The Pervasive Nature of IT Controls: An Examination of Material Weaknesses in IT Controls and Audit Fees

Canada, Joseph; Kuhn, John R.; Sutton, Steve G.

doi:10.2139/ssrn.1393515

Cited by 26 publications

(34 citation statements)

References 19 publications

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“…Identifying a significantly higher audit risk for an audit client leads to increases in audit fees, although there is no evidence that the increased effort is connected to the internal audit deficiency (Felix et al 2001, Canada et al 2009Hackenbrack andKneckel 1997, O'Kneefe et al 1994). The Bell et al (2001) and Bedard and Johnstone (2006) studies confirm a correlation between increased auditor fees and labor hours.…”

Section: 1background Of the Studymentioning

confidence: 99%

The Reliance of External Auditors on Internal Audit's Use of Continuous Audit

Mălăescu

Sutton

2014

Journal of Information Systems

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Abstract:As a response to the increased demand for timely and ongoing assurance over the effectiveness of risk management and control systems, companies are moving towards a more automated control environment through the implementation of continuous audit modules. The purpose of this study is to evaluate external auditors' reliance on internal audit's work when advanced audit techniques are introduced by the internal auditor and the impact this reliance has on budgeted audit hours. Prior literature suggests that internal control deficiencies also have an impact on external auditor reliance and the audit budget. The reliance decision of an external auditor has important economic consequences and implications for efficiency and effectiveness of the overall audit. In recent years, the PCAOB has encouraged greater such reliance to improve audit efficiency. An experiment is conducted with 87 experienced external auditors to investigate the theorized effects. Using a 2 x 2 between subjects factorial design, the frequency of the internal audit (traditional vs. continuous audit) and prior year material weakness (absent vs. present) are manipulated. Consistent with predictions, we find that auditors are willing to rely more on internal audit work in a continuous audit environment than in a traditional environment, and this effect is magnified when the prior year audit report on the effectiveness of internal controls indicates that controls are working properly. The presence of a material weakness, however, negatively impacts judgments on the budget for the valuation of a complex account. In addition, both material weakness and continuous audit have an impact on the overall audit budget, which is reduced only when the company has no prior year material weakness and a functioning continuous audit module is put in place. The results show that auditors increase budgeted hours for the engagement at a higher rate when the client uses traditional internal audit procedures.Keywords: Continuous Audit; Continuous Monitoring; Material Weakness; Internal Audit Reliance; Audit Budgets 3 INTRODUCTIONCompanies are under constant pressure to improve the reliability and accountability of their financial information in order to comply with regulatory bodies and to compete for capital in the evolving global business environment. As a response to global demands for timely and ongoing assurance over the effectiveness of risk management and control systems, companies are increasingly moving towards automated control environments through the implementation of technologies such as continuous audit modules (PwC 2006;IIA 2009;Protiviti 2013).Continuous audit is defined as "a method used to perform control and risk assessments automatically on a more frequent basis" (Coderre, 2006, pg. 1). Continuous audit technology allows ongoing audit testing of financial transactions and associated controls in real time. The internal audit profession is thus better equipped for addressing the needs of stakeholders, in spite of the challenges it faces: question...

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Section: 1background Of the Studymentioning

confidence: 99%

The Reliance of External Auditors on Internal Audit's Use of Continuous Audit

Mălăescu

Sutton

2014

Journal of Information Systems

Self Cite

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“…The dependent variable is set equal to 0 if the CFO does not find a job, 1 if the CFO finds a less than comparable job at a private firm, 2 if the CFO finds a comparable job at a private firm, 3 if the CFO finds a less than comparable job at a public firm, and 4 if the CFO finds a comparable job at a public firm. showing external reputational effects for executives reporting ITMW complement the line of research examining IT internal control weaknesses and their consequences to the organization (e.g., Canada et al, 2009;Klamm and Watson, 2009;Stoel and Muhanna, 2011). In addition, we carefully employed the methodology used by other external reputational studies to help ensure consistency with the body of literature.…”

Section: Resultsmentioning

confidence: 63%

“…In addition, ITMWs are detrimental to the firm's ability to forecast future earnings as ITMW firms make less accurate management forecasts than non-ITMW firms (Li et al, 2012). ITMW firms are also either more difficult to audit or represent a greater risk for auditors because there is a substantial audit fee premium following the disclosure of an ITMW (Canada et al, 2009). Because of these differences, we specifically examine ITMWs.…”

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

“…Specifically, IT provides the foundation for an effective system of internal controls over financial reporting (Hunton et al, 2008;Masli et al, 2010;Li et al, 2012), making ITMWs have an even greater adverse effect on the reliability of financial reporting than non-ITMWs in terms of the total number of material weaknesses and misstatements as well as time to remediate (Klamm and Watson, 2009;Klamm et al, 2012). In addition, ITMWs also increase external auditing costs (Canada et al, 2009), most likely because auditors cannot rely on automated controls and must expand substantive testing. These results are contrary to the advocates of "IT doesn't matter" (Carr, 2003).…”

Section: Introductionmentioning

confidence: 99%

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External reputational penalties for CEOs and CFOs following information technology material weaknesses

Haislip

Masli

Richardson

et al. 2015

International Journal of Accounting Information Systems

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“…One of the internal control objectives in the IT environment is to obtain financial statements of high reliability and to provide an adequate and appropriate evidence to attain the goals of the organization (Al-Laith, 2012). Recently, the assessment of the effect of the internal control of AIS on the quality of financial reporting has received great attention by academic and professional accountants (Grant et al, 2008;Canada et al, 2009). They had much concern about answering the question whether the reliability of internal control will lead to systematic improvements in the quality of financial reporting.…”

Section: Introductionmentioning

confidence: 99%

The impact of the implementations of the Sysrust’s framework upon the quality of financial reporting: structural equation modelling approach

Al-Dmour¹,

Abbod²,

Al-Dmour³

2018

JAMIS

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Abstract:The purpose of this research is to examine empirically, validate, and predict the reliability of the proposed relationship between the reliability of AIS process in the context of SysTrust' framework (principles and criteria) and the quality of financial reporting in shareholdings companies in Jordan. For this purpose, a primary data was used that was collected through a self-structured questionnaire from 239 of shareholdings companies. The extent of SysTrust's framework (principles and criteria) and the quality of financial reporting were also measured. The data were analyzed using structural equation modeling. The results showed that the magnitude and significance of the loading estimate and they indicated that all of the main five principles of SysTrust's framework are relevant in predicting the quality of financial reporting. Moreover, the reliability of AIS by the implementation of these five principles of SysTrust's framework were positively impacting the quality of financial reporting, as the structural coefficient for these paths are significant.

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The Pervasive Nature of IT Controls: An Examination of Material Weaknesses in IT Controls and Audit Fees

Cited by 26 publications

References 19 publications

The Reliance of External Auditors on Internal Audit's Use of Continuous Audit

The Reliance of External Auditors on Internal Audit's Use of Continuous Audit

External reputational penalties for CEOs and CFOs following information technology material weaknesses

The impact of the implementations of the Sysrust’s framework upon the quality of financial reporting: structural equation modelling approach

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