Search results

Section 404 of the Sarbanes–Oxley Act (SOX) altered the relationship between auditors and their clients by requiring an external audit of companies’ internal controls. Regulatory guidance is interpreted and applied by external auditors to comply with SOX. The purpose of this paper is to apply service operations management theories and techniques to the internal control audit process to better understand the role regulatory guidance plays in audit services. We discuss service operations management theories that apply to the production of audit services and employ the operations management technique of simulation to examine the effects of a historical relationship between the client and the auditor, information sharing between the client and the auditor, and the auditor’s perceived risk of the client on the internal control audit process. The application of service operations management theories and the simulation results illustrate that risk and information sharing are key factors for the audit process. The results suggest the updated Public Company Accounting Oversight Board guidance from Auditing Standard 2 to Auditing Standard 5 appropriately increased audit effectiveness by encouraging risk-based judgments and information sharing. This paper merges accounting and service operations management research to examine the effects of regulatory guidance on the internal control audit process. The paper uses simulation to illustrate the importance of interpreting regulatory guidance and the specific effects of risk and information sharing on the internal control audit process.

This research aims to explore whether recent audit reforms have improved auditor objectivity when performing non-audit services.

In two separate experiments, the authors tested whether external and internal auditors' inventory obsolescence judgments are influenced by their client's (or company's) role as the buyer or seller in an acquisition setting.

External auditors assessed the likelihood of inventory obsolescence objectively, regardless of their consulting role in the acquisition setting. Internal auditors assessed the likelihood of inventory obsolescence as higher when consulting for the buyer than when consulting for the seller, consistent with the supposition that the buyer would prefer to write-down inventory and negotiate a lower purchase price, whereas the seller would prefer the inventory not be written down.

From a regulatory perspective, external auditors may be relying too much on the work of internal auditors if internal auditors' lack of objectivity as consultants extends to their assurance role.

This paper extends prior research in the area of internal and external auditor objectivity and is the first paper to include both subject groups in the same experiment. It also addresses the current policy issues that may have a significant effect on audit quality and auditor liability.

This paper presents an account of a project which involved an analysis of the problems which were likely to be encountered in expanding the advisory aspect of the internal role within a large local authority. The project was conducted on behalf of Internal Audit by the Behavioural Science Unit, an internal consultancy group operating within the authority. The latter use concepts and frameworks taken from behavioural science for the conduct of their work. There were two main phases to the project. One was an examination of the role of the auditor within the authority. Particular emphasis was given to the elaboration of the policing and advisory aspects of the role in order to assess any difficulties in their compatibility. The second phase involved the collection of information from the auditor's clients, their potential clients, and from other service groups within the authority likely to be affected by an expanded audit role. The paper stresses the need to take account of the client's perceptions of the expanded role and emphasises their relevance in determining the extent to which the expansion will succeed.

This study aims to examine the mediating effects of corporate governance mechanisms like the board of directors on the association between disruptive technology adoption by audit clients and the risk of material misstatements, including inherent risk and control risk. In particular, the authors study the mediating effects of board characteristics such as board size, independence and gender diversity.

Based on a sample of 100 audit clients listed on the FTSE 100 from 2015 to 2021, this study uses structural equation modelling to test the research objectives.

The findings indicate a significant and negative association between disruptive technology adoption by audit clients and inherent risk. However, there is no significant evidence observed for control risk. The utilisation of disruptive technology by the audit client has a significant impact on the board characteristics, resulting in an increase in board size, greater independence and gender diversity. The authors also find strong evidence that board independence mediates the association between disruptive technology usage and both inherent risk and control risk. In addition, board size and gender exhibit distinct and differential mediating effects on the association and across the two types of risks.

The study reveals that the significant role of using disruptive technology by audit clients in reducing the risk of material misstatements is closely associated with the board of directors, which makes audit clients place greater emphasis on the construction of effective corporate governance.

This study offers essential primary evidence that can assist policymakers and standard setters in formulating guidance and recommendations for board size, independence and gender quotas, ensuring the enhancement of effective governance and supporting the future of audit within the next generation of digital services.

With respect to relevant stakeholders, it is imperative for audit clients to recognise that corporate governance represents a fundamental means of addressing the ramifications of applying disruptive technology, particularly as they pertain to inherent and control risks within the audit client.

