Audit Error Research Articles

Reauditing and dual sourcing? Implication of collusion deterrence measures in ethical sourcing

AbstractWe consider a supply chain in which a buyer sources from a supplier for the production of a product. The supplier's production process is subject to probable violations of either government regulations or ethical requirements. The sourcing contract offered by the buyer demands that the supplier exerts an effort to improve its production process, thus reducing the probability of the occurrence of supplier violation. Because the supplier's effort is hardly observable, the buyer has to send an auditor to perform an audit of the supplier's facility. The auditor in turn reports whether the supplier has exerted the effort or not. If the supplier fails to pass the audit, she may offer a side contract to the auditor, thus engaging in a supplier‐auditor collusion. We study how such supplier–auditor collusion may affect the buyer's outsourcing strategy. We find that the buyer should reduce the order quantity to deter the supplier–auditor collusion when the collusion penalty is relatively low. We further examine reaudit and dual sourcing, two mechanisms which could probably prevent supplier–auditor collusion. We find that a reaudit may complement the collusion penalty under certain conditions; using dual sourcing to deter collusion is viable only if supplier‐improvement techniques or procedures are effective. Finally, we extend our model by considering false positive audit error and linear penalty function. Our analytical and numerical results show that our insights are robust.

Walking the Talk? Managing Errors in the Audit Profession*

ABSTRACTErrors reflect unintended deviations from plans or goals and commonly carry negative connotations. Although errors cannot be eliminated, they offer opportunities for learning and innovation. Audit firms employ powerful mechanisms, such as review processes, to prevent or detect audit errors and safeguard their work in the public interest. At the same time, the profession recognizes positive long‐term outcomes of errors in terms of continuous learning to enhance auditor skills and, ultimately, audit quality. The current study employs semistructured interviews with Dutch auditors to investigate how they manage the tensions emanating from extant public and regulatory demands for flawless audits while embracing errors as opportunities for learning. Our findings reveal that auditors express a positive attitude toward openly communicating audit errors, but, in substance, they espouse negative emotions and defensive strategies for fear of repercussions. We argue that the excessive emphasis audit firms and oversight bodies place on error prevention conditions auditors into perceiving errors as negative and avoidable events. We assert these attitudes result from the profession's efforts to maintain status and legitimacy in the eyes of the public and the regulator, where any auditor error may shed doubt on auditors' work in the public interest. In sum, our findings indicate that viewing errors as incompatible with audit work makes the profession susceptible not only to repeating errors but also to missing out on opportunities to improve services and to achieve innovation.

The Estimated Propensity to Issue Going Concern Audit Reports and Audit Quality

Auditors’ propensity to issue Going Concern Audit Reports (GCARs) is one of the proxies often used for audit quality. Although this propensity is a distinguishing characteristic of auditors, it does not indicate quality according to both theory and practice. In theory, higher quality auditors make fewer audit errors; they are more likely to issue GCARs to clients that deserve them and less likely to issue GCARs to clients that do not. Therefore, the propensity itself does not indicate quality. In practice, Public Company Accounting Oversight Board (PCAOB) inspection reports reveal that the GCAR is rarely mentioned as a deficiency, and in the few cases in which it is discussed, the deficiency is attributed to evidence gathering and estimations, rather than to the GCAR decision itself. The theory and practice motivate our study. This article investigates the empirical ability of the GCAR propensity to proxy for audit quality and finds that different samples and different models yield different determinations of auditor quality. Our findings caution against the use of the propensity to issue GCARs as a proxy for audit quality.

Auditors Under Fire: The Association Between Audit Errors and the Career Setbacks of Individual Auditors

ABSTRACTThis paper examines whether and how individual auditors are disciplined for audit errors. Taking advantage of the long history of auditor identity data from China, we find that signing auditors with client restatements are likely to lose the privilege of signing the audit reports of public clients. However, auditors can avoid this consequence by issuing a modified audit opinion to warn of the potential misstatement. We show that auditors are more likely to be disciplined when their firms operate in less concentrated audit markets. Finally, we find positive outcomes from the disciplinary action of the audit firms. Firms that discipline their auditors for restatements have a larger decrease in the rate of client restatements and a larger increase in market share, compared to nondisciplining firms. Their clients have a higher earnings response coefficient after the disciplinary action. In summary, our results suggest that individual auditors in China can face career setbacks when they produce poor quality audits.

