bluuebunny/crossref_metadata_2025_split huggingface dataset:
A Comparative Evaluation of Belief Revision Models in Auditing
Authors: Krishnamoorthy Ganesh , Mock Theodore J. , Washington Mary T. 
Published: April 2008

External auditors typically gather audit evidence in a sequential fashion and revise their estimates of likelihood of material misstatements based on the evidence collected. Optimal utilization of audit evidence can help control audit risk and improve audit efficiency and effectiveness.
This paper first shows how a typical audit risk assessment and belief revision task can be modeled using four theoretical models of belief revision. Then the descriptive properties of these models are evaluated based on the actual judgments of experienced auditors who assessed the likelihood of error in a task involving inventory valuation. A realistic audit case was administered to 101 experienced auditors. Models based on the following theories were evaluated: a version of Bayesian inference labeled Cascaded Inference Theory (Schum 1987; Schum and DuCharme 1971), two versions of the Belief Adjustment Model (Hogarth and Einhorn 1992), and a version of the Dempster-Shafer Theory of Belief Functions (Srivastava and Shafer 1992; Shafer 1976).
The experimental task involves belief revision after combining evidence about the reliability of a client's internal control system with substantive evidence relating to inventory pricing. Both the experimental and manipulation check results show that the auditors were sensitive to differences in the source reliability and diagnosticity of the manipulated audit evidence. The analytical results reveal that the four models differ in the way they interpret evidence relating to internal control system reliability and the manner in which such evidence is aggregated with price test evidence. Yet, all four models correctly predict the direction of auditor belief revision. The study reveals that important structural differences in the models result in differences in the magnitude, but not the direction of belief revision. This theoretical and empirical evidence has heretofore been unavailable in the literature. Further, the version of the Hogarth and Einhorn (1992) Belief Adjustment Model that views control systems reliability as negative evidence is the only model that captures both the direction and magnitude of auditors' belief revision. Finally, auditors' belief revision was lower than that predicted by the remaining three models, with the extent of discounting ranging from 31 percent to 40 percent. Under-utilization of evidential value with respect to any of the models implies opportunities to improve audit performance either through training or with decision aids. The paper discusses implications for both audit theory and practice.
Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation
Authors: Johnstone Karla M. 
Published: April 2008

Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firm's risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process.
To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement. In terms of risk adaptation, partners screened clients based on the clients' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactive risk-adaptation strategies (e.g., adjusting the audit fee, making plans about necessary audit evidence, etc.) to make less “acceptable” clients more acceptable. It appears that avoiding risk, rather than proactively adapting to risk, is descriptive of how audit partners currently make the client-acceptance decision.
Decision Processes in Audit Evidential Planning: A Multistage Investigation
Authors: Wright Arnold M. , Bedard Jean C. 
Published: April 2008

This paper reports the results of a verbal protocol study designed to assess how variation in inherent-risk factors affects auditors' decision processes throughout audit planning, including the tasks of risk assessment, generation of hypotheses, and development and justification of audit programs. The audit risk model prescribes that audit program plans should be designed to respond to client risk factors. Auditors should be able to identify potential errors that may occur given the risks present and design program plans to test for the presence of these errors. Client inherent-risk factors were varied between subjects to create high- and low-risk conditions and a seeded error enabled assessment of effectiveness in hypothesis generation and audit test planning.
We find that client risk factors have pervasive effects throughout planning, affecting the concentration on error hypotheses, audit program effectiveness, and justification for audit tests. However, risk factors were not associated with differences in extent of testing or with justification of extent decisions. Our findings also suggest that recognition of risk factors may provide a stimulus to auditors with less experience to improve performance in the planning process. These results highlight the importance of identifying and communicating client risk factors to all audit team members in the planning stage.
Going-Concern Opinions: The Effects of Partner Compensation Plans and Client Size
Authors: Carcello Joseph V. , Hermanson Dana R. , Huss H. Fenwick 
Published: April 2008

