Audit Risk Assessment Research Articles

CFO Compensation and Audit Fees

Executive compensation contracts may influence financial reporting quality, and the CFO plays a key role in preparing the financial statements. This study examines whether the structure and components of CFO compensation are associated with audit risk as measured by audit fees for a sample of S&P 1500 companies during the period 2012–2022. We find that the percentage of total compensation composed of either stock or options is significant and positively related to audit fees, while non-equity incentive plan compensation is significant and negatively related to audit fees. We also find that the dollar amount of equity compensation is significant and positively related to audit fees, while the dollar amount of non-equity compensation is not related to audit fees. These results suggest that CFO compensation structure is an important factor in the assessment of audit risk, which is important for compensation committees as well as regulators. This is the first study, to our knowledge, that examines the relationship between the dollar amount and composition of CFO compensation and audit fees.

Data-Driven Smart Assessment for Enterprise Audit Risks Based on Radial Base Function Neural Network and Grey Correlation Analysis

In the era of big data, audit risk assessment is facing increasing business volume. Hence, it is important to develop automatic audit risk assessment methods for enterprises with the assistance of intelligent algorithms. As a consequence, this paper proposes data-driven smart assessment for enterprise audit risks-based radial basis function (RBF) neural networks and grey correlation analysis (GCA). First, evaluation data are collected and analyzed to understand the characteristics and influencing factors of enterprise audit risks. Secondly, RBF interpolation is introduced to establish the network structure for RBF neural networks. Then, GCA is integrated with RBF Interpolation (RBFNN) to formulate the automatic audit risk evaluation method, and the proposal is named RBF and GCA. Such a combined methodology can improve audit risk assessment efficiency. Finally, we make some experiments to evaluate the proposed TBF-GCA on a real-world dataset, and some evaluation indicators are specified based on the actual audit risk situation of the enterprises. The obtained results reveal that RBF–GCA has high accuracy in identity precision and can effectively identify audit risks for enterprises.

Internal Audit Practices and Financial Reporting Quality of Listed Manufacturing Firms in Nigeria: The Role of Audit Committee

The purpose of this study was to investigate the moderating role of audit committee on the association between internal audit practices and quality of financial reporting of listed consumer goods manufacturing firms in Nigeria. The study used cross sectional and correlational research designs with a population of twenty-one (21) while a sample of ten (10) listed consumer goods manufacturing firms were used for the study. Primary data from structured questionnaires were used for data collection after validity and reliability tests while the responses obtained from the questionnaires were analysed using univariate, bivariate and multivariate analysis of data.. The findings indicate a positive and significant relationship between internal controls, audit risk assessment, internal audit independence on quality of financial reports. The study further revealed that audit committee moderates the association between internal audit practices and quality of financial reports. On the basis of the findings, the study concluded that audit committee moderates internal audit practices and financial reporting quality of listed consumer goods firms in Nigeria. Consequently, the study recommended amongst others that Internal audit departments of Consumer goods manufacturing firms should adopt and employ internal control measures like segregation of duties, restricted access through using access passwords that are frequently changed in evaluating earning per share, this gives opportunity to professional to study, understand, and apply new development on auditing procedures and dissemination of relevant financial information which will enhance financial reporting quality.

Climate change disclosure performance and audit fees: evidence from Australia

Purpose This study aims to examine the relationship between climate change disclosure performance (CCDP) and audit pricing. The moderating effect of corporate governance characteristics on that relationship is also investigated. Design/methodology/approach Using a sample of top 300 Australian Securities Exchange listed non-financial firms over the period 2008–2019, this study investigates the association between CCDP and audit fees. The findings are robust to a difference-in-difference test thereby alleviating potential endogeneity concerns. Findings CCDP is found to be significantly positively related to external auditor fees. Research limitations/implications The findings show some important implications for firm management, regulators, investors and auditors. This study presents empirical evidence that climate change, as a factor of external risk, influences audit fees. Practical implications Firms with governance structures characterized by larger more independent boards, larger audit committees and audit committees with a higher level of independence significantly moderate the relationship between CCDP and audit fees. Social implications Investors’ demand for firm transparency and disclosure of information regarding the risks of climate change, effects and opportunities has increased significantly over the past decade, as these factors could have a significant effect on valuation and investment decisions. Originality/value Importantly, stakeholders need to be aware of the costs of climate change, the quantification of climate change impacts and how firms address climate change in their business risk management processes. This study quantifies the impact of CCDP on auditor risk assessments via audit fees.