PRACTICE VS. APPEARANCE: UNDERSTANDING REGULATORY ACTIONS AGAINST AUDITORS FOR INSUFFICIENT PROFESSIONAL SKEPTICISM

Audit regulators frequently describe that auditors lack sufficient professional skepticism, but practitioners argue that these allegations are unsubstantiated. We review SEC audit enforcement actions (AAERs) and PCAOB inspection findings to understand how regulators evaluate skepticism. Our analysis of AAERs provides evidence of an outcome effect, where regulator perceptions of skeptical behavior are influenced by the results of fraud investigations (e.g. known risks and client misrepresentations). Our analysis of PCAOB inspections suggests that the occurrence of a skepticism deficiency is associated with the number of audit errors identified. Also, inspection findings related to documentation issues, audit opinions, and related parties are associated with skepticism deficiencies. These results substantiate practitioner claims that there is an issue with skepticism in appearance rather than skepticism in practice. This study provides guidance for auditors to more visibly demonstrate skeptical behavior and emphasizes the need for clearer expectations and processes for evaluating skepticism.

Application and Management of Financial Sharing Under the Background of Big Data Era

With the advent of the big data(BD) era, financial information and group financial management have shown new characteristics. BD technology also provides support for the construction of shared centers. The establishment of financial shared service centers is the future development direction of large and medium-sized enterprises. The purpose of this article is to study the application and management of financial sharing under the background of the BD era. This article is the development trend of financial shared service center under the background of BD. It briefly described the development and evolution of financial shared services, and pointed out the challenges and future development trends of the construction of financial shared service centers under the background of BD. This article discusses the principles, objectives, overall planning, specific design and issues that should be paid attention to in the construction of the group’s financial shared service center under the background of BD. This paper proposes the framework model and process design of group capital management. Taking the framework model of the financial shared service center under cloud accounting as the core, build a group fund management framework model based on financial shared services under cloud accounting, and then further develop process design for fund budget management, fund control management, fund supervision and management, and fund assessment management. At the same time, it analyzes the causes of the group’s existing personnel career planning and high operating costs, proposes solutions, and investigates the development trend of the financial shared service center. Research shows that the audit error rate of the financial shared service center of surveyed companies in 2014 was 1.27% to 0.57% in 2018. It can be seen that the audit error rate basically fluctuates, which further verifies that the financial shared service center has strict requirements for internal management. The internal service level of the Financial Shared Service Center is continuously optimized and improved.

Substation operation ticket system based on natural language analysis and intelligent reasoning

[Background/Reason] The operation ticket system is an important measure to ensure the safety of substation operation. At present, the issuance and review of substation operation tickets rely on manual operation knowledge and experience, and there are problems such as low work efficiency, lack of standardization, and human error. The risk of grid operation is reduced. [Method/Process] This paper proposes a substation operation ticket system based on natural language analysis and intelligent reasoning. It uses typical/standard operation tickets as the basic corpus and builds a natural language analysis model based on manual labeling to achieve compliance with the operation tickets. Sexual inspection, deduction and comparison of equipment status. Finally, combining the primary wiring diagram of the substation and the operation ticket to construct the equipment relationship knowledge map and the equipment operation knowledge map, use the Neo4j graph database for storage, and realize the intelligent drafting of operation tickets based on the graph search method. [Results/Conclusions] The research results have been implemented and applied in three substations in a certain area, verifying that the system has a high degree of intelligence and versatility, and can effectively solve the existing problems of standard invoicing and audit errors, and improve operation The work efficiency of personnel and the safety control level of power grid substation operation.

