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.

Considering Multiple Materialities for Account Combinations in Audit Planning and Evaluation: A Cost Efficient Approach

1998 ◽  
Vol 13 (2) ◽  
pp. 151-171 ◽  
Author(s):  
Saurav K. Dutta ◽  
Lynford E. Graham
Keyword(s):  
Relative Cost ◽  
Analytic Framework ◽  
Audit Process ◽  
Audit Risk ◽  
Efficient Approach ◽  
Audit Planning ◽  
Audit Efficiency ◽  
Cost Efficient ◽  
User Perspectives ◽  
Audit Effectiveness

An analytic framework is provided for incorporating different user perspectives on materiality into the audit process. The framework serves as a tool for disaggregating materiality to specific accounts based on materiality criteria for accounts and account combinations. To improve audit efficiency, the planning method incorporates the relative cost of auditing various account balances. It extends existing models of audit risk and materiality by considering explicitly the materiality of account combinations (sums and ratios) to enhance audit effectiveness.

The Joint Influence of the Extent and Nature of Audit Evidence, Materiality Thresholds, and Misstatement Type on Achieved Audit Risk

2012 ◽  
Vol 31 (2) ◽  
pp. 19-41 ◽  
Author(s):  
David V. Budescu ◽  
Mark E. Peecher ◽  
Ira Solomon
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Internal Controls ◽  
Financial Statement ◽  
Audit Risk ◽  
Joint Influence ◽  
Materiality Thresholds ◽  
External Auditor ◽  
Audit Effectiveness

SUMMARY We use simulation to investigate the joint effects of materiality, evidence extent, evidence nature, and misstatement type on achieved audit risk, i.e., the risk of undetected material financial statement misstatement due to error or fraud. Our primary results are fourfold. First, contrary to conventional audit wisdom, we show that elevating the extent of testing decreases achieved audit risk only under certain conditions and may well increase it. Second, reducing materiality (attempting to perform a more precise audit) can either enhance or jeopardize audit effectiveness. Third, learning about the quality of the internal controls over financial reporting not only can help the auditor to perform an integrated audit, but also helps the auditor to reach better judgments about the extent to which and how evidence from the auditee organization's management and/or information systems may be distorted as a result of misstatement, reducing the risk that the auditor would be misled by such evidence. Fourth, when financial statements are biased intentionally due to fraud, it is especially important for the external auditor to supplement more traditional audit tests with tests that produce evidence that is less likely to be biased by management. Auditors who do not understand these four results run a heightened risk of compromising audit effectiveness.

scholarly journals HOW DO INDEPENDENT AUDITORS DETECT FRAUDULENT FINANCIAL STATEMENTS?

2016 ◽  
Vol 1 (2) ◽  
pp. 301
Author(s):  
Theresia Laras Wigunani
Keyword(s):  
Financial Statements ◽  
Public Accounting ◽  
Audit Risk ◽  
Professional Skepticism ◽  
Accounting Firm ◽  
Audit Planning ◽  
Independent Auditors ◽  
Branch Office ◽  
Fraudulent Financial Statements ◽  
Participatory Observation

(Participatory Observation in Public Accounting Firm “X”) ABSTRACTIndependent auditors have audit risk making them unable to detect material misstatements, especially those caused by fraud. This is because fraud may involve sophisticated, organized, and carefully designed scheme to be covered from the auditors. In addition, the audit risk could also be influenced by the negligence of the auditors, such as the audit that is not according to auditing standard, having no professional skepticism, and the inadequacy of training and audit experience. The objective of the research is to analyze whether the independent auditors perform a good audit planningand have a professional skepticism and audit experience to be able to detect fraudulent financial statement in the company in order to obtain a reasonable assurance. This research uses qualitative approach using participatory observation on 1 object, Public Accounting Firm (KAP) “X”, the only big four-audit firm that has a branch office in Surabaya. The research findings indicate that the audit team performs good audit planning, has professional skepticism and audit experience, can detect fraudulent financial statements.