This study contributes to the existing literature by investigating the joint impact of corporate governance and the utilisation of disruptive technology by audit clients on inherent risk and control risk, which has not been investigated by previous research.

The purpose of this paper is to explore whether internal audit's reporting relationship with the audit committee and the client's business risk environment impact external auditors' reliance on the work of internal audit.

An experiment is conducted using a 2×2 between‐subjects design where we manipulate the above two factors at strong and weak levels. Participants are 66 audit partners, managers and seniors, all experienced with clients having internal audit functions.

The results indicate that both factors affect external auditors' reliance on work already undertaken by internal audit and their use of internal auditors (IA) as assistants. The results also indicate that external auditors are more likely to use internal audit for control evaluation tasks than for substantive tests of balances. The study does not find any significant interaction effects between the two factors.

No prior studies have examined the influence of reporting relationship and client business risk on external auditors' reliance decisions in the current governance environment. Further, the paper examines the impact of these factors on reliance on work already undertaken by internal audit and on using IA as assistants, with respect to both control evaluation work and substantive testing of balances.

External auditors often rely on other professionals for the audit of the financial statements of their clients. Generally, external auditors rely on clients’ internal auditors. Reliance on internal auditors results in cost savings to the client. The objective of this study is to determine which of the criteria as mentioned by AI 610 will be used by the external auditors to evaluate the work of the internal auditors. Respondents of the study consist of those from the big four and non‐big four firms located in Kedah and Penang. A one‐quarter replicate of 2⁸ Kempthorne's design was used to determine the experimental task. The findings of the study indicate that technical competence and scope of function are the two most important criteria that external auditors consider in their reliance on internal auditors. Malaysian Institute of Accountants (MIA), being the standard setter of the auditing standards in Malaysia, will have to develop precise and operational criteria for these factors in planning the audits. The study also shows that there was consistency in audit judgement.

This study aims to examine the objectivity of accounting professionals based in India.

To examine the objectivity of accountants based in India, this study performs an experiment using a well-established instrument from prior literature. The authors asked accounting professionals based in India to act as either the seller or buyer in a hypothetical acquisition scenario. Participants were asked to evaluate the obsolescence of an apparel company’s inventory, assessing both the probability of inventory obsolescence and the likelihood they would propose an inventory write-down.

The results indicate external auditors and tax professionals were able to remain objective, reflected in the consistency of their assessments across the buyer and seller conditions. Internal auditors were less objective, evaluating inventory obsolescence as more likely when their client was considering buying a subsidiary than when their client was considering selling a subsidiary. Internal auditors were also more likely to recommend an inventory write-down adjustment when hired by the buyer than when hired by the seller.

This study informs regulators and accounting professionals. Offshoring has “prompt(ed) questions regarding the factors that affect the quality of work in India” (Dickey et al., 2022, p. 680). While the authors do not prescribe specific actions, this study provides evidence on the decision-making process of accounting professionals based in India that regulators might use to craft policy. Furthermore, this study responds to calls for additional evidence on the decision-making process of accounting professionals based in India (Spilker et al., 2016; Mohapatra et al., 2015), and for evidence on the objectivity of internal auditors (Burt and Libby, 2021; Stewart and Subramaniam, 2010).

Questions exist regarding the extent to which internal auditors should participate in the external audit, and wide variations are observed in practice. Many professional bodies increasingly advocate the view that increased coordination between the internal and external auditors, including increased use of the internal auditor for the external audit, provides more efficient and effective audit coverage. However, others maintain that internal auditors should not focus on areas that are the subject of external audit interest. This article attempts to shed light on this debate by using insights from transaction cost economics (TCE) to identify conditions under which organizations encourage internal audit participation in the external audit. An analysis of survey data collected from directors of Canadian internal audit departments indicate that some (TCE) variables, particularly transaction‐specific investment, are significantly associated with internal audit participation in the external audit.

Statement on Auditing Standards No. 9 (SAS 9) discusses the role of a client′s internal audit department (IAD) in the independent auditor′s examination. Despite the benefits of reliance on the client′s IAD to both the auditor and client, evidence indicates that SAS 9 has not been effectively implemented in practice. This article illustrates the use of the Analytic Hierarchy Process to develop a judgement aid for determining the overall reliance to be placed on a client′s IAD. The judgement aid illustrated may represent an initial step towards effectively implementing auditing standards requiring a great deal of subjective judgement in practice.