Auditors Under Fire: The Association between Audit Errors and the Career Setbacks of Individual Auditors

This paper examines whether and how auditors are disciplined for audit errors. Taking advantage of the long history of auditor identity data from China, we find that signing auditors with client restatements are likely to lose the privilege of signing the audit reports of public clients. However, auditors can avoid this consequence by issuing a relevant modified audit opinion to warn the potential misstatement. Further, auditors are more likely to be disciplined when they are located in a less concentrated audit market. Finally, we find positive outcomes from the disciplinary action of audit firms against auditors. In comparison to non-disciplining firms, disciplining audit firms have a larger decrease in the rate of client restatements, a larger increase in market share, and their clients have a higher earnings response coefficient (ERC) after disciplinary action. In summary, our results suggest that individual auditors in China can face adverse career consequences when they produce poor quality audits.

From Failure to Excellence: A Capa Plan for Improving CIBMTR Data Submission

Topic Significance & Study Purpose/Background/Rationale Transplant centers that maintain membership in the Center for International Blood & Marrow Transplantation Research (CIMBTR) are required to submit clinical treatment and patient outcome data. To ensure data integrity, the CIMBTR performs audits of submitted data. The audit benchmark is to have a data reporting error rate that is less than or equal to three percent (≤3%) on Transplant Essential Data (TED) and other selected forms. Adverse consequences are instituted if repeated audit failures occur. Audits at our center in 2007, 2011, and 2015 all exceeded the CIMBTR benchmark (>3%). Corrective action plans were implemented after each audit; however, they were not fully completed or successful. Methods, Intervention, & Analysis After the third audit failure in 2015, a systemic review of the data reporting process was performed by the BMT Clinical Nurse Specialist, Research Nurse and Data Manager. Deficiencies were identified in numerous areas: inadequate staffing for data management, lack of ongoing training/development of the data manager, lack of retention of critical documents in the shadow charts, infrequent consultation with content experts, poor design of physical space for storage, and conversion from a paper-based medical records system to an electronic medical record (EMR). A comprehensive corrective action/preventive action plan (CAPA) was implemented to improve the data reporting process and decrease the error reporting rate. The following actions influenced a reduction in errors: structured shadow charts; additional data management support, expansive training of a new data manager, robust internal audit process, and re-commitment by medical staff as content experts for disease-based and GVHD reporting. Findings & Interpretation Internal audits demonstrated improvement over the next three years. A formal audit by CIMBTR in 2019 demonstrated an overall audit error rate of less than one percent ( Discussion & Implications We found the focused use of TED form instructions, extensive auditing and real time audit feedback to be beneficial. The key factor of success for improvement in the data reporting process and subsequent decreased error rate was collaborative work of multiple team members from multiple disciplines within the transplant program.

The Effect of Auditor Scale on the Type Ⅱ Audit Error

The Effect of Auditor Scale on the Type Ⅱ Audit Error

Principal-Agent Analysis on How Legal Risks Affect Audit Fees and Quality

This article develops a principal-agent multi-period model that ties legal risks, auditing fees and internal accounting practices. The principal is the auditing firm and the agent is the client firm. The client firm can improve its credibility by improving its internal auditing practices, which results in lower audit fees to the auditor firm. It is found that in equilibrium, there is a credibility threshold level that firms should meet and which depends on the legal risks associated with accounting practices and audit errors. If, as result of strict legislation, a firm is below the threshold it will pay above optimal auditing fees. In this case, the firm should make a single, immediate improvement to reach the optimal level. Additionally, only firms whose credibility is close to the threshold are affected if government increases legal scrutiny. More credible firms are not adversely affected by the stricter legal climate.

The Audit Risk Model, the Signal Detection Theory, and the Information Manipulation Theory

The Audit Risk Model. The Statement of Auditing Standard (SAS) 99, 107, and International Standards on Auditing (ISA) 240, 315, and 330 require auditors to assess fraud risk factors and materiality level (risk of material misstatement) in a client's financial statements (Bhattacharjee, Maletta, & Moreno, 2016). It further requires auditors to gather sufficient appropriate audit evidences in order to provide reasonable assurance whether the client's financial statements are free of material misstatements (Bhattacharjee, Maletta, & Moreno, 2016). The auditors have to assess the effectiveness of a client’s internal control over the financial reporting, thereby plan the nature, timing, and the extent of their audit procedures to assess the fraud risk in a client's financial statements (Burton, Wilks, & Zimbelman, 2013). The SAS 107 provides a model for audit risk, in which, audit risk (AR) = inherent risk (IR) X control risk (CR) X detection risk (DR). The inherent risk is the susceptibility for an account or assertion to be materially misstated, whereas the control risk is the risk that an entity's internal controls fail to detect financial reporting misstatement. The detection risk is the risk that substantive and analytical audit procedures fail to detect misstatements in the financial reporting. However, this model does not address the influence of sociological, organizational, and ethical factors on the management fraud and does not account for type I and type II audit errors risk, which is the risk to reject fairly presented financial reporting (false negative), and the risk to accept fraudulent audit report (false positive) respectively.

