Audit Risk Research Articles

Improving audit opinion prediction accuracy using metaheuristics-tuned XGBoost algorithm with interpretable results through SHAP value analysis

This study aims to create a machine learning model that can predict opinions in external audits and surpass the benchmark set in a prior study from the literature. This tool could reduce audit risk, which is a crucial task in external audits. Previous studies have shown that it is possible to create models that can predict the audit opinion a company will receive. In these studies, authors used statistics and machine learning models, and both non-financial (e.g. audit lag) and financial data (e.g. financial ratios, or absolute value items available from financial statements) to make predictions. In this study, the performance of the XGBoost model optimized by metaheuristics algorithms is examined and evaluated. This study compares the performance of six different metaheuristic algorithms used to tune the XGBoost model in two separate scenarios. The first scenario represents a realistic client portfolio, where a majority of the clients are known, while the second scenario simulates a new clients-only portfolio, a more difficult scenario where prior information such as audit lag is not available. The study uses a dataset of 12,690 observations of Serbian companies and their audit opinions from 2016 to 2019. The findings indicate an improvement over the benchmark due to a more optimized hyperparameter tuning process and the use of the iterative sine-cosine algorithm for the XGBoost model.

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.

Audit risk of government subsidies in the new energy industry

Green economy has become the world's main goal of economic development in the twenty-first century. The new energy vehicle industry has developed rapidly in a green and low-carbon economy. The government has used subsidies to promote the healthy and efficient development of the new energy vehicle industry in its early development stage. However, due to information asymmetry and the correlation of interests between the government and firms, some new energy vehicle firms have fraudulent behavior to obtain government subsidies. In the face of this fraudulent phenomenon, how should the audit department take corresponding measures to avoid the audit risk of government subsidies for firms, and how can the government face the unknown nature of the development of the emerging industry? The study takes Suzhou Golden Dragon, a new energy automobile firm, as an example to analyze the impact of government subsidies on this automobile firm in recent years and explore the causes of its audit risk and corresponding countermeasures by analyzing the motive and means of its fraudulent behavior, which can play a role in improving the defects of China's government subsidy audit theory and strengthening the rigor of audit practice. By analyzing the fraudulent phenomenon, some reasonable suggestions can be given to the government to promote the healthy and benign development of China's new energy vehicle industry, which can also enrich the means of supporting the development of new industries in the early stage of the future.

Influence of Internal Audit Risk Planning Practices on the Financial Performance of SACCOs in the Western Region of Kenya

To better monitor and control risks, businesses may use risk-based internal audit (RBIA) practices. It also increases transparency and honesty in the financial reporting process. The Western Region and Kenyan Deposit Taking Savings and Credit Cooperatives (DT-SACCOs) are the primary subjects of this research. Despite having an audit department in place, some DT-SACCOs encounter difficulties in auditing their operations, such as a lack of audit evidence (too weak or incorrect) that makes it difficult for the auditor to make the proper choice or generate accurate findings. An internal audit that takes risk into account may help a company prioritize its resources where they will have the most impact. This allows the SACCO to boost its financial performance and provide better reporting to its members. This research looked at how risk-based internal audits affected the profitability of DT-SACCOs in Kenya's Western Region. Based on three theories - the Positive Accounting Theory of internal auditing risk planning, the Contingency Theory of risk management, and the Agency Theory of internal audit capacity—this descriptive study was conducted. Fifteen DT-SACCOs in the Western Region of Kenya will be the focus of the study. Primary data was collected from DT-SACCO members, with a response rate of five per SACCO. The data on financial performance was verified using secondary sources of information. Regression analysis shows that risk-based audit planning had a statistically significant effect on the financial performance of DT-SACCOs in the Western area (t = 5.626, p<0.05). The study recommended that SACCO management practice risk-based auditing with adequate planning from all stakeholders to enhance transparency and accountability. Furthermore, the management should ensure there is timely action on audit queries.

