Research Topics within the New Audit Risk Standards

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Research Topics within the New Audit Risk
Standards

• Presentation for the 2006 CAR PhD/Jr. Faculty
  Consortium
• William F. Messier, Jr.
• Deloitte Touche Professor
• Georgia State University

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New Risk Based Audit Standards

• Since the late 1990s public accounting firms have
  been implementing audit approaches referred to as
  risk-based auditing.
• In 2003, the IAASB issued 3 ISAs (315, 330 and
  350) and these were adopted into Canadian audit
  standards.
• In 2005, the ASB issued 8 SASs 3 of which map
  closely to the 3 ISAs.
• IAASB has a number of exposure drafts on other
  topics (e.g., materiality, group audits) that
  will be issued shortly and that are worthy of
  research.

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Motivation

• Kinneys comments at the 25th AJPT Conference
• Research about auditing is flourishing e.g.,
  audit fee and internal control deficiency data.
• Research in auditing is floundering little
  work being done on how audits are conducted and
  how they may be improved. Reasons (per Kinney)
• Professors lack of current auditing approaches.
• Audit firms have little incentive to disclose the
  proprietary techniques.
• Difficulty in acquiring participants.

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Areas for Research in Auditing

• Risk-based audits
• Materiality
• Evidence
• Group audits

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Risk-Based Auditing

• Limited research on risk-based auditing.
• Examples includeBallou, Earley Rich 2004 Choy
  and King 2005 Kotchetova and Messier 2006
  Kotchetova, Kozloski Messier 2006, ODonnell
  and Schultz 2005 Salterio, Knechel Kotchetova
  2006.

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Figure 1 - Task Representation
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Salterio, Knechel, Kotchetova 2006

• Examine the interaction of strategic analysis and
  client performance measurement systems on auditor
  risk judgments.
• Note that some of their hypotheses tie back to
  the type of evidence/information available.
• Hypotheses are based on structural alignment
  theory.

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Salterio, Knechel, Kotchetova 2006

• Findings
• Auditors incorporate the information from a
  broader set of performance measures in their
  assessment of CBR and the RMM when benchmark data
  is available for performance measures that are
  common to multiple business units.
• On the other hand, benchmarking of unit-specific
  performance measures causes auditors to disregard
  the information contained in other performance
  measures that are not benchmarked but which are
  common to multiple business units.
• Auditors using an extensive strategic analysis of
  a client incorporate the risk implications of a
  broader set of performance measures in their
  judgments.

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Salterio, Knechel, Kotchetova 2006

• Findings
• The results indicate that differences in an
  auditors perception of a units relative
  performance affects their assessment of the risk
  for the unit.
• They observe that auditor judgments about client
  business risk are more responsive to the
  characteristics of the CPMS than are judgments of
  the risk of material misstatement.

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Kotchetova, Kozloski, Messier 2006

• Examine the linkages that underlie the risk-based
  audit approach outlined in recent auditing
  standards and firm methodologies.
• None of the studies previously mentioned examined
  the linkages of the risk assessments throughout
  the audit as suggested by the current audit
  guidance.

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Kotchetova, Kozloski, Messier 2006

• Research Questions
• How does the level of residual strategic risk
  (RSR) affect the number of business risks
  identified by the auditors?
• How does the number of business risks identified
  affect the auditors assessment of risk of
  material misstatement (RMM) and related financial
  statement implications (NFSI)?
• How does the performance of a business process
  analysis (BPA) affect the auditors assessments
  of RMM?
• Do auditors risk assessments vary depending upon
  whether the business process is a core (e.g.,
  product delivery) or supporting (e.g., human
  resources) process?
• Do auditors entity level assessments of RSR and
  client business risk (CBR) relate to their
  account level RMM assessments?

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Kotchetova, Kozloski, Messier 2006

• Some Findings
• Auditors identified more business risks when RSR
  was high.
• The greater the number of business risks
  identified, the higher the CBR and RMM
  assessments.
• Auditors RMM assessments at the account level
  are influenced by process level analysis and not
  by entity level CBR and RSR.

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Glover, Prawitt, Wood 2006

• This study is based on SAS No. 65 and it has some
  implications for PCAOB AS2.
• Comments at main conference.

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Materiality

• SAS No. 107 and IAASB ED.
• Nelson, Smith Palmrose TAR (2005) - rollover v.
  iron curtain methods for AJEs. See SAB 108.
• What are the approaches being followed in
  practice given AS2 and SAS No. 107.

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Evidence

• SAS No. 106 and ISA 500
• Categories of assertions
• Types of evidence and their diagnosticity

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Group Audits

• IAASB has an exposure draft. No guidance in US
  auditing standards.
• Planning and coordinating in such an environment
• Allocating materiality
• Reliance decisions

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Challenges and Pitfalls

• Most of the issues addressed in these standards
  are complex and not subject to easy solutions.
• Complexity of task instruments.
• Experience level of participants.