This study uses audit file data to analyze the association between the auditors' preliminary assessments of goingconcern and fraud risk and the planning and performance of the financial statement audit. We analyze the association between the above risks and the auditor's assessment of the risk of material misstatement (RMM) within the revenue cycle, and examine whether going-concern and fraud risk assessments have an effect on the persuasiveness, timing and extent of audit evidence gathered. Our results indicate that both fraud risk and going-concern risk are significantly related to RMM. Our results also indicate that although the effect of fraud risk is fully mediated by the RMM, moderate going-concern risk remains significantly related to our proxies for the persuasiveness and timing of audit evidence, even after controlling for RMM. SUMMARYThis study uses Big 4 audit file data to investigate the association between the auditors' preliminary assessments of going-concern and fraud risk and the planning and performance of the financial statement audit, specifically the persuasiveness of audit evidence, the timing of collection of audit evidence and the extent of audit evidence collected. The results of our study support our hypotheses that going concern and fraud risk are related to the persuasiveness and timing of evidence, but not the extent of evidence gathered. Going concern and fraud risk assessments should be considerations in Correspondence to: the preliminary assessment of the risk of material misstatement (RMM), and may therefore be mediated by the consideration of RMM. Our results indicate that both fraud risk and going-concern risk are significantly related to RMM. We repeat the initial analysis controlling for the auditor's assessment of RMM within the revenue cycle, and examine whether going-concern and fraud risk assessments continue to have an effect on the persuasiveness, timing and extent of audit evidence gathered. The results also indicate that although the effect of fraud risk is fully mediated by the RMM, moderate going-concern risk remains significantly related to our proxies for the persuasiveness and timing of audit evidence, even after controlling for RMM. This provides an indication that some aspects of going-concern risk are not subsumed by the current Audit Risk Model (ARM). One possible explanation is that our tests of the ARM assume a static risk that can be accurately assessed at the planning stage. Our findings are not as much an indication that assessment of going-concern risk does not flow through RMM, but possibly suggest that the ARM cannot capture the effects on audit evidence as a result of dynamic changes in risk factors. This notion would also help explain inconsistent results in prior research.
This study responds to prior literature highlighting the need for academic research to study the linkage of risks to audit procedures purported in the Audit Risk Model. We use audit workpaper data from a Big 4 firm to examine two significant relationships implicit in authoritative audit guidance: (1) the application of the audit risk model in practice, and the relationship between preliminary risk assessments and audit procedures, and (2) the potential loss of risk information upon risk aggregation suggested in the Audit Risk Model. Our findings indicate that preliminary risk assessments significantly affect planned audit procedures, and the potential for loss of information upon risk aggregation is not to be ignored. These results provide important evidence useful in developing audit policy for linking risk assessments and audit procedures.
This study investigates whether internal control reliability affects information system audit hours and fees. Based on archived workpaper data from 60 clients of an international auditing firm we provide quantifiable evidence that welldesigned internal controls that are in place and operating effectively lead to decreased information system control assessment effort and lower assessment fees. The information system audit fee savings we document may be considered a significant benefit by companies determining the merit of an investment in information system controls. SUMMARYThis study uses information system audit workpaper data of a Big 4 auditing firm to investigate whether well-designed and documented system controls influence both information system audit effort (hours) and fees. We posit that when an information system auditor encounters a firm with a well-documented and designed system, fewer assessment hours are required to complete the controls reliability evaluation, thereby reducing information system audit effort and fees. The results of our study indicate that both the general controls strength assessment and application controls strength assessment (proxies for reliability) are both inversely related to information system audit hours and fees.While prior literature and professional guidance promote effective system controls to achieve information reliability, prior studies report conflicting results as to whether internal control reliance influences either financial statement audit effort or fees. We are unaware of any study that focuses on these relationships in an information system audit setting. The continued proliferation of information technology in systems, as well as conflicting results from prior research with respect to the influence of control assessments, provide substantial motivation for this study.
In todays difficult economic climate, business managers must carefully consider all aspects of business operations to minimize waste and increase efficiency. The revenue cycle continues to be the primary area of fraud and abuse requiring strong, comprehensive internal controls (AICPA 2002). Internal controls in the revenue arena are now more important than ever. The current paper provides a control review checklist for hospitality revenue in the gaming industry. Extant studies have often focused on internal controls for the gambling operations of the gaming industry to the neglect of the hospitality portion of the industry. For many firms in the industry, the hospitality revenue can account for half of total firm revenue. The checklist we provide can be used as a general benchmark to perform preliminary evaluations of a companys internal control system in the hospitality arena. Auditors can compare their clients control objectives with the objectives that are presented. During preliminary investigations of the companys internal control system, auditors should review whether important control objectives have been omitted and whether the omission incurs or heightens risk. The control review checklist can also be used by CFOs or controllers in the gaming industry in reviewing whether their companys internal control systems are adequate. The checklist provides CFOs or controllers internal controls that external, independent auditors consider to be important.
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