The impact of hedge fund activism on audit pricing

The extant literature focuses on the economic effect of significant changes that activist hedge funds enact, but shows mixed findings about the effect on the information environment. We investigate the informational effect on the third party — namely, the auditor — and argue that the potential significant changes in target firms heighten the complexity and uncertainty of the information environment, potentially increasing the workload or risk for auditors. We find that auditors react to hedge fund intervention by increasing audit fees. This relationship holds in a battery of identification tests that address endogeneity, including difference-in-differences analysis with propensity score matching, coarsened exact matching, entropy balancing, and a placebo test. Further analysis supports our conjecture that information complexity and uncertainty increase in target firms, leading to higher audit fees. Moreover, auditors increase their effort after intervention but do not seem to incur greater audit risk. This finding suggests that the information risk arising from the potential post-intervention changes is within auditors’ threshold of risk tolerance, consistent with the corporate governance effect of hedge fund activism.

Pengaruh Risiko Audit Dan Stres Kerja Terhadap Motivasi Auditor Pada Kantor Akuntan Publik Kota Padang

This research aims to find out how much influence audit risk and work stress have on the motivation of auditors at the Padang City Public Accounting Firm. In this research, the population is all auditors in public accounting offices in Padang City. The population in this study was 92 people consisting of several employees who had different positions/groups in KAP Padang City. The sampling method used was the accidental sampling method. The regression analysis carried out was multiple linear regression analysis. The research results obtained based on the partial test (t test) showed: (a) The audit risk variable has a positive and significant effect on auditor motivation. (b) The work stress variable has a positive and significant effect on auditor motivation. Meanwhile, the simultaneous test of audit risk and work stress has a positive and significant influence on auditor motivation. Auditors may be motivated by the challenge of performing high-quality audits in the face of increased audit risk. These challenges can provide a sense of accomplishment and satisfaction for auditors who successfully navigate risks and complete high-quality audits. The stress faced in challenging work situations can motivate individuals to try harder and challenge themselves. When someone feels that they can overcome or cope with a difficult task, this can increase their motivation to succeed.

Climate Change Risk Disclosures and Audit Fees: A Text Analytics Assessment

ABSTRACT In this paper, we first conduct a longitudinal study of public companies’ climate change risk disclosures from 2005 to 2019. Results indicate that although the number of firms disclosing climate change risks increased over time, disclosure length and disclosure clarity did not improve consistently during the study period. It seems that firms temporarily adjusted their disclosure behaviors around 2010 to satisfy the SEC’s 2010 guidance regarding climate change disclosures. From that point forward, however, companies’ disclosure length and clarity declined. Climate change and disclosures in a client’s environment can elevate both inherent risk and audit risk. Accordingly, the second part of the study empirically examines whether climate change risk disclosures are embedded into the auditors’ risk model and associated audit prices. Results suggest that audit fees are significantly associated with climate change risk disclosure length and clarity, and lower climate change risk disclosure clarity is associated with higher audit fees.

Enterprise Audits and Blockchain Technology

Blockchain technology has become more common in the audit industry, posing new problems for traditional audit work. Researchers have been studying the effect of customers’ use of blockchain technology on audits, especially on audit risk and audit methods. This paper examines audit cases of Chinese enterprises that use blockchain technology. It analyzes the effect of the use of blockchain technology on the audit and the new audit problems. It also examines an Australian blockchain audit case using a questionnaire. This case study showed that the application of new technologies to the audit industry may lead to increased inherent risks and control risks. The audit methodology is uncertain and there are two possible approaches: (1) a combination of direct, indirect, account-level, and entity-level evidence and (2) an increase in indirect and entity-level evidence. This paper puts forward the reference case of the Australian blockchain audit experience and suggestions for developing blockchain audits in China.