Enterprise Audit Risk Assessment and Prevention based on AHP Analysis

If there are no auditing standards or auditing processes of big data, the audit risks of enterprises are increased. This paper first introduces the topic through the research background and literature review in order to ensure the integrity and accuracy of audit evidence to the maximum extent, and then analyses the causes of enterprise audit risk. When analysing the risk level of material misstatement, it is mainly the audit risk generated by the enterprise's unique business model, information system and financial management. Audit risk is mainly caused by the ability of auditors and audit process management. After quantitative analysis of the correctness of enterprise audit risk assessment indicators, this paper builds a multi-level comprehensive assessment model of enterprise audit risk on the basis of AHP analysis. At the same time, this paper puts forward specific measures to improve audit methods and audit processes and prevent audit risks in view of the actual problems encountered in the current audit risk of enterprises, so as to provide certain references for enterprise risk management and control.

Assessing Audit Risks in Enterprises on the Growth Enterprise Market: A Grounded Theory Approach

This paper adopts the research method of grounded theory, based on the annual report audit of 66 pharmaceutical manufacturing enterprises on the Growth Enterprise Market, exchange supervision and inquiry letters, the CSRC penalty announcement and online public comment materials, and based on the actual situation, to study the audit risk of pharmaceutical enterprises on the Growth Enterprise Market. . The study found that the misstatement risk of pharmaceutical companies on the GEM is divided into the overall level and the specific level. Among them, the overall misstatement is related to the external environment, operating risks, corporate governance, internal control, and related party transactions, while the specific misstatement risks are reflected in revenue recognition, goodwill impairment, R&D expense recognition, inventory valuation, and the availability of accounts receivable. Recoverability and other five aspects. In the context of big data, construct appropriate risk profiles analytical models are critical to the efficiency and quality of audit oversight. Through the research of this paper, it is helpful to assist intermediaries and regulatory authorities to systematically assess the misstatement risk of pharmaceutical companies on the GEM, and to take targeted risk response measures.

The Auditor’s Responsibility is to Apply the Concept of Materiality in Accordance with the Standard (ISA.320) in Determining Analytical Audit Procedures to Reduce Audit Risks

The research aims to clarify the auditor’s responsibility for applying the concept of materiality in accordance with the (ISA.320) standard in determining the analytical audit procedures represented by the process of assessing audit risks. To achieve the research aims, the descriptive analytical approach was used to deal with data collection and classification. The main study tool, represented by the questionnaire form, was used to collect data from the study sample, which was analyzed through the SPSS program. The questionnaire was distributed to a number of sample members, and the number was suitable for conducting statistical analysis, as it reached 45 questionnaires, of which 40 questionnaires were suitable for analysis. The most important conclusions were that there is a statistically significant effect of the auditor’s analytical procedures when applying the International Auditing Standard Materiality (ISA.320) in assessing audit risks. The study recommended the need for the Accounting and Auditing Council to take measures to verify the compliance of Iraqi audit offices with audit risk assessment procedures through the use of analytical procedures by the auditor in accordance with International Auditing Standard 320 Materiality

Sustainable products and audit fees: empirical evidence from western European countries

Purpose This study aims to examine whether firms that appear to exhibit high sustainable outputs are more likely to pay higher audit fees than firms without such outputs. Design/methodology/approach The sustainability outputs are measured using a sustainable product portfolio consisting of four products: clean energy products, eco-design products (EDP), environmental products (EP) and sustainable building projects (SBP). The audit fee variable is measured by the natural logarithm of the total amount of audit fees. The study tests two models of the association between these outputs and audit fees; Model 1 tests this association in the absence of the moderating variable (sustainability committee), and Model 2 tests the association in the presence of the moderating variable. Findings An analysis of data on 261 European firms from the Refinitiv Eikon database from 2010 to 2019 shows that high sustainability outputs are significantly and positively associated with audit fees. More importantly, this association is moderated by the presence of a board-level sustainability committee, suggesting that this type of committee reflects a factor considered by auditors in their audit risk assessment practices. The findings indicate that in Model 1, one (EP) out of four variables has a significant and positive association with audit fees, while in Model 2 and in the presence of sustainability committee, two variables (EP and EDP) have a significant and negative association with audit fees. However, the robust analysis shows that three variables (EP, EDP and SBP) have significant and negative associations with audit fees. Practical implications The study findings have important implications for policymakers, auditors and firms’ managers. For policymakers, the findings provide support for the argument that sustainable attitudes incentivise firms to manage sustainable product profiles more effectively. As such, policymakers should incentivise firms to establish a sustainability committee and regulate its role and responsibilities. Auditors should coordinate with the sustainability committee to facilitate audit efforts and reduce audit fees. Social implications Understanding the relationship between sustainable products and audit fees will allow firms to improve their portfolio of sustainable products. In addition, other social implications of this study relate to improving relationships with society by establishing a sustainability committee that is responsible to communicate with that society. Originality/value The results support the argument that firms should manage sustainable product portfolios more effectively. In addition, the results of the study highlight the importance of a new variable as a moderator, the sustainability committee, which has not been examined before.

