Audit Risk Assessment Research Articles

Auditor Response to Clients' Reputational Risk

In this study, we use new data to examine client reputation risk as a component of auditor risk assessment and response. The RepRisk database captures negative media coverage of companies’ environmental, social, and governance practices in a quantified measure of client reputational risk. Due to its focus on non-financial risk, this measure is uniquely able to disentangle auditor reputation considerations from the risk of material misstatement. We predict that auditors consider client reputational risk in the risk assessment phase of the audit. Specifically, client reputation risk may impact auditor business risk, where an auditor suffers reputation losses from their association with a client with impaired reputation. We find that client reputational risk has a positive impact on audit fees and the likelihood of auditor changes. Thus, our findings suggest that auditors monitor negative media coverage of their clients and incorporate it into pricing and retention decisions. We conduct supplemental analyses suggesting that our evidence is consistent with an auditor business risk explanation incremental to responses explained by risk of material misstatement and increased effort.

Clients' Workplace Environment and Corporate Audits

SUMMARY We obtain a novel dataset of workplace satisfaction ratings submitted by about 100,000 employees working for large public U.S. companies. We document that lower workplace ratings are associated with higher audit fees and longer audit report lags. Lower workplace ratings also increase the likelihood of firms receiving modified going concern opinions. Our study shows that organizational workplace environments affect auditor risk assessments and auditing outcomes and provide insights for practicing auditors and corporate executives. Our interviews with practicing auditors at large U.S. accounting firms also provide insights as to how workplace quality affects the corporate audit. JEL Classifications: G3; J28; M14; M42.

CONCEPTUAL APPROACHES TO APPLICATION OF QUANTITATIVE AND QUALITATIVE METHODS OF ASSESSMENT OF ACCOUNTING AND AUDIT RISKS AMOUNT

Introduction. The auditor, when assessing and calculating the level of components of audit risk, often encounters the factors or events. The objective probability of occurrence of these factors or events can not be determined on the basis of statistical observations. Purpose. The article aims to consider the problem of audit risk determination, to indicate the main causes of its occurrence. It is necessary to emphasize the relationship of audit risk and risk to the accounting system and the problems of not only minimizing them, but also transferring users to this information. Quantitative and qualitative methods for determining and assessing audit risk should be analysed. Their advantages and disadvantages must be indicated. Results. For maximum objectivity, it has been proposed to combine quantitative methods for assessing audit risk with qualitative ones on the basis of subjective assessments. A conceptual model for its assessment has been developed in order to carry out the effective audit risk management. His model is based on an optimal combination of quantitative and qualitative methods for evaluating factors that may directly or indirectly influence the size of the audit risk.

Методика аудита и оценки рисков в области производственной безопасности на сторонних нефтеналивных терминалах

Методика аудита и оценки рисков в области производственной безопасности на сторонних нефтеналивных терминалах

Implications of Financial and Non-financial Measures on the Refinement of the Assessments of Audit Risk: An Empirical Investigation

Identifying and assessing audit risk is a key part of the audit process. Prior research documented that auditors primarily look at financial data, information, and measures when assessing the audit risk for an audit engagement. However, professional standard setters, regulators, and academic researchers have discussed the potential for non-financial data, information, and measures to provide a powerful and independent benchmark for evaluating the validity of the numbers of financial statements of an audit client. A field study was conducted in Egypt during the years 2013 and 2014 to explore how auditors perceive and assess audit risk for an audit engagement in the period following the Egyptian revolution of January 25, 2011. The results of the field study indicated that auditors appear not to give sufficient attention to non-financial data, information, and measures when assessing the audit risk during an audit engagement. Auditors seem to rely on financial data, information, and measures when assessing the audit risk of an audit engagement. Furthermore, auditors do not seem to consider the inconsistencies between financial and non-financial data, information, and measures of an audit client as an indicator of the existence of fraud or material misstatements in the financial statements of an audit client.

Information Technology Controls Quality and Audit Fees: Evidence From Italy

This study analyzes the impact of Information Technology (IT) Controls quality on control risk and audit fees. The impact is expected to occur when regulation increases sensitiveness to audit risk assessment. The research focuses on IT Controls as part of Internal Control over Financial Reporting, particularly on scoping quality, segregation of duties, and Controls framework compliance. The research was conducted with a questionnaire on a population of Italian listed companies. We find that audit fees are lower for higher IT scoping quality, IT Controls segregation of duties, and IT Controls framework compliance. The overall conclusion is that IT Controls quality is related to lower control risk, audit fees, and audit effort.