Investigating the impact of macro-economic changes on auditors' assessments of audit risk: a field study

2020 ◽  
Vol 21 (3) ◽  
pp. 345-361
Author(s):  
Abdelmoneim A. Awadallah ◽  
Haitham M. Elsaid
Keyword(s):  
Risk Management ◽  
Economic Conditions ◽  
Future Research ◽  
Audit Risk ◽  
Content Type ◽  
Audit Judgment ◽  
Audit Firms ◽  
Management Policies ◽  
Analytical Procedures ◽  
The Impact

PurposeThe study aims at examining whether or not poor macro-economic conditions can lead auditors to change their risk management policies when performing an audit.Design/methodology/approachThe present study is based on a questionnaire distributed to auditors working at the branches of the big four audit firms in Egypt over two rounds under different economic conditions. The responses in each of the two rounds were analyzed to identify any similarities or differences in auditors' behavior when performing analytical procedures under different economic conditions.FindingsAuditors appear to alter their risk management strategies during challenging economic times. The present study results suggest that auditors increase their dependence on non-financial data and information as supporting evidence when assessing audit risk during times of economic difficulties. The findings also show that when the macro-economic trends are declining, audit firms tend to assign the performance of analytical procedures to more experienced audit personnel (i.e. senior auditors, audit managers and partners) with less of this work being done by the audit staff.Research limitations/implicationsThe present study is based on a sample of 40 respondents. It is recommended for future research to use a larger sample size as results may differ for a greater sample. The present research did not consider the effect of auditors' specialization in a certain industry on the audit judgment during an audit engagement. Future research would examine the impact of auditors' industry specialization on audit judgments during periods of unfavorable economic conditions. The present study is based on a survey that aims at capturing auditors' perception. Further research would use other research techniques (e.g. laboratory experiment) to examine the effect of the general economic conditions on auditors' assessment of audit risk.Practical implicationsAuditors need to give sufficient attention to the analyses of non-financial information of their audit clients during the performance of the analytical procedures under unstable economic conditions rather than depending solely on financial information. Moreover, audit firms could use a much richer labor mix for audit teams through increasing their reliance on experienced senior auditors, audit managers and partners during periods of deteriorating macro-economic conditions to mitigate risk and improve audit judgment.Originality/valueThis study adds to the scarce literature in developing countries investigating the influence of external economic factors on the audit process. The present research provides information to practitioners and educators about risk management policies that could be considered in case of performing analytical procedures during an audit conducted under poor economic conditions.

scholarly journals PENINGKATAN PERAN AUDITOR DALAM PENCEGAHAN DAN PENDETEKSIAN FRAUD

2014 ◽  
Vol 5 (1) ◽  
Author(s):  
Mimin Nur Aisyah
Keyword(s):  
Corporate Governance ◽  
White Collar ◽  
Financial Statements ◽  
The Other ◽  
Audit Risk ◽  
Strategic Reasoning ◽  
Audit Planning ◽  
Sarbanes Oxley ◽  
Risk Valuation ◽  
Organizational Condition

PENINGKATAN PERAN AUDITOR DALAM PENCEGAHAN DAN PENDETEKSIAN FRAUDSince the bankrupty cases of several big companies that involve their auditors in the accounting scandal, the auditor profession get strong pressure to improve their performance. Sarbanes Oxley Act of 2002 contains a comprehensive rule about corporate governance. It will increase the number of charges to white collar criminals. Fraud in the company is management’s responsibility, but auditors also have the responsibility to find and disclose it by make a plan and audit work to get a reasonable assurance whether financial statements were free from material misstatement, neither caused by error nor by irregularities. The evaluation of organizational condition, company structure and choices made is expected to help disclosing the motivation, opportunity and rationalization beyond the fraud of financial statements. To avoid the occurrence of fraud arises from motivation and opportunities, management should create a condusive environment in the company. On the other hand, auditors should also improve their competence, especially in fraud detection, by a strategic reasoning in audit risk valuation, audit planning and audit working. Strategic reasoning will be more challenging by the existence of strategic dependence in which the level of auditor’s expectation on manager’s action is affecting manager’s action.   Kata kunci : Fraud, auditor, strategic reasoning  

Nonlitigation Risk and Pricing Audit Services

2005 ◽  
Vol 24 (1) ◽  
pp. 37-53 ◽  
Author(s):  
Richard W. Houston ◽  
Michael F. Peters ◽  
Jamie H. Pratt
Keyword(s):  
Financial Statements ◽  
Future Research ◽  
Litigation Risk ◽  
Business Risk ◽  
Audit Risk ◽  
Audit Fee ◽  
Potential Damage ◽  
General Business