The Role of Audit Risk in Improving Audit Quality

Audit quality is closely related to the auditor's audit process. Attitude and Cognitive Auditor is very necessary for completing the audit; besides that, audit risk considerations play an important role in decision-making by the auditor. Various ways and processes of audit work also adapt to circumstances that are not usually carried out. Therefore, audit quality needs to be studied more deeply so that in the future, the audit process can remain of high quality in all conditions. This study aims to examine the effect of audit quality in terms of audit skepticism, planning, and risk, which play a moderating role. The sample of this research is 265 auditor respondents in Indonesia. A research method is a quantitative approach tested through path analysis. Statistical testing was carried out using the SmartPLS 3 testing tool. The results showed that professional Skepticism affected audit quality. Furthermore, Audit Planning influences Audit quality. Audit risk is proven to strengthen the relationship between professional Skepticism and audit quality. However, Audit Risk has different results, which does not strengthen the relationship between audit planning and Audit Quality. Therefore, audit risk needs to be corrected and considered by the auditor in terms of professionalism and audit planning. It aims to improve audit quality. Future research can consider the use of information technology, which is a major part of the audit process

수주산업 회계부정 사례를 통한 외부감사인의 책임과 시사점

[Purpose] The order－made production industry, including the construction and shipbuilding industries, recognizes revenue based on the progress rate. Because progress estimates involve complex assumptions and estimates, they have high inherent risk and high audit risk. As a result, accounting fraud often occurs in order－made industries such as construction and shipbuilding. This study analyzes the accounting fraud cases of Company A in the ordermade production industry from 2008 to 2015 to present legal responsibilities for external auditors' poor auditing and implications of the court’s ruling on Company A’s accounting fraud on external audit.
 [Methodology] We conducted a search of court rulings related to Company A’s accounting fraud lawsuit and literature published by relevant supervisory authorities.
 [Findings] First, external auditors must strive to strengthen their competence and independence. Second, the scope of responsibility of the audit team must be made clear. Third, if the audited company’s submission of audit－related data is insufficient it is necessary to increase the differential information value of the audit report by actively considering modifying the audit opinion. Fourth, active communication between the auditor and the audited company is necessary, and after communication, audit risks must be managed by documentation.
 [Implications] By analyzing cases of accounting fraud in the order－made production industry based on court rulings, this study presented how the auditor’s perspective on accounting audits differs from the court’s perspective. In addition, it is different in that it analyzes accounting fraud cases from the auditor’s responsibility perspective and suggests implications.

Corporate political donations and audit fees: Some evidence from Australian audit pricing

We examine whether corporate political donations (CPDs) are associated with audit fees in the Australian setting. Our baseline results based on observations of Australian top 500 non‐financial companies show that, on average, firms with CPDs are associated with about 9% lower audit fees than firms without CPDs consistent with the strategic investment or resource dependency view. Using path analysis, we next show that high earnings quality resulting from strategic benefits of CPDs explains the association. Overall, these results confirm that firms use CPDs as strategic investments that are associated with lower earnings management, which leads to lower audit risk and hence reduced audit fees.

How Costly is Tax Avoidance? Evidence from Structural Estimation

ABSTRACT I develop a structural model to quantify the costs of tax avoidance. In the model, the firm trades off tax savings with tax audit risk, financial reporting considerations, and operational frictions imposed by tax avoidance, the last of which I label as nontax costs. The estimated parameters suggest nontax costs, which are difficult to observe, decrease pretax income by 6.4 percent or $58 million per firm-year. The large magnitude of this estimate can explain why firms appear to underutilize tax avoidance strategies. Through counterfactual analysis, I estimate the effect of tax audit risk and financial reporting considerations to find that financial reporting considerations have an effect on tax avoidance similar to the penalties imposed by tax authorities. Overall, the estimated parameters help explain the “undersheltering puzzle.” JEL Classifications: G14; H21; H25; H26; M41; M48.

