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Article
Publication date: 1 May 1992

A.D. Woodhead

Until recently, the formal model for the estimation of audit riskwas relatively straightforward. There were two major approaches: thefamiliar multiplicative planned risk

Abstract

Until recently, the formal model for the estimation of audit risk was relatively straightforward. There were two major approaches: the familiar multiplicative planned risk model in the USA and UK; and the Canadian Bayesian posterior risk model. Recent work has substantially changed the framework for estimating audit risk. Aims to evaluate these proposals and to develop a single framework for the measurement of planned and posterior risk.

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Managerial Auditing Journal, vol. 7 no. 5
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 March 1991

Janet L. Colbert

Business risk and inherent risk both bear on the audit; the auditrisk model; and the nature, timing, and extent of work performed.Inherent risk and business risk bear an…

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1598

Abstract

Business risk and inherent risk both bear on the audit; the audit risk model; and the nature, timing, and extent of work performed. Inherent risk and business risk bear an inverse relationship to detec‐tion risk and have a direct effect on the level of work performed. Neither risk can be eliminated totally and neither is controllable by the auditor. Business risk relates to the financial statements and affects overall audit risk; inherent risk applies to an individual audit area. Inherent risk is explicitly included in the professional standards and the auditrisk model while business risk is not and has only an indirect bearing on the model. Management can take steps to affect the level of inherent risk, but the perceptions of users of the financial statements bear on business risk.

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Managerial Auditing Journal, vol. 6 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 June 1995

Douglas E. Ziegenfuss

Explores the state of the art in internal auditing risk assessmenttechniques by reviewing professional requirements as stated in Statementof Internal Auditing Standards…

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1830

Abstract

Explores the state of the art in internal auditing risk assessment techniques by reviewing professional requirements as stated in Statement of Internal Auditing Standards (SIAS) No. 9 and then examining and discussing currently available risk assessment techniques. Models explored in the study include the traditional risk assessment model and those by Wilson and Randon; Patton, Evans and Lewis; Boritz; and Siers and Blyskal. The results of the study indicate that professional standards are being met by all of the risk assessment techniques examined but none of the techniques is perfect for all users. Indeed, each has at least one flaw which seriously compromises its usefulness. Empirical research comparing predicted areas of high risk with actual areas could be used to determine the robustness of these models.

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Managerial Auditing Journal, vol. 10 no. 4
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 March 1995

Janet L. Colbert and C. Wayne Alderman

Internal auditors should consider the risks pertinent to an auditeewhen planning the work. Internal auditors may select a procedures‐drivenapproach or a risk‐driven…

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3571

Abstract

Internal auditors should consider the risks pertinent to an auditee when planning the work. Internal auditors may select a procedures‐driven approach or a risk‐driven approach. In a procedures‐driven approach, the audit procedures are chosen without full consideration of the risks present. Rather, the internal auditor may use procedures because they are commonly employed or because they were used on the last examination of the auditee. In a risk‐driven approach, specific procedures are planned only after consideration of the risks. A risk‐driven approach is generally more effective and efficient than a procedures‐driven approach because the internal auditor′s efforts are focused on areas with relatively more risk.

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Managerial Auditing Journal, vol. 10 no. 2
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 7 July 2021

Eugenia Yujin Lee and Wonsuk Ha

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

Abstract

Purpose

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

Design/methodology/approach

This study uses an ordinary least squares estimation to examine how audit fees and audit turnover change after the revelation of corporate fraud.

Findings

After a client discloses fraudulent activities, average audit fees significantly increase due to an increase in audit hours, rather than in audit premiums. Both new and continuing auditors increase audit hours for fraud firms, but only new auditors charge higher audit fees for the increased effort. In addition, when auditors are designated by regulators following the revelation of fraud, audit fees and premiums increase, but audit hours do not. Finally, auditor turnover becomes more frequent after the revelation of fraud. Overall, the findings suggest that auditors update their assessment of audit risks after fraud revelation and, thus, adjust their audit pricing and client acceptance decisions.

Practical implications

The study provides regulators and audit practitioners with insights into how to audit contract characteristics and regulatory intervention (auditor designations) affect auditors’ response to increased audit risks.

Originality/value

The study contributes to the auditing literature and practice by providing evidence on how auditors respond to the revelation of fraudulent activities and how their response depends on their ability to determine audit fees. Moreover, we provide novel evidence that audit contracting characteristics and regulatory requirements result in different responses of auditors toward changes in audit risks.

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Managerial Auditing Journal, vol. 36 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 6 April 2021

Hanmei Chen, Weishi Jia, Shuo Li and Zenghui Liu

The purpose of this paper is to examine how the concentration of a specific customer type – governmental customer, affects the pricing of audit services in the USA.

Abstract

Purpose

The purpose of this paper is to examine how the concentration of a specific customer type – governmental customer, affects the pricing of audit services in the USA.

Design/methodology/approach

This paper applies a standard audit pricing model by regressing audit fees on governmental customer concentration and other common determinants of audit fees. This paper also adopts an instrumental variable approach and performs propensity-score matched sample analyzes to mitigate the potential endogeneity problem.

Findings

Using data from major customer disclosures of US publicly listed firms from 2000 to 2014, this paper finds that governmental customer concentration is positively associated with audit fees, suggesting that a higher level of governmental customer concentration increases a firm’s audit risks and audit effort. In addition, this paper performs cross-sectional analyzes and show that the association between governmental customer concentration and audit fees is more pronounced for firms with weak internal governance, weak external monitoring and high financial risks.

