JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

The effectiveness of audits in detecting fraudulent misstatements in financial statements is of major concern to the auditing profession. This concern led to the issuance of Statement on Auditing Standards (SAS) No. 82, which made several changes in the manner in which auditors are required to consider the risk of material misstatements due to fraud. This manuscript reports the results of a study of the practices of CPA firms in implementing SAS No. 82. We compared audit manuals and practice aids and interviewed firm personnel from all of the Big 5 firms and two second-tier firms. Results of this study indicate that audit firms differ as to (1) whether their practice aids for fraud risk assessment are separate or integrated with other risk assessment practice aids, (2) the timing of the fraud risk assessment, and (3) the method of assessing fraud risk. Furthermore, although all of the firms studied include all of the SAS No. 82 factors in their audit practice aids, certain other fraud risk factors identified in academic research are not included in firm practice aids.

No abstract

PurposeThis research study aims to examine how differences in opinions on the material weaknesses identified in the auditor's assessment of the financial statements, and the auditor's assessment of internal control affect investment analysts' assessment of the financial strength of the company and willingness to recommend the stock for purchase to clients. It also aims to examine how the auditor's opinion on management's assessment of internal control affects investment analysts' assessment, providing additional evidence of the appropriateness of the elimination of this requirement under Auditing Standard No. 5.Design/methodology/approachThe paper examines these research questions using data from a laboratory experiment with investment analysts as participants in the study.FindingsThe findings indicate that adverse audit opinions on the effectiveness of internal control result in investment analysts making a higher assessment of company risk, a lower assessment of the strength of internal control over financial reporting, and a marginally significant difference in the likelihood of recommending stock to their client.Research limitations/implicationsThese findings provide evidence that auditors' assessment of internal control risk provides information to investment analysts.Originality/valueThis study contributes to the literature by examining the implications of Section 404 of the Sarbanes‐Oxley Act on the judgment of users of financial statements.

Surveys of business firms in the U.S.A. indicate that standard-based compensation contracts are common in practice. Analytical studies of this form of contract have suggested that under conditions of state risk, an employee's contract and effort choice are significantly affected by how pay relates to measured performance, and whether the compensation contract filters out the effects on measured performance of factors beyond the employee's control. This paper reports the results of a laboratory experiment indicating that in the presence of state risk, an individual's choice of compensation contract depends jointly on these two contract attributes and hislher risk preference as well as performance capability. The findings also indicate that actual effort is a function of the realized state, the presence/absence of a controllability filter, and the level at which the individual had expected to perform at the time of his/ her contract selection. When an adverse state was realized, subjects without a controllability filter still exerted the level of effort that they had expected at contract selection, even though their marginal return to effort had been substantially reduced. On the other hand, when the controllability filter was absent, subjects who had a favourable realized state increased their effort in response to the increased marginal return to effort.