Avoid Critical Audit Errors: Secrets Revealed in Radar and Kids’ Toys—and a Bagel Helps

Failures, errors, mistakes, and exploits are problems if an audit found no significant problem and yet the cause was present. Improved audits do not mean more testing of more “controls.” Instead, it means audits that fully recognize what is new in the external environment, or internal activities or capabilities. Errors are largely preventable by better understanding what is new and what has changed. It’s about better auditing the “new thing.” Avoiding errors starts by: (a) realizing the “new thing” is often old—structural blindness just prevents auditors from seeing it and (b) understanding “how it works”—the machinery of business and information technology (IT). Avoiding structural blindness comes from improving audit and learning processes to proactively overcome the blindness—improving our personal awareness of change. Learning “how it works” comes from improving the process by which we learned about the mechanics of business and IT. It helps to practice this skill by fixing anything from toys to household appliances. Automation not only reshapes what is being audited but also audit activities. Improvement in process, awareness, skill, “how it works” and automation can be faster and easier through outcomes acceleration workshops—these workshops are so efficient because of how they integrate substantive learning and organizational improvement.

Auditor Tenure and Quality of Financial Reporting

Prior studies in general suggest a positive association between auditor tenure (the length of an auditor–firm relationship) and reporting quality (the informational content of reported earnings). In this study, we present evidence that the association is reversed when clients represent increased litigation risks to their auditors. Featuring downward biases in reported earnings as a measure of reporting quality that stem from auditors’ minimization of costs from potential audit errors, we argue that the magnitude of such downward bias decreases in auditors’ experiences with their clients (tenure improves reporting quality). Furthermore, we predict that longer auditor tenure is associated with larger downward bias for firms with increased audit risks (tenure impairs reporting quality). Using non-operating accruals as proxy for downward bias in reported earnings, we find robust empirical evidence in support of our prediction.

Evaluation of the perceived audit quality: study of the Tunisian context

Our research aims at identifying the determinants of a good audit quality. Some researchers consider that audit quality depends essentially on the auditor's independence and competence. By contrast financial scandals showed that the positive association between the audit quality and the auditor's quality is not always verified. For this, they used indirect measures that can help them to identify more efficient measures which can distinguish between the perceived quality and the intrinsic quality of the audit. This article highlights the perception of audit quality in Tunisia. We conducted a questionnaire survey on a sample of 45 Tunisian companies. The results indicate a positive correlation between the perceived audit quality and the following variables: membership to the big four, membership to a multinational network, audit firm's size, customer satisfaction, errors detection and reputation. Also, we have shown that there is a negative correlation between the perceived audit quality and posterior problems.

Audit Error, Managerial Incentives, and Information Sharing

This paper studies the effect of losses due to audit error on audit quality when the auditor’s report of earnings is used for managerial compensation and the auditor can learn about the firm’s productivity environment by observing the manager’s effort. If the auditor observes the manager’s effort, he can tailor the audit quality perfectly to the productivity state. However whether the audit quality, and thus compensation, increases or decreases relative to when the auditor is uninformed, depends on whether the losses due to legal liability are more or less than auditor’s loss of audit fees due to client or reputational loss. The increase or decrease in audit quality affects the manager’s marginal productivity, which affects his compensation. Overall, the principal prefers the auditor to observe the manager’s effort when the losses due to legal liability are more significant than the loss of audit fees due to client loss and the incentive problem is less significant, or when losses due to legal liability are less significant and the incentive problem is more significant.