Originality/value

This paper furthers the understanding of the interactive relationships in supply chain systems and adds new evidence to the literature on customer concentration. Prior studies on customer concentration typically treat all customer types in a uniform manner. To the knowledge, this is the first study that separates governmental customers from other types of customers in an audit pricing setting. The findings highlight the importance of examining governmental customer concentration when assessing a firm’s audit risks and audit fees.

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Managerial Auditing Journal, vol. 36 no. 2
Type: Research Article
ISSN: 0268-6902

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Book part
Publication date: 6 September 2016

Richard J. Barndt, Lori R. Fuller and Kevin E. Flynn

This exercise provides comprehensive coverage of audit materiality, assessing inherent risk, and allocating tolerable misstatement appropriate for an undergraduate auditing

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.

Details

Advances in Accounting Education: Teaching and Curriculum Innovations
Type: Book
ISBN: 978-1-78560-969-5

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Article
Publication date: 8 February 2021

Petros Lois, George Drogalas, Michail Nerantzidis, Ifigenia Georgiou and Eleni Gkampeta

This study aims to investigate the factors associated with the implementation of risk-based internal audit (RBIA).

Abstract

Purpose

This study aims to investigate the factors associated with the implementation of risk-based internal audit (RBIA).

Design/methodology/approach

As a first step, a literature review of the relevant literature is performed and five potential factors related to the implementation of RBIA are identified. Based on that, this paper constructs a questionnaire survey sent out to 185 internal auditors, executives and accountants in Greece to receive 90 responses during the period of November 2019–January 2020. Multiple regression analysis is conducted to identify the factors related to the implementation of RBIA.

Findings

This paper shows that there is a statistically significant positive relationship between the implementation of RBIA and: the provision of risk management training, an active audit committee role and the establishment of a formalized risk management system.

Practical implications

The results have important implications for internal auditors, chief executive officers and accountants who wish to enhance internal audit effectiveness and the accuracy and quality of financial information.

Originality/value

Empirical studies on the factors related to the implementation of RBIA are rare. This is the first study to create empirical variables based on a thorough review of the relevant literature to empirically investigate the factors that are related to the implementation of RBIA in an emerging economy. By focusing on the Greek context, this study also sheds light to other countries with similar corporate governance systems, thus providing insights to settings where the Type II agency problem exists (La Porta et al., 1999).

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 4
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 30 May 2020

Md. Borhan Uddin Bhuiyan, Ummya Salma, Jamal Roudaki and Siata Tavite

The purpose of this paper is to examine the association between the existence of a risk committee (RC) in a firm and financial reporting quality. We also investigate…

Abstract

Purpose

The purpose of this paper is to examine the association between the existence of a risk committee (RC) in a firm and financial reporting quality. We also investigate whether having an RC has an effect on audit pricing. We argue that the existence of an RC in a firm contributes to higher financial reporting quality and this, eventually, affects audit pricing.

Design/methodology/approach

This study uses two different proxies for RC measures and investigates the impact on financial reporting quality and audit pricing. Multivariate regression analysis and propensity score matching techniques are both applied to data from the Australian Stock Exchange's listed companies for the years 2001–2013.

Findings

The results indicate that the existence of an RC reduces the discretionary accruals; this means the financial reporting quality improves when RCs are in operation. Our findings also indicate that the existence of an RC increases audit fees.

Practical implications

The findings from this study will be beneficial to the regulatory authorities responsible for improving the compliance of corporate governance (CG). An RC can serve as a risk-mitigating tool in the investment decision-making process. Finally, the results are beneficial for the development of best practices in CG by promoting the existence of an RC.

Originality/value

This study goes beyond the traditional focus on CG as we use the existence of an RC as an indicator of better governance practices to mitigate financial and non-financial risk factors. To the best of our knowledge, this paper is among the first to investigate the consequences for firms operating with RCs. This issue has implications for investors, auditors, directors and regulators.

Details

Asian Review of Accounting, vol. 28 no. 3
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 31 January 2020

Janus Jian Zhang, Yun Ke, Shuo Li and Yanan Zhang

The purpose of this paper is to investigate whether and how auditors’ pricing decisions are affected by their clients’ offshore trading activities, which are…

Abstract

Purpose

The purpose of this paper is to investigate whether and how auditors’ pricing decisions are affected by their clients’ offshore trading activities, which are comprehensively measured through a textual analysis technique.

Design/methodology/approach

The authors identified a sample of 32,264 firm-year observations from publicly listed firms in the US during 2004 to 2015. The authors then used multivariate regressions to examine the effect of offshore trading activities on audit fees. In the regression models, the authors also control for a series of factors that are documented to influence audit pricing.

Findings

The authors find that offshore trading activities are positively associated with audit fees, suggesting that offshore activities are likely to increase a client firm’s business risk and/or the extent of client complexity. The authors also find that auditors charge higher audit fees only to firms purchasing inputs produced by their own assets overseas but not to firms buying inputs produced by local firms overseas. Moreover, the association between offshore trading activities and audit fees is more pronounced for offshore activities that are in countries with high trading centrality, for Big 4 auditors, or for auditors with industry expertise.

Originality/value

This paper extends the literature on the consequences of offshore activities by providing evidence on how auditors react to offshore activities. Moreover, it contributes to the audit fee literature. Prior studies largely focus on client-level determinants, while this study complements this line of literature by identifying firm’s offshore activities as an important risk indicator, which is perceived by auditors in their pricing decisions. A firm’s offshore activity is unique because the risk implication of the offshore activities depends not only on factors within the firm, but also on factors outside the firm in foreign nations.

Details

Managerial Auditing Journal, vol. 35 no. 4
Type: Research Article
ISSN: 0268-6902

Keywords

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