The Strategic Effects of Auditing Standard No. 5 in a Multi-Location Setting

2015 ◽  
Vol 35 (1) ◽  
pp. 119-138 ◽  
Author(s):  
Evelyn R. Patterson ◽  
J. Reed Smith
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Private Information ◽  
Financial Statement ◽  
Top Down ◽  
Control Strength ◽  
Financial Statement Audit ◽  
Financial Misstatement ◽  
Strategic Effects

SUMMARY Auditing Standard No. (AS) 5 provides guidance in the required audit of internal control over financial reporting and its integration into the financial statement audit. AS 5 advocates a “top-down” approach, in which control testing helps the auditor assess the risk of financial misstatement across multiple locations. We consider a manager who oversees two locations and who has private information about internal control strength in each location. Only when controls are weak can the manager commit fraud. We show how the manager's opportunity to commit fraud and informational characteristics of internal control tests impact the manager's probability choice of fraud and the auditor's choice of substantive test effort.

SOX 404(b) Audits: Evidence from Auditing the Financial Close Process of the Accounting System

2019 ◽  
Vol 34 (3) ◽  
pp. 77-103
Author(s):  
Diane J. Janvrin ◽  
Maureen Francis Mascha ◽  
Melvin A. Lamboy-Ruiz
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Accounting System ◽  
Audit Process ◽  
Financial Statement Audit ◽  
Multiple Method ◽  
Access Controls

ABSTRACT Auditing Standard No. 5 requires that auditors integrate their evaluation of large issuers' internal control over financial reporting (ICFR) into their financial statement audit process, but the PCAOB warns that auditors may not adequately test related manual and systems internal controls. We use a multiple method approach to examine how auditors evaluate one important component of ICFR, the financial close process, and whether they evaluate it differently when conducting a SOX 404(b) integrated versus a financial statement audit. Interviewees relied heavily on walkthroughs, and tended to perform only cursory reviews of entity-level controls related to the financial close process. In addition, they often failed to test the link between the general ledger and supporting systems, including evaluating related access controls. Financial statement-only auditors were more likely to re-perform key controls than rely on cursory walkthroughs. Auditors performing integrated audits appeared to over-rely on ICFR findings when conducting financial statement audits. Data Availability: Interview data are available from the first author. PCAOB inspection reports are publicly available.

An Analysis of the Demand for Reporting on Internal Control

2000 ◽  
Vol 14 (3) ◽  
pp. 325-341 ◽  
Author(s):  
Heather M. Hermanson
Keyword(s):  
Decision Making ◽  
Financial Reporting ◽  
Internal Control ◽  
Operational Definition ◽  
Financial Statement ◽  
Individual Investors ◽  
Internal Auditors ◽  
Additional Information ◽  
User Groups ◽  
Definition Of

The purpose of this study is to analyze the demand for reporting on internal control. Nine financial statement user groups were identified and surveyed to determine whether they agree that: (1) management reports on internal control (MRIC) are useful, (2) MRICs influence decisions, and (3) financial reporting is improved by adding MRICs. In addition, the paper examined whether responses varied based on: (1) the definition of internal control used (manipulated as broad, operational definition vs. narrow, financial-reporting definition) and (2) user group. The results indicate that financial statement users agree that internal controls are important. Respondents agreed that voluntary MRICs improved controls and provided additional information for decision making. Respondents also agreed that mandatory MRICs improved controls, but did not agree about their value for decision making. Using a broad definition of controls, respondents strongly agreed that MRICs improved controls and provided a better indicator of a company's long-term viability. Executive respondents were less likely to agree about the value of MRICs than individual investors and internal auditors.

Does Auditor Explanatory Language in Unqualified Audit Reports Indicate Increased Financial Misstatement Risk?

2014 ◽  
Vol 89 (6) ◽  
pp. 2115-2149 ◽  
Author(s):  
Keith Czerney ◽  
Jaime J. Schmidt ◽  
Anne M. Thompson
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Positive Association ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Reporting Quality ◽  
Accounting Principles ◽  
Client Relationship ◽  
Financial Misstatement ◽  
Audit Reports

ABSTRACT According to auditing standards, explanatory language added at the auditor's discretion to unqualified audit reports should not indicate increased financial misstatement risk. However, an auditor is unlikely to add language that would strain the auditor-client relationship absent concerns about the client's financial statements. Using a sample of 30,825 financial statements issued with unqualified audit opinions during 2000–2009, we find that financial statements with audit reports containing explanatory language are significantly more likely to be subsequently restated than financial statements without such language. We find that this positive association is driven by language that references the division of responsibility for performance of the audit, adoption of new accounting principles, and previous restatements. In addition, we find that (1) “emphasis of matter” language that discusses mergers, related-party transactions, and management's use of estimates predicts restatements related to these matters, and that (2) the financial statement accounts noted in the explanatory language typically correspond to the accounts subsequently restated. In sum, our results suggest that present-day audit reports communicate some information about financial reporting quality.