Critical remark on multi-criteria approach to corporate auditing risk assessment - evidence from Brazil

Audit risk assessment concerns establishing a confidence level for engagement, thereby enhancing the detection of RMM and in so doing assisting the selection of mitigating procedures. This study examines the risk evaluating approaches predominantly adopted by big-4 and the second tier firms and proposes a CARM using the multi-criteria approach. In order to support the said objective one draws on the following philosophical premise: corporate audit risk is a sum of service risk and auditing risk whose values scaled by multi-criteria assessment results a reliable auditor value judgment. Upon simulating the model, results show that on one hand, audit partners would only accept audit services with low service risk and on the other hand, audit proposal that conjugates significant and very significant ethical risk; moderate, significant and very significant moral risk; moderate, significant and very significant loss of earning risks; would be treated with extreme due professional care by auditors.

Critical remark on multi-criteria approach to corporate auditing risk assessment - evidence from Brazil

Critical remark on multi-criteria approach to corporate auditing risk assessment - evidence from Brazil

The Limitations of Risk-based Auditing using Fuzzy Methods

Purpose - Investors, creditors, governments, and others make decisions using reasonable information provided by others. In many cases, the users of this information have goals and objectives conflicting with those of the information's producers, indicating the need for external auditors. Research design, data, and methodology - Competition in auditing has noticeably intensified globally, especially in developed countries. This means that auditors are striving to increase the efficiency of their methods. In recent years, risk-based auditing has become prominent among these efforts. In risk-assessment auditing, the auditor may directly affect the effectiveness and efficiency of the audit. Results - As a central framework, the risk assessment process improves audit quality and effectiveness such that the audit will lead to necessary changes. Previous studies have shown that risk assessment affects the nature, timing, and content of audit procedures. Conclusions - In the planning stage of an audit, audit risk assessment may identify any inappropriate or inefficient distribution of resources or determine whether the results of an audit will be ineffective or incorrect. Thus, assessing audit risk is a critical task.

Role for Internal Auditor to Cope with IT Risks and IT Infrastructure in Jordan Commercial Banks

This study aims to provide assurance to senior management on the adequacy of the controls to ensure the IT infrastructure was planned, managed and maintained to support efficient operations and analyze risk assessment and know the role of it auditors to deal with risks which threats attain strategic objectives. The study population consists of the internal auditors in Jordan commercial banks. the most results : Audits can focus on such major IT assets as ERP systems and help management to make rational decisions in investing in IT assets to attractive new customers and make core competences for company, technology infrastructures have continued to grow in size and complexity. Servers, storage area networks (SANs), and network attached storage (NAS) and Audit risk assessment Evaluation of risks related to the value drivers of the organization, covering strategic, financial, operational, and compliance objectives, Audit risk assessment Evaluation of risks related to the value drivers of the organization, covering strategic, financial, operational, and compliance objectives. and most recommendations are An audit to verify that IT management has developed an organizational structure and procedures to ensure a controlled and efficient environment for information process and risk assessment is the identification and analysis of relevant risks to the achievement of an organization's objectives, important to care risk assessment is the identification and analysis of relevant risks to the achievement of an organization's objectives.

Determinants of audit risk assessment for governmental audits in Indonesia: a study of the national audit board of the republic of Indonesia

This study aimed to determine the influence of: geography, demography and topology; culture; maturity of organization (age of government); maturity of people; auditor’s capability in the assigned region; expertise / education level; and experience of auditing team in risk assessment; on the examination of audit risk by The National Audit Board of The Republic of Indonesia (Badan Pemeriksa Keuangan (BPK) in Indonesia. This study found the factors affecting the audit risk model in general. This study identified several factors that influence the determination of audit risk assessment which occur when conducting local governmental audits in Indonesia. This study was conducted by identifying the factors that might influence the risk of audit used by The National Audit Board. The results of the identification are elaborated in some of the items included in the questionnaire. The number of respondents in this study was 143 respondents as Auditors of The National Audit Board in Indonesia. This study conducted multiple regression analysis. Maturity of people, auditor’s capability, and expertise level have a significant influence on the risk assessment. These factors are derived from an auditor’s judgment when they perform the examination seen from the condition of local government in Indonesia

Методика за оценка на системата за вътрешен финансов контрол (за целите на данъчноконтролната практика)

The possibility of applying the methodological toolkit for assessing the internal financial control system, WHICH is part of the audit risk assessment, is examined. In this regard, a methodology for the assessment of the internal financial control system in enterprises during tax audits (at the stage of their preparation and planning) is derived and adapted as a means to increase their effectiveness. The most important features of internal control in small enterprises are also pointed out.