Audit Risk Assessment Model Construction by Incorporating Deep Learning Techniques

Abstract While risk-oriented auditing has gradually emerged as a new trend in current internal auditing, the absence of specific risk assessment methods in related internal auditing standards has made it a common challenge for many enterprise internal auditing organizations and personnel to effectively implement and conduct risk assessments. This research focuses on integrating deep learning technology to construct an audit risk assessment model, first describing the problem of audit risk assessment and then validating it using the CNN-LSTM method. We select the appropriate indicators for audit risk assessment assignment after screening the sample data to ensure their qualitative and quantitative comparability. We construct a CNN-LSTM audit risk assessment model based on the above data. We use two input methods, the convolutional neural network and the long- and short-term memory network, to enhance the assessment model’s learning ability. We then choose 12 enterprise companies as data cases, with Company A serving as the representative for the CNN-LSTM-based assessment model’s performance simulation test and risk level assessment. We compare the four models, and the CNN-LSTM model’s AUC exceeds 0.5 in the confusion matrix and ROC curve graph, confirming the usefulness of CNN-LSTM in audit risk assessment.

Audit Quality Control and Financial Risk Prevention Strategies for CPAs under Multi-Objective Optimization Calculation Considering Sustainable Development Strategy

Abstract Audit functions as the “guardian” of the capital market by overseeing economic activities and providing forensic analysis on the major projects and financial transactions of the entities it examines. The sustainability of auditing as a profession hinges critically on audit quality. This study aims to investigate the characteristics and elements that influence audit quality control, employing modern risk-oriented audit theory to formulate a financial audit risk assessment process. The research uses a multiple linear regression model to analyze factors affecting audit quality control among certified public accountants (CPAs). The model analyzes data from 513 A+H share listed companies, with parameters estimated using the Singular Value Decomposition (SVD) method within an overall least squares framework. Furthermore, the Particle Swarm Optimization (PSO) algorithm, a technique within the multi-objective optimization algorithm suite, is utilized to refine parameters in the manipulability Jones model. This adjustment is intended to better quantify the level of earnings management of the audited entities, thus enhancing the reflection of financial audit risks. Findings from the study reveal that the coefficient reflecting the impact of a CPA’s practice experience on audit quality control is 0.249. Additionally, it was observed that a 1% deterioration in the financial condition of an audited entity correlates with a 0.505% decrease in audit quality. For high-risk clients classified under ‘Special Treatment’ (ST), the range of practice years for CPAs is predominantly between 6 to 14 years, which may not fully meet the clients’ auditing needs. The study suggests that tailored audit surveys should be conducted for various client types prior to audit engagements. This strategic approach would enable better allocation of CPA resources, thereby enhancing audit quality control and the capability to mitigate financial audit risks.

Accounting Personnel Quality, Audit Risk, and Auditor Responses

SUMMARY This study draws on human capital theory to measure the quality of accounting personnel based on their education level and investigate whether the education level of the client firm’s accounting personnel affects auditors’ assessment of audit risk by examining audit outcomes. It shows that auditors charge higher fees and are more likely to make audit adjustments for companies whose accounting personnel have a lower level of education. The relationship between the education level of accounting personnel and audit fees (audit adjustments) is robust to an instrumental variable model, an entropy balancing approach, and a difference-in-differences analysis. Audit firms strategically assign more experienced partners to audit companies whose accounting personnel’s average education levels are relatively low. Taken together, these findings suggest that the education level of clients’ accounting personnel affects auditors’ assessment of audit risk and audit outcomes. JEL Classifications: M40; M42; J01; J24.

