were associated with higher auditor's risk assessment, as indicated by higher audit fees. The results are consistent after controlling for various auditor and client variables. Implications of this study support the importance of incorporating social performance of clients in the auditor's evaluation since it can provide key insights into the client's underlying risk of future litigations which can arise due to socially irresponsive behaviours. In doing so, we seek to come closer to an accurate client assessment as well as respond to the call of PCAOB for minimising the deficiencies of the auditing process particular in the area of material misstatement.

ACCEPTABLE AUDIT RISK EVIDENCE IN JAKARTA INDONESIA

Early 20’s century begins with revealed some accounting financial scandals from reputable companies around the world’s where the economic crisis starts. Facts from some cases proofed that the auditors have weakness in assessing audit risk from those reputable companies (some are Enron (2001), worldcom (2002), Madoff (2008), and Saytam (2009)), recent years the scandals were happens to Japan companies where it hits Olympus (2011) and Toshiba (2015). Indonesia had Kimia Farma (2002) for example where the auditor were convicted less professional from assessing acceptable audit risk. The phenomena showed that auditors have big uncertainty of risk when they do the audit process and highly related to their integrity in doing the process. Assessment audit about clients will be influenced by the approach that was undertaken, audit planning program, risk assessment and how to analyze audit evidence (Bell et al; 2005). This research were aimed to give an empirical evidence on public accountants behavior in Jakarta, Indonesia when assessing acceptable audit risk based on their independent auditors. Using 11 public accountant offices in south and east Jakarta were picked randomly from OJK Public accountant offices Listed in 2015 with multivariate regression model between audit complexity, audit sampling judgment and management integrity toward acceptable audit risk. The result showed that the small portion of audit sampling judgment were set by the public accountants when they give their opiniondo makes the acceptable risk getting higher. Audit complexity and management integrity didn’t show related toward acceptable audit riskin public accountant offices in Jakarta during 2015.

Excess audit committee compensation and audit pricing

In this study, we explore audit pricing decisions in the presence of excess audit committee compensation. Specifically, we examine whether excess compensation of audit committee members is related to audit fees. We find that excess compensation is positively associated with audit fees. We further examine whether the excess compensation affects auditors' pricing of earnings manipulation, and find evidence suggesting that auditors perceive earnings manipulation risk relatively low when the audit committee members are paid excess compensation. Overall, our results support the notion that audit committee excess compensation represents greater monitoring over a firm's financial reporting process, which affects auditor's risk assessment.

Methodological aspects of audit risk assessment taking into account factors of activities, events and restrictions

Methodological aspects of audit risk assessment taking into account factors of activities, events and restrictions