Relationships between leader behaviors and audit team performance

This study considers the nature and importance of leadership in the audit process. The relationships between audit team performance and leader behaviors, which are practised by in-charge auditors to supervise staff assistants, are examined in a field experiment. The results identify a number of leader behaviors which relate, either directly or through some intermediary factors, to audit team performance. For example, high performing audit teams tended to be supervised by in-charge auditors who allowed staff innovation, were considerate to the staff's personal needs, administered frequent positive reinforcement, relied heavily on time budgets, assigned a small number of tasks per staff member and administered negative reinforcement infrequently. These and other results appear to have implications for practicing auditors as well as future research in the area.     

Factors affecting the internal audit effectiveness: A survey of the Saudi public sector

This study assesses factors influencing internal audit effectiveness (IAE) in Saudi Arabia. Data were obtained from 203 managers and 239 internal auditors from 79 Saudi Arabian public sector organizations. Multiple regression analysis examines the association between IAE and five principal factors. Results suggest that management support for IAE drives perceived effectiveness of the internal audit function from both management's and the internal auditors’ perspective. Management support is linked to hiring trained and experienced staff, providing sufficient resources, enhancing the relationship with external auditors, and having an independent internal audit department. Saudi Arabia is representative of many developed and developing environments, and its recent tradition of governance and audit is mirrored in countries worldwide. Moreover, its specific cultural traditions involving clan and tribal allegiances, and pervasive and core religious beliefs, characterize the GCC countries, the Arab World generally, and indeed, many other developing countries, irrespective of wealth. Thus, links between management support and internal audit effectiveness are likely generalizable beyond the Saudi public sector context.     

Is the objectivity of internal audit compromised when the internal audit function is a management training ground?

We conduct an experiment with 74 internal auditors to examine the effects of using the internal audit function as a training ground for future senior managers. Specifically, we investigate internal auditors' willingness to resist current management's aggressive revenue recognition policies, assuming that internal auditors expect to move into senior management positions in the future. We also examine whether increasing the power of the board of directors can reduce threats to internal auditors' objectivity. This is the first study to empirically examine whether training grounds influence internal auditors objectivity. Results of our study indicate that internal auditors are less objective (i.e. they are more likely to side with management's aggressive revenue recognition policies) when they expect to move into senior management positions, relative to when internal auditing is not used as a training ground. We also find that empowering the audit committee further decreases the objectivity of internal auditors. These results suggest that board power can have unintended consequences on the behaviour of internal auditors and that board empowerment does not guarantee improved governance or improved oversight of financial reporting.     

Evaluating the Work of Internal Audit: A Comparison of Standards and Empirical Evidence

Numerous changes have recently been proposed or made to audit standards providing guidance for external auditors' evaluations of internal audit work. This paper reports the results of a study to compare the UK's Accounting Practices Board Statement of Auditing Standard 500, first, with similar standards promulgated by international, Canadian and US societies, and second, with audit quality factors derived from practising internal auditors. The data for the latter comparison was obtained from a two-phase study that first generated a set of potential quality factors through intensive structured interviews with audit groups from six different and diverse organisations, and then obtained evaluations of these factors from a large sample of internal auditors worldwide. Results first indicate that there are strong similarities between the guidance provided by SAS 500 and that proposed or promulgated by the UK, international, Canadian and US audit groups. Furthermore, the guidance provided by these SASs for items to consider in evaluating the quality of internal audit work are largely in agreement with the factors determined by practising internal auditors. There are, however, several items listed in SAS 500 that are not considered useful by internal auditors and there are other factors considered crucial by internal auditors but not mentioned in the SASs.     

The (mis)fit between the profile of internal auditors and internal audit activities

This study investigates whether there is a fit between the profile of internal auditors and the activities of the internal audit department (IAD). It also seeks to discover which type of internal auditors fit which type of internal audit (IA) activities. This is commonly referred to as the person-job (P-J) fit. Furthermore, this study investigates whether this (mis)fit is associated with the outsourcing/co-sourcing of IA activities and turnover within the IAD. Bringing strategic human resource management (SHRM) into IA can be considered as the key contribution of this paper. The results of this study are based on a questionnaire completed by 280 members of the Institute of Internal Auditors in Belgium. The results show that there is a fit between some characteristics of internal auditors working in an IAD and the activities of the IAD. The results also show that certain internal auditor characteristics fit with certain types of IA activities. However, the degree of fit varies. Furthermore, it was found that IADs that co-source/outsource were significantly more associated with a misfit between the profile of the internal auditors and the activities of the IAD, whereas a misfit was not significantly associated with a high turnover of internal auditors.     

