The Importance of Account Relations on Audit Planning Decisions Based on the Seriousness of Interim Evidence Findings and the Presence of Profit Pressure

2004 ◽  
Author(s):  
Scott D. Vandervelde
Keyword(s):  
Audit Planning ◽  
Planning Decisions

Integration of Fraud Risk in the Risk of Material Misstatement and the Effect on Auditors' Planning Decisions

2018 ◽  
Vol 3 (1) ◽  
pp. A52-A79
Author(s):  
Velina K. Popova
Keyword(s):  
Data Availability ◽  
Risk Environment ◽  
Major Area ◽  
Audit Planning ◽  
Fraud Risk ◽  
Planning Decisions ◽  
Public Company ◽  
Study Participants ◽  
Audit Program ◽  
Planning Judgments

ABSTRACT Prior research finds that although auditors assess fraud risk accurately, they generally fail to adjust audit procedures appropriately. The most recent Public Company Accounting Oversight Board (PCAOB) inspections in 2016 still identify response to risks of material misstatement (RMM) as a major area of inspection focus and cite it as a recurring audit deficiency. In this study, participants assess RMM and make audit-planning judgments in a high/low fraud risk environment using either a traditional source-based representation of RMM (i.e., based on inherent, control, and fraud risk) or a newer type-based representation of RMM (i.e., based on error and fraud risk). The results indicate that while auditors in both groups show similar sensitivity to risk, the type-based group of auditors are better able modify their audit plans by using more procedures that are new to a standard audit program and assigning more experienced staff to address high fraud risk. Data Availability: Contact the author.

Analytical Procedures and Audit-Planning Decisions

2000 ◽  
Vol 19 (2) ◽  
pp. 27-45 ◽  
Author(s):  
Steven M. Glover ◽  
James Jiambalvo ◽  
Jane Kennedy
Keyword(s):  
Financial Statements ◽  
Future Research ◽  
Audit Risk ◽  
Audit Planning ◽  
Planning Decisions ◽  
Analytical Procedures ◽  
Interim Testing ◽  
Audit Effectiveness

This study examines auditors' decisions to revise preliminary audit plans after analytical procedures performed during interim testing reveal significant, unexpected fluctuations. We examine the effects of two variables on these decisions: (1) the presence or absence of an explicit incentive for management to misstate the financial statements, and (2) the degree to which management's explanation for the fluctuation is independently corroborated. We hypothesize that these two variables interact. Auditors will be more likely to increase their planned tests when there is minimal corroboration of management's explanation for the fluctuation and there is an explicit incentive for management to misrepresent the financial statements. The results of an experiment are consistent with this hypothesis. While our results suggest that auditors are more likely to revise audit plans in these conditions, we also find that a relatively high proportion of auditors do not revise their plans when faced with increased audit risk signaled by significant, unexpected fluctuations. Future research is needed to better understand auditors' reluctance to expand testing and whether this reluctance jeopardizes audit effectiveness.

Primacy Effects and the Role of Risk in Auditor Belief-Revision Processes

1999 ◽  
Vol 18 (1) ◽  
pp. 75-89 ◽  
Author(s):  
Brenda H. Anderson ◽  
Mario J. Maletta
Keyword(s):  
Order Effect ◽  
Internal Controls ◽  
Positive Information ◽  
Audit Planning ◽  
Inherent Risk ◽  
Planning Decisions ◽  
Audit Judgment ◽  
Primacy Effects ◽  
Conditional Function

Numerous studies in the audit judgment literature provide evidence indicating that auditors can be susceptible to recency effects. This study extends the research by examining auditor susceptibility to primacy, an order effect, which, like recency, can lead to suboptimal audit-planning decisions (see Ashton and Ashton 1988) and yet, unlike recency, has received very little attention in the accounting literature. Specifically, the research investigates whether primacy effects in auditor belief revisions are a conditional function of the level of inherent risk present in the audit environment (high/low) and the nature of the information contained in the latter portion of the information sequence (e.g., whether the information is positive or negative with respect to the client's internal controls). The results, consistent with expectations, indicate that auditors are susceptible to primacy effects when making likelihood of error and audit-hour planning judgments in settings that are relatively low in inherent risk, and such effects are due to less integration of late positive information in low- as compared to high-risk conditions. No evidence of primacy was found for either judgment when the inherent risk associated with the audit setting was high and, auditors did not differentially revise their beliefs across inherent risk conditions for late negative information. The findings indicate that primacy is essentially the result of insufficient integration of late positive information in low inherent risk settings, suggesting that primacy may lead to overauditing and thus, an inefficient use of audit resources.

The Effects of Industry Specialization on Audit Risk Assessments and Audit-Planning Decisions

2004 ◽  
Vol 79 (1) ◽  
pp. 201-219 ◽  
Author(s):  
Kin-Yew Low
Keyword(s):  
Time Budget ◽  
Perceived Quality ◽  
Risk Assessments ◽  
Audit Risk ◽  
Industry Specialization ◽  
Risk Levels ◽  
Audit Planning ◽  
Planning Decisions

This study investigates the effects of industry specialization on auditors' risk assessments and audit-planning decisions. In an experiment, auditors from different industry specializations complete a hypothetical audit case set in a specific (bank) industry, which creates either a match or a mismatch between the auditors' industry specialization and the hypothetical client's industry. Furthermore, I manipulate the industry-specific case information to achieve differential audit risk levels. I also provide the auditors with a set of preliminary audit procedures and a constrained time budget. I find that the auditors' knowledge of the client's industry improves their audit risk assessments and directly influences the nature and the perceived quality of their audit-planning decisions. In addition, the auditors' knowledge of the client's industry moderates the sensitivity of the auditors' planning decisions to their audit risk assessments.

The Audit Risk Model, Business Risk and Audit-Planning Decisions

1999 ◽  
Vol 74 (3) ◽  
pp. 281-298 ◽  
Author(s):  
Richard W. Houston ◽  
Michael F. Peters ◽  
Jamie H. Pratt
Keyword(s):  
Risk Premium ◽  
Risk Model ◽  
Business Risk ◽  
Audit Risk ◽  
Audit Planning ◽  
Pricing Decisions ◽  
Planning Decisions ◽  
Audit Risk Model

This study identifies conditions under which the audit risk model does, and does not, describe audit-planning (investment and pricing) decisions. In an experiment, audit partners and managers examined one of two cases where a material misstatement—error or irregularity—was discovered. The auditors assessed the elements of the audit risk model, assessed business risk and provided recommendations for the audit investment and fee. When the likelihood of an error was high, the audit risk model dominated business risk in the explanation of the audit investment, and the fee did not contain a risk premium. When the likelihood of an irregularity was high, business risk dominated the audit risk model in the explanation of the audit investment, and the fee contained a risk premium. These results suggest that the ability of the audit risk model to describe auditor behavior and the inclination of auditors to charge a risk premium depend upon the nature of the risks present in the audit. In the presence of errors, the audit risk model adequately described audit-planning decisions; in the presence of irregularities it did not.

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