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This study tests a research model for promoting understanding of the responsibility attribution process.
Abstract
Purpose
This study tests a research model for promoting understanding of the responsibility attribution process.
Design/methodology/approach
A between-subjects experiment was conducted to test the hypotheses.
Findings
The results reveal that counterfactual thinking about how a system failure could have been prevented moderates the effect of cause of misstatement on perceived control. Counterfactual thinking about how an audit failure could have been avoided also moderates the effect of perceived control on causal account. Additionally, causal account mediates the effect of perceived control on responsibility judgment of an audit firm. Inclusion of audit firm size and auditor systems competency as control variables in the hypothesis tests and as grouping variables in the invariance tests does not alter the model results.
Research limitations/implications
Research can guide the audit profession on development of innovative strategies for detecting fraud to protect the interests of decision-makers. Strategies can also be devised to prompt users to consider relevant factors to enhance their ability to arrive at an accurate assessment of an audit firm’s responsibility for an audit failure.
Practical implications
Regulators may need to address whether availability of advanced data analytic tools increases the audit firms’ responsibility for presenting convincing evidence suggesting due diligence in the audit work in the event of an audit failure.
Originality/value
This study examines the process variables influencing responsibility judgment of an audit firm. Elicitation of counterfactual thoughts before the participants responded to the questions measuring the process and dependent variables facilitates discernment of the intensity of counterfactual thinking on the variables examined in the research model.
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Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those…
Abstract
Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those with clients interested in cross‐border securities markets, should comprehend the similarities and differences in the requirements found in the Standards in these significant audit areas. A comparison of the international Standard for error and fraud to the two US Standards for these topics discloses numerous similarities and a few differences. The findings are reassuring to auditors serving clients with cross‐border interests. Whether the auditor is utilizing the international or the US guidance, comparable audit work in searching for misstatements arising from errors and fraud is being performed.
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John T Reisch, Karen S McKenzie and Alan H Friedberg
This paper investigates state auditors’ decisions regarding the isolation or projection of sample misstatements to underlying sample populations. Seventy-eight state auditors…
Abstract
This paper investigates state auditors’ decisions regarding the isolation or projection of sample misstatements to underlying sample populations. Seventy-eight state auditors completed four treatment cases that incorporate the complete 2×2 manipulation of intentional/unintentional and systematic/non-systematic misstatements in different case scenarios, enabling a test of the independent variables both across and within case scenarios.
The results indicate that both across and within case scenarios, auditors tend to project systematic misstatements more often than they project non-systematic misstatements. However, the auditors’ isolation/projection decisions are generally not influenced by whether the sample misstatements are intentional or unintentional.
Mohamed Abdel Aziz Hegazy and Samar Salama
The purpose of this paper is to investigate the effect of qualitative materiality factors on auditors’ assessment of materiality and the determination of the type of the auditors’…
Abstract
Purpose
The purpose of this paper is to investigate the effect of qualitative materiality factors on auditors’ assessment of materiality and the determination of the type of the auditors’ reports. This paper also analyzes whether differences in personal characteristics of auditors can influence their use of qualitative materiality factors in assessing material misstatements.
Design/methodology/approach
A questionnaire and experimental case studies were undertaken to determine whether differences in personal characteristics of auditors can influence their degree of reliance on qualitative factors in assessing the materiality of detected misstatements. Descriptive and statistical tests were used to analyze the data collected.
Findings
The results of this paper show that qualitative materiality factors strongly influence the auditor’s materiality judgments. However, no significant differences were found regarding the effects of auditors’ personal characteristics on the degree to which they rely on the qualitative factors in their materiality judgments. Also, in certain situations, auditors considered factors other than the income for assessing certain misstatements as material and consequently modified their audit reports.
Originality/value
This paper examines the influence of qualitative factors on auditors’ materiality judgments and develops a list of qualitative factors to be considered by auditors when assessing materiality. It also concludes that the nature of misstatement is the least important qualitative factor considered by auditors when assessing materiality of detected misstatements and that the existence of more explicit or standardized qualitative materiality guidelines would lead to a more uniform judgment among auditors.
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The need for independent audit goes back to the agency theory, the theory of delegation of power and the issue of trust. Stakeholders delegate power to management to manage the…
Abstract
The need for independent audit goes back to the agency theory, the theory of delegation of power and the issue of trust. Stakeholders delegate power to management to manage the business on their behalf, yet they face the risk of information asymmetry and management motivations to commit fraud. The main aim of having an independent auditor was therefore to reduce the risk of information asymmetry and fraudulent behaviour by management. Auditors are required by the International Auditing Standards to detect material fraud and error, and they are expected to have a duty of care for stakeholders. However, recently independent auditors, whether conducting private or public audit, have been scrutinised for failing to detect material fraud. There have been a lot of discussions in the literature about the role of private auditors in detecting fraud, but very little discussions about the role of public auditors in detecting fraud. This chapter will outline the difference between private audit and public audit; explain the legal liability of public auditors in relation to fraud detection; the role of public auditors in detecting fraud; and will critically review the root causes for auditors’ failure to detect fraud.
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The purpose of this paper is to examine how levels of trait professional skepticism (i.e. professional skepticism based on personal traits) and different experiences with a…
Abstract
Purpose
The purpose of this paper is to examine how levels of trait professional skepticism (i.e. professional skepticism based on personal traits) and different experiences with a specific hypothetical client (i.e. positive, negative, or none) affect audit judgments.