Partner compensation plans in large accounting firms tend to emphasize either local office profits or worldwide firm profits (“small-pool” or “large-pool” firms, respectively) (Trompeter 1994). Some have expressed concern over possible impairment of auditor independence when a small-pool compensation plan is used, and Trompeter (1994) found in an experimental setting that partners in small-pool firms were less likely to require income-decreasing adjustments.
We examine, in an archival setting, the association of partner compensation plans and client size with auditors' propensity to issue going-concern audit opinions to stressed clients. We find no evidence that auditors' going-concern reporting decisions were directly affected by partner compensation plans. However, there is evidence of an interaction between partner compensation plans and client size. This interaction suggests that auditors in small-pool firms may be more sensitive to client size than partners in large-pool firms when making certain going-concern opinion decisions.
Error Projection and Uncertainty in the Evaluation of Aggregate Error
Authors: Burgstahler David , Glover Steven M. , Jiambalvo James 
Published: April 2008

At the end of the audit process, auditors evaluate the risk that aggregate financial statement error exceeds materiality. This evaluation is complex in that it requires a consideration of known error, projected error, and sampling risk related to various segments of the audit. If the risk of material aggregate error is unacceptably high, the auditor can require the client to make adjustments for known and/or projected errors to reduce audit risk to an acceptable level.
Results of an experiment indicate that auditors tend to underestimate the effect of both projected error and uncertainty when evaluating aggregate error and the need for adjustments to financial statements. Auditors were provided information about known errors in four accounts and the results of sampling applied to two additional accounts for a hypothetical audit case. They were then asked to indicate the adjustments to the financial statements, which would be required before issuing a “clean” audit opinion. Comparisons of auditors' required adjustments with and without explicit error projections and error bounds suggest that auditors may not adequately consider projected error and sampling uncertainty in the absence of explicit projections and error bounds.
The Effect of Auditor Attestation and Tolerance for Ambiguity on Commercial Lending Decisions
Authors: Wright Michael E. , Davidson Ronald A. 
Published: April 2008

We begin this study by developing a model of the decisions made by bank loan officers when they evaluate a commercial loan. The model indicates that loan officers make three sequential decisions: level of risk associated with the loan, whether to recommend the loan, and the interest rate to be charged. We assume that the financial information included with a commercial loan application can be audited, reviewed, or prepared by management with no involvement by their auditors. We argue that the level of attestation should affect the perceived credibility, or conversely, the relative amount of ambiguity of the financial statements presented by management. Tolerance for ambiguity should affect how commercial lending officers handle this ambiguity.
We test these effects by varying the level of attestation in a between-subjects experiment with commercial loan officers. Subjects are asked to make judgments on the risk of the loan, whether they would recommend the loan, and the interest rate to be charged. Subjects also completed a tolerance-for-ambiguity instrument.
Results of the study indicate that only tolerance for ambiguity significantly affects the risk-assessment judgment. Auditor attestation had no effect on risk assessment. Risk assessment in turn significantly affects the decision to recommend the loan. Finally, the previous risk-assessment decision, tolerance for ambiguity, and the interaction between attestation and tolerance for ambiguity significantly affect the interest rate decision.
An Experimental Assessment of Recent Professional Developments in Nonstatistical Audit Sampling Guidance
Authors: Messier William F. , Kachelmeier Steven J. , Jensen Kevan L. 
Published: April 2008

The American Institute of Certified Public Accountants has recently set forth significant revisions in its nonstatistical audit sample-size decision aid (AICPA 1999). In a controlled setting involving 149 experienced auditors, we test the effects of the new guidance on auditors' sample-size judgments, extending Kachelmeier and Messier's (1990) (KM) investigation of a previous AICPA (1983) decision aid.
We find that the current decision aid results in significantly smaller sample sizes than the previous aid. Further, auditors continue to “work backward” in their choice of decision aid inputs, resulting in sample sizes that are more intuitively acceptable. An optional supplemental worksheet added to the AICPA's guidance to assist the auditor in specifying tolerable misstatement generates a marginal increase in sample sizes, but does not eliminate the working-backward phenomenon. However, the supplemental worksheet significantly reduces sample size variability. Additional findings update the conclusions in KM by showing that the excess of decision-aided sample sizes over intuitive sample sizes in their study no longer applies. A final extension addresses a limitation in KM by showing that sample-size judgments are not sensitive to the variation of population size as a separate treatment factor. Overall, this study directs focus to an improved understanding of nonstatistical sampling judgments, which are of increasing importance in the contemporary audit environment.
The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence
Authors: Swanger Susan L. , Chewning Eugene G. 
Published: April 2008