Error Management in Audit Firms: Error Climate, Type, and Originator

ABSTRACTThis paper examines how the treatment of audit staff who discover errors in audit files by superiors affects their willingness to report these errors. The way staff are treated by superiors is labelled as the audit office error management climate. In a “blame-oriented” climate errors are not tolerated and those committing errors are punished. In contrast, an “open” climate characterizes error commitment as a normal, albeit unfortunate aspect of organizational life that offers opportunities for learning without sanctions on the originator. We examine error management climate in the context of audit-specific factors that might affect the decision to report errors: audit error type (conceptual or mechanical) and who committed the error (the individual who discovered it or a peer). An open climate results in an increase in the reporting of mechanical (but not conceptual) errors and all peer errors versus a blame climate. Post hoc findings suggest that one obstacle to reporting conceptual errors stems from an auditor's own impression management concerns. We discuss how auditing standards and regulatory inspections may impact audit firm error management climates.Data Availability: Experimental data are available from the second author subject to data confidentiality restrictions issued by the participating firms.

Auditor Independence and Auditor Bargaining Power: Some Spanish Evidence Concerning Audit Error in the Going Concern Decision

It is well known that where an auditor's relative bargaining power is high, this may help its independence and prevent a Type II error (no qualification but corporate failure). It is less well known that this may also lead to a lack of independence in the form of over‐conservatism and an unjustified inclination by an auditor to qualify to protect its reputation leading to a Type I error (a qualification but no corporate failure). We therefore hypothesize that there is a positive relationship between the auditor's relative bargaining power and Type I errors (‘H1’) and a negative relationship between it and Type II errors (‘H2’). The empirical study supports H1 but rejects H2. Taken together, these results suggest that Spanish auditors have a high propensity to qualify to protect their reputation, undeterred by pressure from client companies, in order to protect their reputation – ‘over‐conservatism’ as we have called it.

Is an Auditors’ Propensity to Issue Going Concern Opinions Related to Audit Quality?

Auditors’ propensity to issue going concern (GC) opinions is commonly used as a proxy for the unobservable audit quality. In this paper we examine the validity of this proxy by empirically testing whether the propensity to issue GC opinions is indeed related to fewer audit errors. We start our analysis by categorizing auditors according to their propensity to issue GC opinions according to a GC regression model. We then test whether auditors, who have a relatively higher propensity to issue GC opinions, have lower audit opinion error rates. We obtain two main results. First, auditors’ propensity to issue GC opinions is not significantly associated with their Type II opinion error rates (a Type II error is a clean opinion for a firm that files for bankruptcy within one year of the audit opinion). Second, the auditors who issue relatively more GC opinions are more likely to make Type I errors, indicating that the additional GC opinions are being issued for the wrong companies (a Type I error is a GC opinion for a firm that does not file for bankruptcy within one year of the audit opinion). Our findings cast doubt on the link between the propensity to issue GC opinions and audit quality.

Evidence On The Effect Of Financial Distress On Type II Audit Errors

A Type II audit error is defined as the failure of an auditor to issue a going concern audit opinion for a client that subsequently declares bankruptcy. Prior research studies have examined audit effectiveness (as measured by Type II audit errors) following the Sarbanes-Oxley Act of 2002, and have generally found an increase in the auditors likelihood of issuing going-concern audit opinions. This increase in the auditors likelihood of issuing a going concern opinion post-Sarbanes-Oxley has been interpreted as an increase in the level of auditor conservatism. [For example, see Geiger et al. (2005) and Fargher and Jiang (2008)]. However, prior studies have often limited their analysis of going-concern audit effectiveness to firms that were already in financial distress, and have also failed to specifically address the extent to which varying levels of financial distress affects the auditors propensity to issue a going-concern opinion. This raises the main research questions addressed in this study: Does the relationship between financial distress and the probability of receiving a going-concern differ for distressed versus non-distressed firms, and more importantly, to what extent do varying levels of financial distress affect this relationship? We find that the relationship between financial distress and the probability of receiving a going-concern opinion is not linear, as is assumed in prior studies. Rather, we find that the positive relationship between financial distress and going-concern opinions applies only for certain levels of financial distress. These results have implications both in the interpretation of previous auditing research that has incorporated variables for financial distress, as well as implications for the design and interpretation of future research.