In this study we expand the audit fee model introduced by Simunic (1980) and extended by Houston et al. (1999) by adding a third factor, nonlitigation risk, which refers to general business risks and/or opportunities that extend beyond litigation risk or the conduct of the audit (e.g., opportunities for future audit and nonaudit revenues, potential damage to the auditor's reputation from involvement with a client). In an experiment, we ask audit partners and managers to assess various risks and develop an audit plan after reviewing one of four risk-increasing audit scenarios—the discovery of an error, the discovery of a GAAP inconsistency, a client buyout where the audited financial statements are used in the determination of the exchange price, and the loss of a major client customer. We find that, in the error and buyout cases, audit fee increases are explained only by the planned increase in audit investment; in the GAAP inconsistency case, the audit fee increase is explained in part by the planned increase in audit investment, but to a greater extent by residual litigation risk; in the loss of customer case, the audit fee increase is explained by the planned audit investment, residual litigation risk, and nonlitigation risk. These results suggest that business risk is comprised of at least three factors (acceptable audit risk, residual litigation risk, and nonlitigation risk), and that auditors are compensated to act as auditors, provide insurance for investor losses, and bear risks associated with factors that extend beyond the conduct of the audit. We also discuss how nonlitigation risk can clarify the results of previous research and be used in future research.

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.

scholarly journals The use of analytical procedures at the audit planning stage

2021 ◽  
pp. 31-38
Author(s):  
A. S. Bikteubayeva ◽  
K. Zh. Elshibekova
Keyword(s):  
Financial Reporting ◽  
Financial Stability ◽  
Financial Statements ◽  
Timely Manner ◽  
Planning Stage ◽  
Audit Planning ◽  
Minimal Time ◽  
Express Analysis ◽  
Analytical Procedures ◽  
Audit Program

The article considers the main stages of an audit. They allow to achieve the main goal of audit planning, that is, the implementation of a reporting test to identify possible errors; reporting testing for probable errors; horizontal and vertical analysis and "reading" of reports; express analysis of reporting. At the stage of planning the audit, after the disclosure of inconsistencies in the forms of financial statements, significant changes in the dynamics and structure, it is possible to determine the coefficients and at the same time the method of express analysis of the statements is used. The article focuses on the main mistakes in financial reporting. The main ratios for the analysis of financial statements are also given: liquidity ratios; financial stability; turnover; profitability. The analytical procedures presented in the article, which are guided by auditors at the stage of planning an audit, can be divided into the following groups. In addition, the division of audit procedures helps to identify problems in the provided information in a timely manner when disclosing it in the financial statements, and is aimed at identifying audit risks at the substantive stage. The use of analytical procedures at the stage of planning an audit allows you to create an audit program with minimal time costs, reduce the risks of problems that are associated with a lack of time and skills of personnel.

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.

scholarly journals Multilocation Audit Risks

2011 ◽  
Vol 14 (4) ◽  
pp. 1 ◽  
Author(s):  
Robert D. Allen ◽  
James K. Loebbecke
Keyword(s):  
Risk Factors ◽  
Risk Model ◽  
Future Research ◽  
Audit Risk ◽  
Accounting Firms ◽  
External Auditors ◽  
Audit Planning ◽  
Large Size ◽  
Single Location ◽  
Risk Framework

<span>Multilocation audits (MLAs) pose unusual risks for external auditors. Recent lawsuits against auditors manifest these risks. Despite the complexity and risk, there is little existing research and/or professional guidance that address MLA issues. This sparsity is especially surprising given that most companies of medium and large size conduct business activities in multiple locations. The purpose of this paper is to identify risks that exist in a MLA environment that do not necessarily exist in a single-location audit. The MLA risk framework was developed by 1) identifying risk factors specific to MLAs that we believe are important in audit planning, 2) evaluating the risk factors through interviews with MLA experts, 3) examining the policy and procedure manuals of public accounting firms, and 4) relating the risk factors to the audit risk model. The paper is intended to provide a framework for future research related to MLAs.</span>

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