The practice of outsourcing the internal audit function to the external audit firm has raised fears by many parties such as the SEC of possible independence impairment. The fear stems from the increased economic bond that exists when additional services are provided to an audit client, as well as the long-held view that internal auditing is a management function and, as such, is incompatible with the external audit function. This paper reports the results of a two-phase study of the perceptions of financial analysts regarding external auditor independence when a CPA firm performs both external and internal auditing services.
In phase 1, analysts' perceptions of auditor independence are greater when the client employs its own internal audit staff or outsources to a different CPA firm than when the external auditor also performs internal audit functions. Phase 2 results show that analysts' perceptions of auditor independence are higher when the internal audit services are provided by the staff of a different division of the CPA firm compared to a nostaff separation treatment. Perceptions do not differ between full and partial outsourcing treatments, which conflicts with the recent SEC rule limiting the extent of outsourcing arrangements.
Audit Firm Tenure and Fraudulent Financial Reporting
Authors: Carcello Joseph V. , Nagy Albert L. 
Published: April 2008

The Sarbanes-Oxley Act (2002) required the U.S. Comptroller General to study the potential effects of requiring mandatory audit firm rotation. The General Accounting Office (GAO) concludes in its recently released study of mandatory audit firm rotation that “mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence” (GAO 2003, Highlights). However, the GAO also suggests that mandatory audit firm rotation could be necessary if the Sarbanes-Oxley Act's requirements do not lead to improved audit quality (GAO 2003, 5).
We examine the relation between audit firm tenure and fraudulent financial reporting. Comparing firms cited for fraudulent reporting from 1990 through 2001 with both a matched set of non-fraud firms and with the available population of non-fraud firms, we find that fraudulent financial reporting is more likely to occur in the first three years of the auditor-client relationship. We fail to find any evidence that fraudulent financial reporting is more likely given long auditor tenure. Our results are consistent with the argument that mandatory audit firm rotation could have adverse effects on audit quality.
The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era
Authors: Ettredge Michael L. , Li Chan , Sun Lili 
Published: April 2008

This study analyzes the impact of internal control quality on audit delay following the implementation of the Sarbanes-Oxley Act (2002) (SOX). Unlike prior studies of audit delay that obtain information about internal control strength via surveys, or use fairly crude proxies for internal control quality, our study employs external auditor assessments of internal control over financial reporting (ICOFR) that are publicly disclosed in SEC 10-K filings under SOX Section 404. Thus, the empirical evidence provided in this study is both timely and reliable (i.e., not subject to small sample bias or weak proxies). Consistent with our expectation, we find that the presence of material weakness in ICOFR is associated with longer delays. The types of material weakness also matter. Compared to specific material weakness, general material weakness is associated with longer delays. Additional analyses indicate that companies with control problems in personnel, process and procedure, segregation of duties, and closing process experience longer delays.
After controlling for other impact factors, this study also documents a significant increase in audit delay associated with the fulfillment of the SOX Section 404 ICOFR assessment requirement. This suggests that Section 404 assessments have made it more difficult for firms to comply with the SEC's desire to shorten 10-K filing deadlines. Our finding thus supports and helps explain the SEC's decisions in 2004 and 2005 to defer scheduled reductions in 10-K filing deadlines (from 75 days to 60 days) for large, accelerated filers.
A Note on Self-Explanation as a Training Tool for Novice Auditors: The Effects of Outcome Feedback Timing and Level of Reasoning on Performance
Authors: Earley Christine E. 
Published: April 2008

This study extends a previous experiment (Earley 2001), showing how a “self-explanation” training intervention promoted learning in an auditing context. A causal model is proposed to examine the effect of providing outcome feedback (i.e., the correct answer) prior to or after self-explaining on the level of reasoning exhibited in self-explanations, and then the effect of level of reasoning on performance.
The model was tested through an experiment in which auditors were trained to assess the reasonableness of client-provided discount rates used in real estate valuation. The following three relationships were tested: (1) the effect of outcome feedback timing on the level of reasoning exhibited, (2) the effect of outcome feedback timing (without considering reasoning level) on performance, and (3) the diminishing effect of outcome feedback timing on performance when level of reasoning is introduced as a covariate, with level of reasoning then having a significant effect on performance. The results support the causal model, indicating that in the absence of outcome feedback, auditors exhibit a lower level of reasoning in their self-explanations, which then adversely affects their performance.
Audit Review: The Impact of Discussion Timing and Familiarity
Authors: Favere-Marchesi Michael 
Published: April 2008