Auditors’ self-perceived abilities in conducting domain audits

This study investigates the extent to which auditors’ ratings of self-perceived abilities correspond with their actual performance, and whether these perceptions are influenced by audit experience and effectiveness when conducting audits within their domain of specialization. One hundred forty-four (144) industry-specialized audit seniors and managers reviewed two sets of audit working paper cases, one in banking and one in healthcare. At the end of the review, the auditors rated their ability to perform an audit in their domain. The analysis of these ratings shows that auditors significantly inflated their perceived abilities relative to actual performance. The results indicate that differences in auditor rank are insignificant in terms of this propensity to overestimate self-perceived abilities relative to actual performance; however, above median effective auditors are far less overconfident than below median effective auditors. These results have implications for the audit profession in terms of training, assignments, performance evaluation, and the use of decision aids to mitigate the propensity toward overconfidence.     

The influence of auditor narcissism and moral disengagement on risk assessments of a narcissistic client CFO

Global capital markets rely heavily on independent and skeptical auditors as gatekeepers to provide assurance that corporate financial reports are free of material fraud. The rise of narcissism among the ranks of both client and audit professionals challenge this gatekeeper function. In addition, auditor moral disengagement may undermine auditor skepticism, further eroding public confidence in the integrity of financial reporting and the audit process. We conduct a quasi-experiment with 118 auditors from three international audit firms. In a simulated interview with a client CFO, we examine whether auditors underestimate risks of fraudulent financial statements due to the interactive effects of (1) client narcissism (manipulated verbally and nonverbally) and (2) auditor narcissism. We also examine the influence of auditor moral disengagement on client risk assessments. Results indicate that CFO verbal and nonverbal narcissism significantly influenced auditors’ assessment of management-related client risk. Moreover, auditor narcissism was found to interactively influence client risk inferences such that auditors higher in narcissism exhibited narcissistic tolerance (lower risk assessments) when the hypothetical CFO displayed high verbal narcissism. Auditor moral disengagement was negatively associated with client risk assessments. We discuss the implication of these findings on future audit judgment research, audit firm policy and training on maintaining auditor skepticism, and the audit oversight role of standard-setters.     

The effect of inspections,rotations and client preferences on staffing decisions

With increased regulatory focus on audits and concerns about whether audit regulation is achieving its stated aims, it is timely to investigate how regulator inspection of audit files and partner rotations may be affecting staffing decisions. This is an important issue, which affects all audits, as the calibre of staff allocated across engagements impacts the quality of audit work delivered. This study reports the results of an experiment where auditor participants allocate staff across two audits, where regulation anticipated (none, inspection, rotation) and a client request for the best staff (absent, present) are manipulated between‐subjects. We find that auditors allocate lower calibre staff when neither an inspection nor rotation is anticipated than when either is anticipated. When an inspection is anticipated, auditors allocate staff with more knowledge and compliance skills. When a rotation is anticipated, auditors allocate staff with more people skills. A client request for the best staff only has an effect when a partner is due to be rotated, where auditors allocate staff with more people skills in response to the client request. Our findings provide greater understanding of staffing decisions, which may affect audit quality if concerns around audit inspections and partner rotations are perceived by auditors as more important than the underlying risk or complexity of an engagement when allocating staff.     

The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution

Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross-sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample includes all of the former "Big 6" international accounting firms and clients from twenty-nine different industries.     

External auditors' willingness to rely on the work of internal auditors: The influence of work style and barriers to cooperation

The extent to which external auditors rely on the work of internal auditors is an important judgment. Recently, the Public Company Accounting Oversight Board has recommended that external auditors “rely (more) on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the Sarbanes–Oxley Act. Reliance decisions, however, are complex decision tasks that require professional judgment and may be influenced by a number of factors, both external (environmental) and internal (cognitive and affective), including the auditors' working style and pervious experiences related to barriers to external/internal auditor cooperation (e.g., previously experienced low versus high internal auditor objectivity and/or competence). We experimentally examine these influences in our research reported herein. Consistent with expectations, external auditors' work styles significantly influenced the extent of planned audit testing, internal auditor reliance judgments, and interpretation of analytical procedures results. Auditors' perceptions about internal auditors' competence and objectivity, developed over years of interaction, also influenced these judgments, and interacted with work styles. Inconsistent with expectations, auditor rank (senior versus manager) did not influence judgments.     

