Inherent Risk and Control Risk Assessments: Evidence on the Effect of Pervasive and Specific Risk Factors

Abstract

This paper reports on a study that examines the effect of pervasive and specific risk factors on auditors' inherent risk and control risk assessments in an experimental setting. Two hypotheses concerning the significance of inherent and control risk factors on auditors' inherent risk (IR) and control risk (CR) assessments were tested by having 124 senior auditors and managers provide risk assessments on eight cases. The results show that the pervasive and specific risk factors included in the experiment were significant to both the auditors' IR and CR assessments. For the case used in this study, there was a significant positive association between auditors' IR and CR assessments. Taken together, these findings are consistent with Waller's (1993) notion of a knowledge-based dependency between IR and CR assessments. The findings are not consistent with Kinney's (1989) reformulation of the (IR×CR) component of the audit risk model.

Risk of Material Misstatement in Fluctuated Economic Environments: The Case of Greece

“…For the purposes of their study, they developed a sequential linear modeling process in order to add previously assessed risk components to the audit risk model and they have finally concluded on the conditional nature of audit risk components assessment. Messier and Austen (2000) supported the existence of a positive relationship between inherent and control risk. Their conclusion was based on the indirect US GAAS guidelines as well as on other causal relationships related to entities' environment, internal controls and potential misstatements.…”

“…Many prior studies (Dusenbury, Reimers & Wheeler, 2000;Messier & Austen, 2000;Ritchie & Khorwatt, 2007;Bloomfield, 1995;Quadackers, Mock & Maijoor, 1996;Quick, 2012) studied the functional relationship among the variables of the Audit Risk Model (ARM) or examined the dependencies between the entity's environment as it is reflected in the business risk and in the designed and implemented audit approach. However, most studies regarding the interrelations of audit risk components have been focused on ARM variables at the assertions level and they mainly examine the inherent and control risk as two different risk components.…”

“…However, most studies regarding the interrelations of audit risk components have been focused on ARM variables at the assertions level and they mainly examine the inherent and control risk as two different risk components. In addition, a significant volume of prior research on ARM studies (Dusenbury et al, 2000;Messier & Austen, 2000;Ritchie & Khorwatt, 2007;Bloomfield, 1995), has been based on US professional standards of auditing and the US GAAS approach. After 1983, when SAS No 47 was published, replacing SAS 39 (AICPA, 1983), both approaches, US GAAS and ISAs, converged at a quite similar approach regarding risk components and their assessment.…”

“…Following the positive relationship between inherent and control risk concluded by Messier and Austen (2000), Ritchie and Khorwatt (2007) conducted an empirical study regarding the understanding of the AR components and their application by professional Libyan auditors in practice. This study focused on Libyan auditors' assessment regarding the inherent and control risk and has also been based on US GAAS guidelines regarding ARM.…”

The development of audit detection risk assessment system: Using the fuzzy theory and audit risk model

“…At the initial stage of audit planning, improper audit risk assessment would lead to wrong resource distribution and inefficient or ineffective audit results (Helliar et al 1996;Khurana and Raman 2004;Krishnan and Krishnan 1997;Low 2004). At present, the common basic audit risk assessment methods include (Arens et al 2005;Cushing et al 1995;Low 2004;Messier and Austen 2000;Taylor 2000;Wustemann 2004): risk factor analysis; fuzzy combined assessment; internal control assessment; analytical audit; audit risk model; qualitative risk assessment; and 2 risk rate assessment. AICPA's (1983) audit risk model provided the major conceptual framework of the audit process, which described that when the audit personnel plan the audit work, according to their understanding of the auditees' business, they should professionally judge and set up the audit risk level, which could affect submit proper audit opinions for the financial statements, consider the remaining sum of each subject or various exchange factors and related internal control, and assess the degrees of inherent risk and control risk.…”