The Relationship between Assessing Audit Risks and Revealing Creative Accounting Methods in Accounting Estimates: The Perspective of Algerian External Auditors

Numerous studies have underscored the pivotal role of external auditors in identifying unfair estimates and preventing accounting manipulation. This is achieved by gathering sufficient and appropriate evidence when material misstatements are detected and verifying the existence of such misstatements. This study aims to explore the relationship between audit risk assessment (comprising the assessment of inherent risks, control risks, and the control of detection risks) and the detection of creative accounting methods in accounting estimates, from the perspective of Algerian external auditors. To fulfill this objective, a descriptive-analytical approach was adopted. The review encompasses the most significant findings of prior studies, supplemented by a field study involving the distribution of a questionnaire to a random sample of Algerian external auditors practicing the profession (n=300). The collected data were subsequently analyzed using the Statistical Package for the Social Sciences (SPSS26). The study concludes that there exists a positive and statistically significant relationship between the assessment of audit risks and the revelation of creative accounting methods in accounting estimates, according to Algerian external auditors. This implies that as audit risks are assessed, the likelihood of detecting creative accounting methods in accounting estimates increases, accounting for 62.8% of the variance. The remaining 37.2% is attributed to other factors. Notably, there is a positive relationship, varying in degree, between the assessment of audit risks and the detection of creative accounting methods. Assessing inherent risks has the highest impact, followed by assessing control risks and controlling detection risks. Additionally, the study identifies statistically significant differences in the perception of audit risks and creative accounting methods in accounting estimates among Algerian external auditors based on demographic characteristics within the study sample.

Impact of COVID-19 on Audit Risk Assessment Procedures: Insights from Malta

Impact of COVID-19 on Audit Risk Assessment Procedures: Insights from Malta

Audit partners’ gender and time variances of key audit matters

PurposeThis study aims to examine whether audit partners’ gender affects the year-to-year changes (year-to-year additions and drops) of key audit matters (KAMs) identified in the audit report. This study also examines whether female audit partners’ audit experiences, accounting education and narcissism reduce the difference in time variances of KAMs reporting between female and male audit partners. This study defines the year-to-year additions and drops of KAMs as the time variance of KAMs.Design/methodology/approachData of this study includes the audit reports of Australian Securities Exchange 300 companies for the period from 2017 to 2021. This study also applies the theory of female auditors’ preference for anchoring and availability heuristics. This study uses multivariate regression with robust standard errors clustered by the firms. This study also uses several robustness tests.FindingsThe findings suggest that female audit partners disclose fewer time variant KAMs in that they have a lower tendency both to add new KAMs and to drop old KAMs. Further analysis suggests that the differences between female and male audit partners decrease as the female audit partners’ experience increases or if the female audit partner possesses a bachelor’s degree in accounting. Female audit partners’ narcissism also reduces the gender gap in the time variances of KAMs.Practical implicationsThe fact that female audit partners report more stable KAMs implies that there are differences between female and male audit partners in the way audit risk assessments are conducted, audits are planned and professional judgement is applied by female and male audit partners.Social implicationsThe findings imply that female audit partners’ experience, accounting education and narcissistic personality can play a significant role in explaining the differences in audit outcomes produced by male and female audit partners.Originality/valueThis study is novel in showing that female audit partners report more stable and less time-variant KAMs. The findings of this study may inform audit firms and regulators that female audit partners’ experience, tertiary qualifications in accounting and narcissistic personality traits may be effective means of reducing the gender gap in auditing. The findings also imply that auditors’ observable and unobservable personality traits affect audit outcomes.

Implementasi ATLAS dalam Prosedur Penilaian Risiko Audit (Studi Kasus pada KAP Luthfi Muhammad & Rekan)

This study aims to determine the implementation of ATLAS in audit risk assessment at the Public Accounting Firm Luthfi Muhammad & Partners. The research method used is descriptive qualitative including theoretical studies, previous research, and interview results. Then the results of the theoretical review, previous research and interviews will be analyzed, and conclusions drawn. Until now ATLAS has become a tool used by auditors in carrying out audit procedures. This is because ATLAS has been systematically arranged to make it easier for auditors to carry out their work. In addition, ATLAS will also speed up the audit implementation process and improve audit quality. Based on the results of the interviews conducted, the implementation carried out by the Public Accounting Firm Luthfi Muhammad & Partners is in accordance with auditing standards. The auditing standard in question is Auditing Standard 315 regarding the identification and assessment of the risks of material misstatement through an understanding of the entity and its environment. The renewal of this research is to present the implementation of ATLAS, especially the risk assessment stage, whereas previous research only discussed the implementation of ATLAS in general.

