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1 – 10 of over 31000Until recently, the formal model for the estimation of audit riskwas relatively straightforward. There were two major approaches: thefamiliar multiplicative planned risk model in…
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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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 inverse…
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 audit‐risk 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.
Explores the state of the art in internal auditing risk assessmenttechniques by reviewing professional requirements as stated in Statementof Internal Auditing Standards (SIAS) No…
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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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 approach. In a…
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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Highlights that the multiplicative risk model which forms the basis of auditing standards in both the USA and the UK only considers the risk of incorrect acceptance of an account…
Abstract
Highlights that the multiplicative risk model which forms the basis of auditing standards in both the USA and the UK only considers the risk of incorrect acceptance of an account balance. Points out, however, that when planning audit tests, the auditor also faces a risk of incorrect rejection of the sample under consideration if an unrepresentative sample is obtained. Incorporates the risk of incorrect rejection of the account balance into a theoretical risk model and investigates the relationship between the risks of incorrect acceptance and incorrect rejection using the power function of the test. Concludes that, first, the ability of an audit test to identify the magnitude of the error in the population, and especially its ability to identify material error reliably, is very important and, second, planning of effective audit testing should be undertaken, rather than relying on the extension of testing when results fail to meet expectations.
Ruwan Adikaram and Julia Higgs
This study aims to demonstrate how pressures (incentives) in the audit environment can lower audit quality because of a breakdown between professionally skeptical (PS) judgment…
Abstract
Purpose
This study aims to demonstrate how pressures (incentives) in the audit environment can lower audit quality because of a breakdown between professionally skeptical (PS) judgment (risk assessment) and PS action (testing).
Design/methodology/approach
The authors used a Qualtrics-based experiment with attitude change as a proxy measure of cognitive dissonance (CD). The authors analyze the results using a one-way independent between-group ANOVA with post hoc tests and t-tests.
Findings
The authors find that auditors experience CD when they fail to take appropriate high PS action (audit tests) that are in line with high PS judgment (risk assessments). The motivational force to reduce CD drives auditors to revise their assessments upward (rank higher), lower diagnostic audit tests (PS actions) and lower risk assessments (PS judgments). This leads to lower overall professional skepticism, and hence lower audit quality.
Originality/value
This investigation provides an empirical investigation of Nelson’s (2009) model of professional skepticism and demonstrates a specific mechanism for how incentives in the audit environment lower audit quality. Based on the findings, treatments to enhance audit quality can benefit by strengthening the critical link between PS judgments (risk assessments) and PS actions (audit tests).
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Sheng Yao, Siyu Wei and Lining Chen
Existing studies have shown that all kinds of audit risks greatly affect audit pricing for accounting firms. However, it is still unclear whether environmental risks caused by…
Abstract
Purpose
Existing studies have shown that all kinds of audit risks greatly affect audit pricing for accounting firms. However, it is still unclear whether environmental risks caused by environmental violations lead to a high audit fee. This study aims to investigate whether accounting firms raise audit fees after client firms have violated environmental regulations or have been punished for such violations.
Design/methodology/approach
This study selects listed firms with environmental violations between 1994 and 2018 as the treatment sample and match the treatment group with a control group of firms from the same industry, of similar asset size and with no environmental violations for the same time period. Then, this study constructs a difference-in-difference (DID) model to explore the impact of firm environmental violations (or punishment for environmental violations) on the audit pricing.
Findings
This study finds that accounting firms tend to raise audit fees after client firms have violated environmental regulations or have been punished for such violations, and this increasing effect is different due to environmental regulation intensity, regional span and internal control defects. Further evidences show that environmental violations influence audit fees through financial restatement, whereas environmental punishments impact audit fees through earnings management and risk-taking.
Originality/value
This study enriches the literature on determining factors of audit fees and economic consequences of environmental violations and provides empirical supports to understand the pricing behavior of accounting firms.
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Jianhua Tan, Kam C. Chan, Samuel Chang and Bin Wang
This paper aims to examine the effect of carbon emissions on audit fees. The authors hypothesize that firms in cities with higher carbon emission levels have lower reporting…
Abstract
Purpose
This paper aims to examine the effect of carbon emissions on audit fees. The authors hypothesize that firms in cities with higher carbon emission levels have lower reporting transparency, higher return volatility or are subject to higher reputation risk, causing them to be charged higher audit fees for auditing services.
Design/methodology/approach
The authors use panel data of 25,960 firm-year observations from a sample of Chinese firms. The carbon emission data for each Chinese city are obtained from the China Emission Accounts and Datasets for Emerging Economies. This paper adopts a multiple regression model to study the impact of carbon emissions on audit fees.
Findings
The authors find that firms located in cities with higher carbon emission levels and firms with more carbon emissions are charged, on average, a higher audit fee. This audit fee effect of carbon risk is transmitted by lessened information transparency and elevated financial risk within these firms. This paper shows that auditors consider carbon risk in their audit fee decisions and other factors that could influence audit risk and effort.
Originality/value
This study draws a connection between carbon emissions and audit fees. It is especially relevant due to the increasing importance of environmental factors in the audit risk assessment. In addition, the findings suggest that a firm implementing a proactive environmental strategy benefits the economy and decreases the costs to the firm for services such as auditing.
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Dahlia Robinson, Thomas Smith, James Devin Whitworth and Yiyang Zhang
This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the…
Abstract
Purpose
This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string.
Design/methodology/approach
The authors use regression models on a sample of publicly-traded USA companies with earnings strings.
Findings
The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks.
Research limitations/implications
The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models.
Practical implications
The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk.
Originality/value
An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.
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Seung Uk Choi, Hyung Jong Na and Kun Chang Lee
The purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit…
Abstract
Purpose
The purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit reports to explain perceived audit risk.
Design/methodology/approach
The authors construct the sentiment value, a novel audit risk proxy derived from audit reports, using big data analysis. The relationship between sentiment value and explanatory language is then investigated. The authors present the validity of their new metric by examining the relationship between sentiment value and accounting quality, taking audit fees and hours into account.
Findings
The authors first find that reporting explanatory language is positively related to audit fees. More importantly, the authors provide an evidence that explanatory language in audit reports is indicative of increased audit risk as it is negatively correlated with sentiment value. As a positive (negative) sentimental value means that the audit risk is low (high), the results indicate that auditors describe explanatory language in a negative manner to convey the inherent audit risk and receive higher audit fees from the risky clients. Furthermore, the relationship is strengthened when the explanatory language is more severe, such as reporting the multiple numbers of explanatory language or going-concern opinion. Finally, the sentiment value is correlated with accounting quality, as measured by the absolute value of discretionary accruals.
Originality/value
Contrary to previous research, the authors’ findings suggest that auditors disclose audit risks of client firms by including explanatory language in audit reports. In addition, the authors demonstrate that their new metric effectively identifies the audit risk outlined qualitatively in audit report. To the best of the authors’ knowledge, this is the first study that establishes a connection between sentiment analysis and audit-related textual data.
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