A study of whistleblowing among trainee auditors

Over the last number of years whistleblowers have been gaining prominence. This paper investigates some of the factors that influence the propensity or willingness to blow the whistle among trainee auditors. Three categories of factors are examined: audit firm organisational structures, personal characteristics of whistleblowers and situational variables.A survey of 240 final year students of the Institute of Chartered Accountants in Ireland was undertaken. Trainee auditors (just about to sit their finals) were asked about their confidence in internal and external reporting structures in their firms. Using four scenarios, audit trainees were questioned on their willingness to challenge an audit partner's inappropriate response to concerns raised during the audit. Finally, audit trainees were asked about the influence of legal protection on their likelihood of whistleblowing.Results indicate that where firms have adequate formal structures for reporting wrongdoing, trainee auditors are more likely to report wrongdoing and have greater confidence that this will not adversely affect their careers. Training increases this confidence. Trainee auditors also express a willingness to challenge an audit partner's unsatisfactory response to wrongdoing. Significant differences were found in attitudes depending on whether the reports of wrongdoing were internal or external. The willingness to report wrongdoing externally reduces for older (aged over 25) trainees.     

内部经济责任审计探析

《党政主要领导干部和国有企业领导人员经济责任审计规定》明确地指出内部审计机构对本部门和单位的内部管理领导干部经济责任进行审计。如何更好地开展内部经济责任审计是内部审计机构和内部审计人员面临的一项重要课题,笔者结合审计工作实际,通过对内部经济责任审计面临的难点问题的分析,进而提出了消解内部经济责任审计操作疑惑的对策。     

Audit report lag: the role of auditor type and increased competition in the audit market

This study investigates the effect of auditor type (private vs. state) and increased competition in an audit market on audit report lag (ARL). This is the first study to provide evidence regarding the effect of audit market competition on ARL. Utilising structure–conduct–performance theory, we predict that competition pressures private auditors to be more efficient and to have less reporting lag than state auditors. We also predict that competition among auditors after a liberalisation period forces auditors to be more efficient and to record less ARL than before. We use a unique data set in Iran, whereby the audit market liberalisation (an audit market where services were previously provided primarily by a state entity) has resulted in both state and private auditors simultaneously providing audit services. The findings are consistent with the following hypothesis, that is ARL is shorter for private auditors than it is for state auditors, and ARL decreases as competition increases in the Iranian audit market. Consistent with the structure–conduct–performance theory, the findings suggest that increased competition in the audit market results in higher efficiency, as reflected by a shorter ARL.     

The influence of litigation risk and internal audit source on reliance decisions

External auditor reliance on the work of internal auditors in an integrated audit of the financial statements and internal control is an important audit planning procedure that can impact audit efficiency and effectiveness. The purpose of this study is to examine how perceived auditor litigation risk and internal audit source affect external auditors' reliance decisions in an integrated audit environment under varying levels of risk of material misstatement. In an experimental study using 89 practicing Big 4 auditors, this study finds that auditors who perceive low litigation risk from placing reliance on the work of internal auditors will rely more on outsourced internal auditors than in-house internal auditors. The results also show that auditors' reliance decisions are sensitive to the level of account risk consistent with the risk-based approach to the integrated audit encouraged by the PCAOB.     

An Empirical Investigation of the Interface Between Internal and External Auditors

Professional standards place specific responsibilities on auditors for the discovery of material mis-statements in reports of corporate financial performance. Certain factors have been shown to increase the likelihood of fraudulent financial reporting. One warning sign is the potentially pervasive effect of a weak internal control environment consistent with a weak internal audit group. This study investigates the impact of internal audit department quality differences on auditors ‘willingness to place reliance on the work performed by internal auditors. The study also gives consideration to auditors’ recent experiences with material errors and irregularities and examines the influence of two previously untested individual auditor differences on audit judgment decisions: (1) conflict management style and (2) perception of internal/external auditor communication barriers. The results indicate that auditors attend to internal audit department quality differences and that individual auditor differences exhibit significant influence over auditor judgments. Implications for audit practice are considered and directions for future research are suggested.     