Effect Technology Information On Quality Financial Statement With Internal Control As Moderating Variable

2021 ◽  
Vol 2 (1) ◽  
pp. 9-13
Author(s):  
Aris Eddy Sarwono ◽  
Asih Handayani
Keyword(s):  
Information Technology ◽  
Control System ◽  
Financial Reporting ◽  
Internal Control ◽  
Local Governments ◽  
Sampling Technique ◽  
Financial Statement ◽  
Financial Reports ◽  
Internal Control System

The problem with the low quality of financial reports in local governments is the reason this research was conducted. This research was conducted with the aim of analyzing the use of information technology on the quality of financial reports by considering the internal control system (SPI) factor. The location of this research is in the Karisidenan Surakarta area which includes 6 districts and 1 city. The population of this research is all state civil servants (ASN) in local governments who work in accounting. The sampling technique was using purposive sampling method. The results showed that the use of information technology had a positive effect on the quality of financial reporting in local governments, while the internal control system moderated the effect of the use of information technology on the quality of financial reporting in local governments.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

Can Auditors Mitigate Information Asymmetry in M&As? An Empirical Analysis of the Method of Payment in Belgian Transactions

2013 ◽  
Vol 33 (1) ◽  
pp. 57-91 ◽  
Author(s):  
Mathieu Luypaert ◽  
Tom Van Caneghem
Keyword(s):  
Information Asymmetry ◽  
Private Information ◽  
Regression Models ◽  
Financial Statements ◽  
Financial Statement ◽  
Firm Characteristics ◽  
Target Level ◽  
Financial Statement Audit ◽  
Method Of Payment ◽  
The Relationship

SUMMARY In this paper, we empirically examine the relationship between the external financial statement audit and the method of payment across a sample of Belgian mergers and acquisitions between listed and private firms over the period 1997–2009. We investigate whether a Big N audit (at the target level) reduces the need for a contingent payment resulting from information asymmetry about the target's value. In addition, we analyze whether a Big N audit (at the bidder level) limits incentives for bidders to exploit private information about their own value. Using multivariate ordered probit and binary regression models, we determine that contingent payments are less common when the target is audited by a Big N auditor after controlling for several other deal and firm characteristics. Furthermore, we find that the incentive to use stock payments in periods of stock market overvaluation is lower for acquirers with a Big N auditor. Finally, target shareholders are more likely to accept a contingent offer if the acquirer's financial statements are certified by a Big N auditor. JEL Classifications: G34; M4.

Dickinson Technologies, Inc.: Assessing Control Environment and Fraud Risk

2003 ◽  
Vol 18 (1) ◽  
pp. 71-78 ◽  
Author(s):  
Christopher P. Agoglia ◽  
Kevin F. Brown ◽  
Dennis M. Hanno
Keyword(s):  
Risk Assessment ◽  
Internal Control ◽  
Financial Statement ◽  
Risk Assessments ◽  
Background Information ◽  
Control Environment ◽  
Abstract Concepts ◽  
Fraud Risk ◽  
Financial Statement Audit ◽  
Fraud Risk Assessments

This instructional case provides you an opportunity to perform realistic audit tasks using evidence obtained from an actual company. Through the use of engaging materials, the case helps you to develop an understanding of the control environment concepts presented in SAS No. 78 (AICPA 1995), Consideration of Internal Control in a Financial Statement Audit, and fraud risk assessment presented in SAS No. 99 (AICPA 2002), Consideration of Fraud in a Financial Statement Audit. This case involves making a series of fraud risk assessments based on company background information and a detailed and realistic control environment questionnaire, which provide you a context that makes the often abstract concepts relating to control environment and fraud risk assessment more concrete.

Investor reactions to restatements conditional on disclosure of internal control weaknesses

2018 ◽  
Vol 19 (3) ◽  
pp. 423-439 ◽  
Author(s):  
Yiwen Li ◽  
You-il Park ◽  
Jinyoung Wynn
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Internal Control ◽  
Private Information ◽  
Abnormal Returns ◽  
Content Type ◽  
Sarbanes Oxley ◽  
Financial Restatements ◽  
Abnormal Stock Returns ◽  
Internal Control Weaknesses

Purpose The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Design/methodology/approach The research uses cumulative abnormal stock returns (CARs) as a proxy for investor reactions. Restatements and internal control reports are available on audit analytics. Multivariate regression analyses were used for testing. Findings Using a sample of restating firms whose original misstatements are linked to underlying internal control weaknesses, the research finds that cumulative abnormal returns for firms disclosing internal control weaknesses in a timely manner is negative in a three-day window around the restatement announcements. The finding indicates that restatements with early disclosure of internal control weaknesses provide more persuasive evidence of the ineffectiveness of a firm’s internal control over financial reporting, rather than early disclosure lowering the information asymmetry between a firm and investors. Research limitations/implications This study employs CARs to examine the market reaction to restatements conditional on disclosure of internal control weaknesses. Practical implications Further study on reactions by creditors who have access to private information on firms could extend the implications of the finding. Originality/value The study contributes to the existing research by documenting that early disclosure of material weaknesses in internal control affects investors’ reactions to financial restatements.

scholarly journals A Top-Down Approach to Identification and Documentation of Critical Accounting Application Controls

2007 ◽  
Vol 1 (1) ◽  
pp. A12-A20
Author(s):  
Jerry L. Turner
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Financial Data ◽  
Financial Statement ◽  
Top Down ◽  
Flow Paths ◽  
Data Repositories ◽  
Critical Data ◽  
Reporting Process ◽  
Audit Approach

SUMMARY: PCAOB Auditing Standard No. 5 prescribes assessing internal controls over financial reporting using a “top-down” approach. This paper describes a method for documenting internal controls that aligns the documentation for application controls to the overall top-down audit approach. This method identifies critical data flow paths by beginning with the general ledger and tracing data backward (down) through the system to its origin, effectively focusing on the critical data repositories in the financial reporting process. It also directs attention to the processes that affect critical financial data and to where controls related to those processes should exist based on management assertions about financial statement account balances. The approach is both more efficient and effective than traditional bottom-up documentation approaches.

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