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This study examines auditors' evaluation of audit risk at the financial statement level (risk of material misstatements). Specifically, the study investigates whether perceived audit risk is influenced by individual differences (e.g., tolerance-for-ambiguity (TFA) and experience), and changes in industry risk. Forty-eight auditors from two offices of a “Big Five” CPA firm participated in this study.

The results of this study support the contention that TFA significantly influences the assessment of audit risk. Auditors with a high TFA perceived less audit risk than auditors with a low TFA. Industry risk also is shown to have a significant influence on the assessment of audit risk at the financial statement level. Higher industry risk was found to be associated with higher perceived audit risk. Lastly, the results indicate that audit experience is not a significant factor in explaining perceived audit risk. Important implications from these results for the overall audit process are provided.

This study investigates how auditors alter their audit program decisions in response to an increased likelihood of fraud risk. A total of 48 auditors from one Big 5 CPA firm were surveyed regarding the type of audit procedures they would use in response to an increased likelihood of material misstatements caused by fraud. The auditors were provided with a scenario that reflected changes in economic and industry factors that increase audit risk and typically require a reevaluation of the audit program. They were asked to make choices as to which tests of balances and details and analytical procedures to perform. The results of the study are summarized and tabulated and then explained in terms of the tradeoff between effectiveness and efficiency and corporate governance.