Information technology (IT) largely affected contemporary businesses, and accordingly, it imposes challenges on the auditing profession. Several studies investigated the impact of IT, in terms of the extent of use of IT audit techniques, but very studies are available on the perceived importance of the said issue in developing countries. This study aims to explore the impact of implementing IT on the auditing profession in a developing country, namely, Egypt.

This study uses both quantitative and qualitative data. A survey of 112 auditors, representing three of the Big 4 audit firms as well as ten local audit firms in Egypt, is used to gather preliminary data, and semi-structured interviews are conducted to gather details/qualitative-pertained information. A field-based questionnaire developed by Bierstaker and Lowe (2008) is used in this study. This questionnaire is used first in conducting a pre-test, and then, the questionnaire for testing the final results is developed based on the feedback received from the test sample.

The findings of this study reveal that auditors’ perception regarding client’s IT complexity is significantly affected by the use of IT specialists and the IT expertise of the auditors. Besides, they perceive that the new audit applications’ importance and the extent of their usage are significantly affected by the IT expertise of the auditors. The results also reveal that the auditors’ perception regarding the client’s IT is not affected by the control risk assessment. However, the auditors perceive that the client’s IT is significantly affected by electronic data retention policies. The results also indicated that the auditors’ perception regarding the importance of the new audit applications is not affected by the client’s type of industry. The auditors find that the uses of audit applications as well as their IT expertise are not significantly affected by the audit firm size. However, they perceive that the client’s IT complexity as well as the extent of using IT specialists are significantly affected by the audit firm size.

This study is subject to certain limitations. First, the sample size of this research is somehow small because it is based on the convenience sampling technique, and some of the respondents were not helpful in answering the surveys distributed for this research’s purpose. This can be attributed to the fear of the competitors that their opponent may want to gather information regarding their work to be able to succeed in the competition in the market so they become reluctant to provide any information about their firm. Even some people who were interested to participate were not having enough time because the surveys were distributed during the high season of their audit work and there was limited time for the research to be accomplished. Hence, it is difficult to generalize the results among all the audit firms in Egypt because this limits the scope of the analysis, and it can be a significant obstacle in finding a trend. However, this can be an opportunity for future research. Second, the questionnaire is long and people do not have enough time to complete it. This also affected the response rate. In addition to this, the language of the questionnaire was English, so some respondents from the local audit firms were finding difficulty in understanding some sophisticated IT terms.

This study makes some recommends/suggestions that can well be used to solve some practical problems regarding the issues concerned. This study focuses on accounting information system (AIS) training during the initial years of the auditors’ careers to help staff auditors when they become seniors to be more skilled with AIS expertise needed in today’s audit environment. Clear policy statements are important to direct employees so that IT auditors evaluate the adequacy of standards and comply with them. This study suggests increasing the use of AIS to enhance individual technical and analytical skill sets and to develop specialized teams capable of evaluating the effectiveness of computer systems during audit engagements. This study further recommends establishing Egyptian auditing standards in this electronic environment to guide the auditors while conducting their audit work.

Auditors should prioritize causes of risks and manage them with clear understanding of who receives them, how they are communicated and what action should be taken in a given community/society. So, they have to determine and evaluate all risks according to the client’s type of industry (manufacturing, non-financial services and financial). Auditors also have to continually receive feedback on the utility of continuous auditing (CA) in assessing risk. In particular, it is better for the auditor to determine how the audit results will be used in the enterprise risk management activity performed by the management. In addition, privacy has several implications to auditing, and so, it has to be reflected in the audit program and planning as well as the handling of assignment files and reports. Alike, retention of electronic evidence for a limited period of time may require the auditor to select samples several times during the audit period rather than just at year end.

As mentioned, this study is conducted within a developing country’s context. The use and importance of IT is reality of time. However, very few studies are devoted to explore the use/importance of IT in auditing in developing countries, and thus, this study carries a significance to have better understanding about it. Moreover, knowledge of how IT is used, the related risks and the ability to use IT as a resource in the performance of audit work is essential for auditor effectiveness at all levels including developing countries.