Effects of carbon emissions on audit fees

PurposeThis paper aims to examine the effect of carbon emissions on audit fees. The authors hypothesize that firms in cities with higher carbon emission levels have lower reporting transparency, higher return volatility or are subject to higher reputation risk, causing them to be charged higher audit fees for auditing services.Design/methodology/approachThe authors use panel data of 25,960 firm-year observations from a sample of Chinese firms. The carbon emission data for each Chinese city are obtained from the China Emission Accounts and Datasets for Emerging Economies. This paper adopts a multiple regression model to study the impact of carbon emissions on audit fees.FindingsThe authors find that firms located in cities with higher carbon emission levels and firms with more carbon emissions are charged, on average, a higher audit fee. This audit fee effect of carbon risk is transmitted by lessened information transparency and elevated financial risk within these firms. This paper shows that auditors consider carbon risk in their audit fee decisions and other factors that could influence audit risk and effort.Originality/valueThis study draws a connection between carbon emissions and audit fees. It is especially relevant due to the increasing importance of environmental factors in the audit risk assessment. In addition, the findings suggest that a firm implementing a proactive environmental strategy benefits the economy and decreases the costs to the firm for services such as auditing.

Executive compensation horizon incentives, performance targets, and auditor risk assessment

Shorter compensation duration can induce executives to act myopically and manage earnings to boost short-term firm performance. Such earnings management activities increase financial statement misstatement risk and, therefore, audit risk. Using audit fees as a proxy for auditors’ risk assessments, we investigate whether auditors consider executives’ compensation horizon incentives in assessing audit risk. We find that shorter executive compensation duration is associated with higher audit fees. However, auditors also consider other elements of the executive compensation contract when assessing audit risk. Specifically, we find that when executive compensation includes performance-vesting grants, auditors pay less attention to compensation duration and perceive companies that meet or just beat performance targets as riskier (and thus charge them higher fees). Overall, our findings suggest that auditors adopt a nuanced approach to the audit risks posed by executive compensation contracts.

The presence of local CEO, clan culture and audit pricing: Evidence from China

This paper examines whether the presence of local CEOs affects audit risk assessment and audit fees. Using a sample of Chinese listed firms, we find that firms managed by local CEOs pay lower audit fees and stronger clan culture weakens the relationship between the presence of local CEOs and audit fees. We show that the presence of local CEOs is associated with lower performance volatility and higher accounting information quality. Moreover, the firms managed by local CEOs are more likely to have local major clients. These findings suggest that lower business and audit risks are reasons for auditors charging lower audit fees to firms managed by local CEOs. Our results are robust after conducting a variety of endogeneity tests. Overall, our findings suggest that CEO locality is an important non-contractual factor affecting audit pricing.

Military directors and audit fees

PurposeThis study investigates the relationship between companies with military directors and audit fees in Indonesia.Design/methodology/approachUsing upper echelon and audit pricing theories, the authors examine military directors' roles in the demand for and supply of auditing services. The authors use Indonesia as their research setting as their military forces have a long history of involvement in business. The study sample includes 898 firm-year observations on the Indonesia Stock Exchange during 2014–2018.FindingsThe authors find a negative relationship between military connections and audit fees. This is consistent with auditors assessing lower audit risk and charging lower audit fees to companies that have leaders with military experience. The study findings are strongest where there is military experience on the board of directors and where the military experience is from the Army.Originality/valueThis study extends the literature on the benefits of military experience in company leadership, especially in the context of auditing research. The study findings also have implications for the selection of board candidates and auditor risk assessments.

Deep learning‐based image processing for financial audit risk quantification in healthcare

AbstractRecently, deep learning technology has gradually penetrated various fields. Today, the field of healthcare is also closely linked to deep learning technology. Image processing technology based on deep learning can accurately segment medical images, which is convenient for medical research and pathological analysis. Accurate distribution of images can effectively save medical resources. Therefore, image processing techniques can contribute to the quantification and assessment of economic audit risks. In recent years, medical image segmentation has achieved many research results. However, with the improvement of accuracy, the segmentation standards of medical images are also becoming more and more stringent. For medical images, they tend to have rough and fuzzy boundaries and noise disturbances of different shapes. The above problems pose challenges for accurate localization and segmentation of lesion regions. On the other hand, in the field of medical images, there are also problems such as unbalanced number of samples and scarcity of large medical image datasets. In response to these problems, this paper conducts research work and proposes an Attention Mechanism and Multi‐Scale spatial Pooling‐based conditional Adversarial Network (AM‐MSP‐cGAN) model to achieve automatic segmentation of medical images. AM‐MSP‐cGAN can learn more detailed features from fuzzy boundaries, and effectively solve the problem of data lack, thereby promoting economic audit risk quantification and assessment in the healthcare field.