Teaching Inherent Risk and Tolerable Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool

Abstract

Purpose

This exercise provides comprehensive coverage of audit materiality, assessing inherent risk, and allocating tolerable misstatement appropriate for an undergraduate auditing course. The Delphi method could be an appropriate tool in any accounting setting where the learning goals involve judgment, consensus, or learning through group interaction.

Design/methodology/approach

This chapter describes a classroom exercise that required students to establish planning materiality, assess inherent risk associated with balance sheet accounts, and allocate tolerable misstatement using a modified application of the Delphi method. Additionally, the exercise calls attention to group processing skills and the role played by professional judgment in planning an audit. We assigned students to five-person audit teams and through a series of Delphi rounds asked them to establish planning materiality and assess the inherent risk associated with each balance sheet account for a fictitious company. Students prepared a matrix, both individually and as a team, that compared each statement account to every other account to determine which account in each pairing they viewed as having higher inherent risk. As a final step, they allocated tolerable misstatement mathematically for each account based on pairing results.

Findings

The result was a consensus of opinion and an early attempt at forming professional judgment. The students’ responses to a debriefing questionnaire and the results of a pre-/post-test suggest that the learning objectives of the exercise were met.

Originality/value

The specific learning objectives of the exercise were to help students understand the concepts of tolerable misstatement and planning materiality, the elements of inherent risk, the Delphi method for reaching group consensus, the need to work as a team, and the importance professional judgment plays in the audit process. The result was a consensus of opinion and an early attempt at forming professional judgment. The students’ responses to a debriefing questionnaire and the results of a pre-/post-test suggest that the learning objectives of the exercise were met.

Citation

Barndt, R.J., Fuller, L.R. and Flynn, K.E. (2016), "Teaching Inherent Risk and Tolerable Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool", Advances in Accounting Education: Teaching and Curriculum Innovations (Advances in Accounting Education, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 125-140. https://doi.org/10.1108/S1085-462220160000019005