The Impact of Monitoring by Short Sellers on Auditor's Risk Assessment: A Cross-Sectional Study

We investigate two competing perspectives as to how institutional ownership, analyst following, and equity incentives moderates the effect of short interest on the behavior of auditors. It is unclear how information signal embedded in short interest affects the audit process for companies of different characteristics. In this paper, Wwe investigate two competing perspectives as to how external monitoring and managerial incentives affect the association between short interest and audit risk. The supply side perspective (i.e. labeled signaling) argues that if there is strong external monitoring and managerial incentives, short interests will not lead to greater amount of audit effort because auditor’s of auditors’ self-interest in minimizing costs, self-interest largely drives audit effort, while the demand side perspective argues that the same factors (i.e. institutional ownership, analyst following, and equity incentives) will lead to a greater demand for audit effort. Using audit fees as a proxy for audit risk, we find that an increase in short interest is associated with an increase in audit fees for companies that have weak external monitoring (i.e. low institutional ownership, low analyst following) and weak managerial incentives (i.e. compensation is less sensitive to stock price movements). In contrast, an increase in short interest is not associated with an increase in audit fees for companies that have a high institutional ownership, large analyst following, or managerial incentives that are more sensitive to stock price movements. Our results provide support for the signaling perspective, but not for the demand perspective.

The Effect of Alternative Business Model Representation Techniques on Business and Audit Risk Assessment

We investigate the effects of business model representation techniques, specifically format and presence of causal linkages, on business risk and audit risk assessment. We conduct an experiment involving auditing students with previous audit work experience as participants and business model information based on an existing public company. Participants given business model representation in either diagrammatical or tabular format make more accurate risk assessments than those given the same information in a free-form narrative format. Contrary to our prediction, overall performance in diagram and table conditions does not differ statistically. The inclusion of causal linkages in the business model representation has mixed effects on risk assessment accuracy. We also investigate whether task-specific experience moderates the effects of representation techniques on risk assessment. We find an interaction effect of task-specific experience with causal linkages; specifically, linkage effects are limited to the subsample of participants with no risk documentation experience.

Performing a Strategic Risk-Based Assessment: Integrating Data Analytics into the Audit Universe

Traditionally, many professionals have used data analysis solely in the execution phase of audits but the truth is that data analysis tools offer the greatest value when used from end to end within the Audit Universe—from audit planning and risk assessment to reporting.Data Analysis tools can be used to unlock hidden value and act as a key catalyst for delivering insights that can positively influence an organization’s risk management framework.

Business Modeling to Improve Auditor Risk Assessment: An Investigation of Alternative Representations

ABSTRACTThis study investigates the effects of alternative methods for documenting business models on audit risk assessment behavior. We consider tabular versus diagrammatic representations of the relationship between business model components such as environmental factors, strategic goals, internal processes and resources, and financial statement accounts. Multiple scenarios based on a real company were constructed and 24 participants, including audit partners, managers, and novice auditors performed a risk assessment for each scenario, presented in either a diagrammatic or a tabular format. The participants' verbal discussions as they performed the risk assessments were tape recorded, transcribed, and coded. A content analysis of the participants' coded verbal behavior indicates that the tabular presentation appears to elicit more frequent mention of accounts by the participants, while the diagram format leads to more mentions of other business model components. There is also some evidence of expertise effects.This study indicates that a tabular presentation can possess many of the benefits often associated with a diagrammatic representation. However, in our study, obtaining such benefits involved the deliberate structuring of the tabular presentation to organize the components of the business model and the links between them and financial statement accounts.

