Experimental Tests of a Descriptive Theory of Combined Auditee Risk Assessment

Vandervelde, Scott D.; Tubbs, Richard M.; Schepanski, Albert; Messier, William F.

doi:10.2139/ssrn.958791

Cited by 3 publications

(6 citation statements)

References 36 publications

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“…Model (1) also contains control variables reflecting FVM and client characteristics. 13 CONTROL_RISK is the auditor's assessment on a scale ranging from 1 ¼ low to 11 ¼ high; we expect a positive coefficient, consistent with prior research (e.g., Haskins and Dirsmith 1995;Dusenbury, Reimers, and Wheeler 2000;Messier and Austin 2000;Vandervelde, Tubbs, Schepanski, and Messier 2009;Miller, Cipriano, and Ramsay 2012). SPEC_CLIENT equals 1 if the client uses a valuation specialist, and 0 otherwise; we expect a positive coefficient as the presence of a client specialist implies a more complex valuation (Griffith 2015).…”

Section: Models and Variablessupporting

confidence: 81%

Auditing Challenging Fair Value Measurements: Evidence from the Field

Cannon¹,

Bedard

2016

The Accounting Review

174

120

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Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.

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Section: Models and Variablessupporting

confidence: 81%

Auditing Challenging Fair Value Measurements: Evidence from the Field

Cannon¹,

Bedard

2016

The Accounting Review

174

120

View full text Add to dashboard Cite

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“…While the recent standards may have enhanced the usefulness of the ARM, the enhancements are potentially undermined if they lead to a misunderstanding of IR and CR when combined into the risk of material misstatement (RMM) construct. Our study extends a literature documenting discrepancies between the historical definition of ARM components in the standards and the implementation of the ARM, as observed in controlled lab experiments such as that by Vandervelde et al (2009). Specifically, we examine whether auditors assess IR without incorporating assumptions about their clients' controls.…”

Section: Introductionmentioning

confidence: 70%

“…The prompt for the question is an important aspect of our experimental procedure. By asking auditors to ignore any prior knowledge (or assumptions) they may have regarding the client and by also excluding any reference to the client's internal control structures in our initial task description, we differentiate our instrument from most audit engagements and from the Vandervelde, et al (2009) study. In practice, information from prior year engagements with the client may be used to develop an initial baseline level of RMM that includes a consideration of prior year CR.…”

Section: Methodsmentioning

confidence: 99%

“…In practice, information from prior year engagements with the client may be used to develop an initial baseline level of RMM that includes a consideration of prior year CR. In Vandervelde, et al (2009), subjects are given information about baseline controls prior to receiving inherent and CR stimuli. This prevents them from examining whether or not auditors enter the experiment with baseline priors regarding CR.…”

Section: Methodsmentioning

confidence: 99%

“…In the research design of Haskins and Dirsmith (1995), stimuli from the “control environment” construct (with potential impact on both IR and CR assessment across all accounts/assertions) were purposely given to subjects. In Vandervelde et al (2009), subjects received “background information” which included information about the client's internal control structures prior to gathering subjects' responses in their “IR only” condition. As such, it is not surprising that subjects in both studies embedded a “baseline CR assessment” into their initial assessment of RMM.…”

Section: Expectationsmentioning

confidence: 99%

See 2 more Smart Citations

Do auditors assess inherent risk as if there are no controls?

Miller

Cipriano

Ramsay

2012

Managerial Auditing Journal

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PurposeThe purpose of this paper is to examine whether auditors interpret the risk of material misstatement (RMM) in accordance with current standards' definition of inherent risk (IR). It is argued that controls should not be presumed when assessing inherent risk and that inherent risk should be considered separate from and prior to control risk when it is practical to do so. Because auditing standards explicitly require auditors to assess IR without consideration of internal controls (i.e. control risk (CR)), RMM should not be adjusted upward for control deficiencies.Design/methodology/approachThe authors survey and interview practicing auditors to gain an understanding of current risk assessment practice. They then evaluate whether their understanding of risk assessment is in line with current standards.FindingsContrary to auditing standards' definition of inherent risk, it appears that auditors presume some level of expected control effectiveness when assessing IR and they may increase RMM in response to internal control deficiencies. Such a presumption is inconsistent with the definition of inherent risk from the Auditing Standards Board (SAS No. 107), Public Company Accounting Oversight Board (AS 8), and International Auditing and Assurance Standards Board (ISA 200). Such misinterpretation may be an inadvertent result of guidance provided by standard setters in the form of SAS No. 109 from the ASB, AS 12 from the PCAOB and ISA 315 from the IAASB, which suggest combining IR and CR into RMM.Research limitations/implicationsThe research is limited both by the small sample size and the small number of risk factors investigated.Practical implicationsIf auditors presume a level of controls in assessing inherent risk, they may reduce audit effectiveness by estimating a lower RMM than is appropriate.Originality/valueThis study presents insights on the interpretation and assessment of audit risk in audit environments where inherent risk is no longer automatically set to be at the maximum. Namely that due to the definition of inherent risk, control information should have a unidirectional downward effect on the risk of material misstatement.

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Audit fees, perceived audit risk, and the financial crisis of 2008

Chen

Hua

Liu

et al. 2019

ARA

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Purpose The purpose of this paper is to investigate how audit fees change in responding to the financial crisis of 2008. It also examines auditors’ perceived risk and how they priced the risk in the financial crisis. Design/methodology/approach Using a sample of 20,930 firm-year observations, this paper examines the change of audit fees before, during and after the financial crisis, as well as the relationship between audit fees and restatements. Furthermore, this study investigates whether this relationship between audit fees and restatements strengthened during the financial crisis. Findings The paper finds that audit fees increase as a result of the macro-systemic risks from the crisis. It also finds that there is a significantly positive relationship between audit fees and restatements, which is a proxy of risk factors related to poor financial reporting quality and poor audit quality. However, the results show that there is no significant change of the fees–restatements relationship in the financial crisis period. Research limitations/implications The main limitation of this study is that no definite answer can be provided for the question that whether auditors believe that poor audit quality and audit failures are leading up to the financial crisis. The test rejects the alternative hypothesis. However, it does not necessarily prove the null hypothesis is true. Originality/value This paper contributes to the current literature by analyzing not only the impact of the financial crisis on audit fees, but also how the accounting profession views its own role in the financial crisis.

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Experimental Tests of a Descriptive Theory of Combined Auditee Risk Assessment

Cited by 3 publications

References 36 publications

Auditing Challenging Fair Value Measurements: Evidence from the Field

Auditing Challenging Fair Value Measurements: Evidence from the Field

Do auditors assess inherent risk as if there are no controls?

Audit fees, perceived audit risk, and the financial crisis of 2008

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