The impact of auditors creating flowcharts on auditors’ understanding of the flow of transactions and internal control evaluation
ISSN: 0268-6902
Article publication date: 26 September 2024
Issue publication date: 18 November 2024
Abstract
Purpose
Motivated by the importance of gaining an understanding of the flow of transactions when assessing the effectiveness of internal controls for Sarbanes–Oxley Act (SOX) compliance, concerns raised by the Public Company Accounting Oversight Board (PCAOB) of audit firm deficiencies in these areas and auditors’ use of both narratives and flowcharts to document the flow of transactions, this article aims to examine the impact of auditors creating flowcharts versus narratives on auditors’ transaction flow understanding and internal control evaluation performance.
Design/methodology/approach
This paper conducts a between-participants experiment examining auditor-created flowcharts versus narratives and different levels of documentation quality on auditors’ understanding of the flow of transactions and internal control evaluation performance.
Findings
This paper finds that auditors who create flowcharts gain a better understanding of the clients’ transaction flow and perform better on internal control evaluations than auditors who create narratives. Process results from a moderated-mediation model also show a moderating effect of quality and mediating effect of understanding.
Practical implications
These findings inform PCAOB policy decisions and inspection efforts and audit firms’ quality and process improvement efforts by providing initial support for having auditors create flowcharts to improve their understanding of the flow of transactions and internal control evaluation performance.
Originality/value
To the best of the authors’ knowledge, this is the first study to examine the effect of auditor-created flowcharts compared to narratives on auditors’ understanding of the flow of transactions and internal control evaluation performance.
Keywords
Acknowledgements
The authors thank Uday Murthy, Patrick Wheeler and Lisa Gaynor for valuable comments and suggestions. The authors also thank research workshop participants at the University of South Florida and audience participants at the Florida Accounting Behavioral Research Symposium for helpful comments on an early version of this paper. The authors gratefully acknowledge the comments and suggestions from the anonymous reviewers and James Bierstaker (associate editor).
Citation
Perols, R.R. and Perols, J.L. (2024), "The impact of auditors creating flowcharts on auditors’ understanding of the flow of transactions and internal control evaluation", Managerial Auditing Journal, Vol. 39 No. 7, pp. 779-798. https://doi.org/10.1108/MAJ-10-2023-4094
Publisher
:Emerald Publishing Limited
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