I investigate how the trend in audit practice of including face-to-face discussions between the preparer and the reviewer affects audit team performance. Specifically, I focus on the timing of reviewer/preparer discussion and explore whether performance of the audit team in a task involving a review by interview process is affected by the timing of the discussion. The discussion timing compares senior/manager teams when review discussions are held either concurrently with or following the manager's review of the senior's work. Additionally, I explore how reviewers' familiarity with preparers may also affect the audit team performance. Familiarity is examined by comparing senior/manager teams where the managers had either positive prior involvement or no prior involvement with the reviewed seniors.
The audit team performance in generating hypotheses in a preliminary analytical review case was measured to assess any differences due to those attributes. Consistent with expectations, I find that post-review discussion and familiarity with the preparers are both, independently, important sources of audit team performance gains in a review process that includes face-to-face discussions.
Developing a Process Approach in the Business Core Curriculum
Authors: Walker Kenton B. , Ainsworth Penne L. 
Published: April 2008

This paper illustrates a business-process approach to delivering the core business undergraduate curriculum, consistent with the trend toward processmanaged organizations. In addition, it discusses how accounting education can be incorporated into this model and how a process-centered curriculum may give accounting students a broader and more integrated educational experience. This model conforms to recommendations from the academic accounting community and the accounting profession's demands for increased capabilities in accounting graduates.
Six business-process modules are outlined for the undergraduate business core curriculum, and the role of accounting in each of these modules is presented. In addition, we outline three teaching approaches to managing and delivering a process-centered program and discuss assessment of program outcomes. This proposed approach may provide business programs a mechanism for achieving several benefits that include: (1) the potential for a more effective way to deliver an integrated understanding of how businesses function, (2) a more efficient educational process, and (3) a framework for formulating and implementing a strategy for developing the accounting and business curriculum consistent with modern business practices.
Questrom vs. Federated Department Stores, Inc: A Question of Equity Value
Authors: Taylor Gary K. , Samson William D. , Gup Benton 
Published: April 2008

This case is based on a factual situation facing the courts. Allen Questrom, recently retired Chief Executive Officer (CEO) of Federated Department Stores, is suing the company for the amount of incentive compensation he earned during the five years he was Federated's CEO. This incentive compensation was to be based on the increase in the firm's total equity value over this five-year period, a time during which Questrom rescued the retailer from bankruptcy. Questrom and Federated are in dispute over Federated's equity value as of January 28, 1995. Therefore, the court is being asked to estimate Federated's equity value as of January 28, 1995 and then determine the amount of compensation that Federated owes Questrom.
The presiding judge (Gilbert Snider) wants you to analyze selected information from Federated's financial statements. As part of your analysis, the judge has asked you to explain the role that certain components of the financial statements have with respect to firm valuation. You are asked to estimate Federated's total equity value as of January 28, 1995 (the end of the five-year period under consideration) using the “free cash flow” and the “residual income” valuation models. The “residual income” model, which combines historical financial accounting and earnings forecasts to value companies, has generated considerable excitement in financial accounting academic circles and among accounting and consulting practitioners. Variants of the residual income valuation model, such as Stern and Stewart's EVA® (Economic Value-Added) and McKinsey's Economic Profit Model, have been widely discussed by academics and utilized by consultants to value businesses in a variety of settings and purposes.
A Classroom Experiment on the Benefit of Auditing in Financial Markets
Authors: Boylan Scott J. 
Published: April 2008

In this paper, I discuss a classroom experiment that can be used to illustrate how auditing can impact investor behavior and financial market performance by providing assurance on the quality of financial information. In particular, the experiment demonstrates that auditing can influence security prices and investment portfolio compositions in a way that benefits investors and lowers the cost of capital for firms. The experiment complements the material in auditing texts by creating an environment where students can directly observe how auditing influences investor behavior in a set of financial markets in which students trade securities based on the contents of a financial report. The simplicity of the experiment, its relatively short duration, and the formal inclusion of financial reporting make it a particularly attractive alternative for those who wish to utilize an auditing experiment in their classes.
In the experiment, students trade securities in a sequence of markets in which financial information pertaining to security values is made public. The quality of the information depends on whether it was audited, and varies from market to market. Data on transaction prices, security holdings, and investor profits from a typical sequence of markets are presented, as are a series of discussion topics designed to illustrate how to use the experiment and related data to address a variety of auditing-related issues.