Design/methodology/approach
The paper is based on an experiment with auditing students, with one manipulated variable and one measured variable.
Findings
The results show that initial expectations are driven primarily by client experience except when none is present (then driven by trait), but the experience has greater influence on low trait skeptics. Participants who are more skeptical are more sensitive to fraud evidence at the evidence evaluation stage.
Research limitations/implications
The study uses student participants which reduces generalizability of the results to other populations. However, students are advantageous participants for examining pure trait skepticism unaffected by audit experience.
Originality/value
The paper examines audit judgments at multiple stages of the audit decision‐making process to determine the impact on each stage. The results of this paper support concerns that audit quality is affected both by trait professional skepticism and prior client‐specific experiences.
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Bilal Makkawi and Allen Schick
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…
Abstract
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.
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Santanu Mitra, Bikki Jaggi and Talal Al-Hayale
The purpose of the study is to examine the effect of managerial stock ownership on the relationship between material internal control weaknesses (ICW) and audit fees.
Abstract
Purpose
The purpose of the study is to examine the effect of managerial stock ownership on the relationship between material internal control weaknesses (ICW) and audit fees.
Design/methodology/approach
The paper uses multivariate regression analyses on a sample of 1,578 ICW and 1,578 pair-matched (based on both propensity score and managerial stock ownership) non-ICW firm observations for a period from 2004 to 2010 to investigate how managerial incentive at various stock ownership levels impacts the relationship between material ICW and audit fees.
Findings
For the firms with low managerial stock ownership (up to 5 per cent stockholdings), the authors find no significant effect of managerial ownership on the positive relationship between audit fees and ICW. However, the impact of managerial stock ownership on the relationship between ICW and audit fees is significantly positive when managerial ownership is medium, i.e. more than 5 per cent and less than or equal to 25 per cent stockholdings, and the managerial ownership effect is even higher when managerial stock ownership is high, i.e. more than 25 per cent stockholdings. The result is especially robust for the ICW firms with high managerial stock ownership (i.e. where managers hold more than 25 per cent equity stake in the firms). The additional analyses further show that this managerial ownership effect is more pronounced when the firms suffer from company-level material control weaknesses that have pervasive negative effect on financial reporting quality.
Research limitations/implications
The results imply that in a low managerial ownership firms with substantial misalignment between manager and shareholder incentives, managerial stock ownership has little effect on the ICW and audit fee relationship. But when managers’ ownership interest is at a high level, they are more prone to purchase higher-quality audit service to reduce the risk of financial misstatements due to material ICW, which results in higher audit fees. The results add to the audit fee literature by suggesting that managerial incentive at various ownership levels is a critical governance factor that impacts auditor’s fee structure especially when higher reporting risk exists due to material ICW.
Originality/value
Prior literature documents that there is some relationship between managerial attributes and earnings quality; however, there is no substantive empirical evidence on the effect of managerial stock ownership on audit pricing when client companies face higher risk of financial misreporting as a result of material ICW. In this study, the authors seek answers to these empirical questions and fill the gap in the literature.
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Jerry W. Lin, Mark I. Hwang and Jack D. Becker
While financial reporting fraud has become more prevalent and costly in recent years, fraud detection has been badly lagging. Several recent studies have examined the feasibility…
Abstract
While financial reporting fraud has become more prevalent and costly in recent years, fraud detection has been badly lagging. Several recent studies have examined the feasibility of various computer techniques in business and industrial applications. The purpose of this study is to evaluate the utility of an integrated fuzzy neural network (FNN) for fraud detection. The FNN developed in this research outperformed most statistical models and artificial neural networks (ANN) reported in prior studies. Its performance also compared favorably with a baseline Logit model, especially in the prediction of fraud cases.
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Philmore Alleyne and Michael Howard
Recently, fraud has been brought to the forefront with the scandals of Enron and Worldcom. Fraudulent financial reporting and misappropriation of assets served to undermine…
Abstract
Purpose
Recently, fraud has been brought to the forefront with the scandals of Enron and Worldcom. Fraudulent financial reporting and misappropriation of assets served to undermine investors’ confidence in audited financial statements. This study investigates how auditors and users perceive the auditors’ responsibility for uncovering fraud, the nature and extent of fraud in Barbados, and audit procedures utilised in Barbados since Enron.
Design/methodology/approach
A total of 43 respondents (19 auditors and 24 users) were surveyed regarding their perceptions and experiences on fraud, using qualitative and quantitative approaches.
Findings
Indicates that the expectation gap is wide, as auditors felt that the detection of fraud is management's responsibility, while users and management disagreed. Also finds that fraud is not a major issue in Barbados and that companies who have internal auditors, sound internal controls and effective audit committees are better equipped to deal with fraud prevention and detection.
Research limitations/implications
The sample size is relatively small and it is not intended nor claimed that those interviewed comprise a representative sample.
Practical implications
This research fills a void in research in this area in a small country like Barbados. These findings have important implications for users of Barbadian accounts, especially investors, auditors and regulators.
Originality/value
This paper fulfils a resource need for academics and practitioners, and makes an interesting contribution to our understanding of fraud in Barbados.