External auditors’ reliance on internal audit: the impact of sourcing arrangements and consulting activities

This study examines the impact of internal audit outsourcing and involvement in consulting on external auditors’ reliance on the work of internal audit. We test whether these factors influence reliance on internal audit work already undertaken and the use of internal auditors as assistants, distinguishing between control evaluation and substantive testing. Involvement in consulting impacts reliance on work undertaken and the use of internal auditors as assistants for control evaluation. External auditors make greater use of internal auditors as assistants for substantive testing when internal audit is provided in‐house. Overall, external auditors use internal audit more for control evaluation tasks.     

Internal audit reporting lines,fraud risk decomposition,and assessments of fraud risk

The main purpose of this research is to examine the effects of internal audit reporting lines on fraud risk assessments made by internal auditors when the level of fraud risk varies. Significant emphasis has been placed on the importance of reporting lines in maintaining the autonomy of internal auditors, but the perceived benefits of requiring internal audit to report directly to the audit committee have not been validated or systematically investigated. Results of an experiment involving 172 experienced internal auditors and additional survey findings indicate that internal auditors perceive more personal threats when they report high levels of risk directly to the audit committee, relative to management. Perceived threats lead internal auditors to reduce assessed levels of fraud risk when reporting to the audit committee relative to when reporting to management. This finding runs counter to the anticipated benefits of requirements that the internal audit function report directly to the audit committee, and it reveals potential conflicts of interest and independence threats created by the audit committee itself. We also investigate the effects of fraud risk decomposition on risk assessments made by internal auditors. We find that fraud risk assessment decomposition does not have the same effects on internal auditors as it has on external auditors, and the effects of decomposition do not align with the expected benefits of decomposition.     

监管处罚中的“重师轻所”及其后果:经验证据

在中国证券市场中,监管者对审计师的行政处罚通常采取师所并罚的方式,但也存在重师轻所的情况。后一种做法是否合适,在业内始终存在较大争议,也缺乏相关的经验证据。笔者认为,与师所并罚的方式相比,重师轻所的做法并未对涉案会计师事务所的质量控制体系作出明确警示和惩戒,从而置身于该体系中的事务所负责人(主要施为主体)以及其他未受罚注册会计师(主要承责主体)的审计行为更不可能受到警示和震慑。对2003～2005年间的监管处罚案件的经验分析支持了笔者的观点,从而提供了重师轻所处罚方式具有负面后果的证据。     

Sampling Practices of Internal Auditors at Corporations on the Standard & Poor's Toronto Stock Exchange Composite Index*

The purpose of this study is to find out how often statistical and nonstatistical audit sampling practices are used by internal auditors in companies listed on the Standard and Poor's (S&P) Toronto Stock Exchange (TSX) Composite Index and how such practices are related to the training and background of the respondents. We adapted the questionnaire used by Hall, Hunton, and Pierce (2002) in their survey of U.S. auditors in public accounting, industry, and government. Although 20 percent of companies responding do not have an internal audit department, the other 80 percent use statistical methods to plan sample sizes 15 percent (+5 percent) of the time, random sample selection methods 23 percent (+5 percent) of the time, but statistical evaluation methods only 10% (+4%) of the time. Despite the low percentage use, almost half of the respondents reported substantial training in statistical sampling and evaluation methods. Moreover, we found statistically significantly higher proportions of respondents with substantial training in audit sampling methods among companies cross‐listed on U.S. exchanges compared with companies listed only on the TSX. Finally, respondents with a chartered accountant designation tend to have a negative impact on the use of statistical methods in audit sampling, and companies cross‐listed on U.S. exchanges tend to have larger internal audit departments than companies listed only on the TSX.     

Determinants of leader behavior in an audit environment

Although leader or supervisory behaviors are generally thought to have a significant effect on subordinate performance, motivation and job satisfaction, the variables which affect an auditor's approach to supervision have not been investigated. In this paper we examine two categories of variables (situational variables and leader-person variables) which determine an auditor's use of key leader behavior. The determinants of leader behavior are examined in the context of an audit team composed of an accountant in charge (leader) and one or more staff assistants (subordinate). The results of our empirical tests provide some evidence that leader behavior is related to three variables: (1) the match between the accountant in charge's perception of the complexity of the task assigned to the staff assistant and the staff assistant's job experience, (2) the staff assistant's intolerance of ambiguity and (3) the accountant in charge's personality dominance.