Professional Judgment and Reticence to Apply Sampling Techniques

Audit sampling means, according to International Standard on Auditing 530 “Audit Sample”, applying audit procedures to less than 100% of the items or class of transactions within an account balance. Sampling is used not only in auditing financial statements, but widely in market research, scientific analysis, market analysis, surveys. An ideal situation would involve studying the entire population under investigation. This is impossible in situations where we find large populations of data. The auditor must use professional judgment to assess audit risk and establish appropriate procedures for the transactions and accounts tested. When the auditor uses sampling, his goal is to ensure that the sample provides a reasonable basis to draw conclusions about the population from which the sample is selected. Using statistical sampling assumes a computer program, more expensive, it requires statistical knowledge and assumes in a lesser extent the use of professional judgment. Non-statistical sampling does not allow quantification of risk, leaving large margin of interpretation, exposing the auditor to a high risk of malpractice.

Are Capitalized Software Development Costs Informative About Audit Risk?

SYNOPSISCapitalization of software research and development costs (SDC) under SFAS No. 86 is the only exception to SFAS No. 2 that calls for immediate expensing of R&D costs. Although intangible assets have become increasingly relevant for firm valuation, they remain largely unexplored in audit research. This is an important topic because intangible assets, especially those that are internally developed, pose greater challenges in assessing audit risk relative to tangible assets. Capitalization of SDC offers a unique opportunity to study how auditors assess audit risk associated with the recognition of this intangible asset. While capitalized SDC could shed light on software products' potential commercial success and inform the auditor about the client's business risk, the accounting flexibility allowed by SFAS No. 86 also increases the risk of earnings management, and thus implies higher audit risk. Using audit fees as a proxy for audit risk, our results indicate that capitalized SDC are negatively associated with audit fees for firms where capitalization is inconsequential to beating analysts' forecasts, and also for firms with low analysts' following. These results support the notion that capitalized SDC signal lower business risk, especially for firms with low earnings management risk or high private information.

The Relationship Between Segment-Level Manipulations And Audit Fees

We examine the auditorssensitivity to manipulative financial reporting by investigating the relationbetween audit fees and segment-level manipulations. Segment reporting provides an interestingsetting to examine auditor risk assessments because of the discretion affordedto management under existing regulations. Segment manipulations, a form of classificationsmoothing, are not in violation of accounting standards; nevertheless, thesemanipulations violate the spirit of faithful representation by distorting theperformance of a subset of the reporting unit at the expense of (or to thebenefit) of another subset. Because disaggregatedinformation is used by analysts and investors in bottom-upforecasting, these distortions can influence firm value even though they do notaffect bottom-line net income. Ourmeasure of classification smoothing measurescost shifting between core operating segments and non-core segments to proxyfor segment manipulation. We find thataudit fees, a proxy for the auditors risk assessment, have a positiveassociation with segment-level manipulations. Subsequent analyses suggest that higher auditfees are also due to the additional effort exerted in the presence of segment-levelmanipulations. Further, auditors appearjustified in charging higher fees to clients that engage in segmentmanipulations as we document evidence of a positive association betweenrestatements and segment-level manipulations. Collectively, these results suggest thatauditors are aware of the risk associated with companies that engage in segment-levelmanipulations and auditors respond appropriately by charging higher fees anddoing additional work.

AUDIT PLANNING JUDGMENT OF CPAs IN THAILAND: AN EMPIRICAL INVESTIGATION OF THE ANTECEDENTS AND CONSEQUENCES

ABSTRACT The objective of this research is to investigate the impacts of audit planning judgment on audit practice excellence and audit effectiveness of CPAs in Thailand. Audit planning judgment includes audit method determination, audit resource allocation focus, audit scope setting decision and audit risk assessment orientation. The antecedents of audit planning judgment are audit modern well-roundedness, audit knowledge, regulation compliance and competitive leaning. The results of empirical testing using responses from 157 CPAs in Thailand indicate that audit planning judgment which includes audit method determination, audit scope setting decision and audit risk assessment orientation has a positive relationship with audit practice excellence and audit effectiveness. In addition, modern well-roundedness, audit knowledge, regulation compliance and competitive leaning are the antecedents related more to increase audit planning judgment. Specifically, the moderating effect of professional experience does not interact with audit planning judgment, audit practice excellence and audit effectiveness. Keywords Audit Planning Judgment; Audit Practice Excellence; Audit Modern Well-Roundedness; Audit Knowledge; Regulation Compliance; Competitive Learning; Professional Experience; Audit Effectiveness