Research on Audit Risk Prevention and Control in Ruihua Accounting Firm

With the rapid development of the market economy, the market environment has become more complex and the forms of economic activities have become increasingly diverse, leading to an increasing audit risk. In recent years, there have been frequent incidents of audit failures in accounting firms, which have greatly impacted the market economy. As a result, people's trust in accounting firms has declined, and doubts have been raised about the professional competence of auditors. This paper takes the audit of Kangdexin by Ruihua Accounting Firm as a research object, aiming to identify specific instances of inadequate quality control in the audit process and propose strategies and recommendations to strengthen audit risk prevention and control.

Evaluation of Climate Change As a Global Risk Factor in Terms of Internal Audit Risks

Evaluation of Climate Change As a Global Risk Factor in Terms of Internal Audit Risks

A comprehensive data analytics framework for risk management in photovoltaic system design projects

Risk management is an essential step of any project, which leads to a reduction in the cost of sudden losses. In the meantime, given the limited time available to make risk management decisions and the large volume of risks that cannot be considered, they should be prioritized with a comprehensive approach. In this paper, in addition to identifying the risks of the project life cycle, the aim is to use a hybrid multi-criteria decision-making (MCDM) method under fuzzy uncertainty for risk management in any photovoltaic system design (PSD) project. First, by reviewing the background, the risk factors of PSD projects are identified according to the stages of the project life cycle and introduced in the form of 2 factors in 4 categories. Next, these factors have been prioritized with a hybrid MCDM approach. These risk factors are prioritized with the cloud model (CM) and fuzzy TOPSIS method (CM-FTOPISIS). The results obtained from fuzzy TOPSIS integrate CM evaluation, which can reduce the uncertainty of the results. The research results show that incorrect project design, human resources risks, negotiation and contract signing risks, previous data risks, consumption audit risks, and equipment risks are the most critical risks in any PSD project.

Based on the Big Data Audit Risk Model Audit Process Research

With the gradual application of big data technology in enterprises, the way and connotation of audit have changed greatly. This paper is based on the impact of big data technology on auditing, Break down the audit risk into four risk elements, including inherent risk, control risk, big data technology risk and inspection risk, Building an audit risk model adapted to the big data environment, Summarize the new connotation of the four risk elements in the new model; Then, analyze and explore the impact of big data audit risk model on the audit implementation process from four stages: audit objective, audit risk identification and evaluation, audit plan and audit risk response, Combined with the audit practice, the big data audit process is sorted out again, Provide thinking guidance and solutions for big data audit.

Effects of Economic Deterrence Theory and Environmental Regulation on Tax Evasion: Evidence from Energy Sector

Environmental regulation is the responsibility of individuals, corporations, and other entities to prevent environmental damage or improve the tarnished environment. The Environmental law of every country works to protect the natural resources of land, water, air, and soil. There are research evidence that environmental regulation influences Corporate taxes. Economic deterrence theory acted as deterrent to threats of punishment for unwanted or illegal behavior. The fundamental concept of the theory is deterring the taxpayers into compliance by the risk of audit, penalty, etc. The objective of the study is to analyze the impact of economic deterrence theory and environmental regulation on corporate tax evasion, particularly petroleum profit taxes in Nigeria. The components of Economic deterrence theory (tax agents, tax complexity, tax knowledge) and environmental regulations are the independent variables and corporate tax evasion particularly PPT is the dependent variable of the study. It is quantitative research based on primary data which was collected from the oil and gas companies’ representatives. Structural Equation Modelling techniques were applied, and the outcome of the research is a positive and significant relationship between tax agents, tax complexity, tax knowledge, and environmental regulations on corporate tax evasion. The result further shows a positive but non-significant relationship between tax audits and perceived petroleum profit tax evasion. The study draws the attention of policymakers to formulate environmental regulations that are more robust, simple, and flexible, to reduce adverse effects of environmental damage on the economic growth and development of oil and gas-producing countries.

The Effect of Audit Client Assets Tangibility on Audit Risk: An Empirical Study on Nonfinancial Firms Listed on the EGX

The Effect of Audit Client Assets Tangibility on Audit Risk: An Empirical Study on Nonfinancial Firms Listed on the EGX

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.