The case for process mining in auditing: Sources of value added and areas of application

Process mining aims to extract knowledge from the event logs maintained by a company's ERP system. The objective of this paper is to make the case for why internal and external auditors should leverage the capabilities process mining offers to rethink how auditing is carried out. We do so by identifying the sources of value added of process mining when applied to auditing, which are as follows: 1. process mining analyzes the entire population of data and not just a sample; 2. critically that data consists of meta-data—data entered independently of the actions of auditee—and not just data entered by the auditee; 3. process mining allows the auditor to have a more effective way of implementing the audit risk model by providing effective ways of conducting the required walkthroughs of processes and conducting analytic procedures; 4. process mining allows the auditor to conduct analyses not possible with existing audit tools, such as discovering the ways in which business processes are actually being carried out in practice, and to identify social relationships between individuals. It is our argument that these sources of value have not been fully understood in the process mining literature, which has focused on developing it as a statistical methodology rather than on applying it to audit practice. Only when auditors and audit researchers appreciate what is new and unique about process mining will its acceptance in auditing practice become feasible.     

Public sector auditor identities in making efficiency auditable: The National Audit Office of Denmark as independent auditor and modernizer

This paper examines how the National Audit Office of Denmark (NAOD) manoeuvred in making the Danish military receptive to a performance-accountability project in the period 1990–2007. Evidence is provided from a detailed case study, where the actions of the auditors have been followed in their efforts to make the military activities auditable by focusing on the multiple and dynamic interactions between them, the auditee and others. This study contributes to our understanding of how auditors manoeuvre with their performance audit devices in different ways to make efficiency auditable. It appears that as the auditee initiated the implementation of a new accounting system called DeMars a stream of overflows threatened to destabilise it. Groups within the auditee were eager to put heat into the overflowing. This study illuminates how the auditors, equipped with their devices of purification in the later stages of the project, helped at least provisionally to contain the overflows and stabilize the construction. Due to such different manoeuvres by the auditors, this paper demonstrates the problems that emerge when state auditors manoeuvre in performance auditing with identities both as ‘modernizers’, i.e., participating in providing the reasons for change and defining its designs and as ‘independent auditors’, i.e., to legitimize the construction in which they participated themselves. Many allies to the auditors worked hard in protecting the NAOD as the two identities conflicted with each other during the execution of the project.     

Stakeholder perceptions of performance audit credibility

This paper examines the credibility of performance audit at the micro-level of practice using the general framework of Birnbaum and Stegner's theory of source credibility in which credibility is dependent upon perceptions of the independence of the auditors, their technical competence and the usefulness of audit findings. It reports the results of a field study of a performance audit by the Australian National Audit Office conducted in a major government department. The paper establishes that problems of auditor independence, technical competence and perceived audit usefulness continue to limit the credibility of performance auditing.     

Management letter comments: Their determinants and their association with financial reporting quality in local government

The issuance of management letters (MLs) as part of financial statement audits is a long-standing practice; however, previous studies of MLs are few and no previous research has tested the utility of MLs empirically. This paper reports a study of MLs issued by independent CPA firms pursuant to audits of Florida general purpose local governments. We investigate the determinants of ML comments, finding that such comments are influenced by auditee characteristics and auditor tenure but not by auditor specialization, a proxy for audit quality. Further, we explore the relationship between MLs and financial reporting quality. We observe a negative relationship between first-year ML comments and assessed financial reporting quality. When lagged one year, first-year ML comments bear a positive relationship with financial reporting quality. The absence of ML comments is positively associated with financial reporting quality. Our results suggest that MLs are beneficial to auditees. As such, our study should be interesting to policymakers, users of financial reports, auditees, and auditors.     

An empirical study of audit expectation-performance gap: The case of Libya

The purpose of this research is to empirically examine the causes of the audit expectation gap in Libya. The study builds on the frameworks developed by Porter (1993) and Porter & Gowthorpe (2004) to investigate the influence of the audit expectation gap to the auditing profession in the case of Libya. The data was collected through a questionnaire survey randomly selected members of four broad interest groups including auditors, auditees and audit beneficiaries both inside and outside the financial community were followed by in-depth interviews. A total of 988 questionnaires were distributed from which 431 questionnaires with usable responses were received from four groups. The overall usable response rate was 44%, ranging from 47% for the financial community audit beneficiaries to 41% for the auditors group. The findings of the study revealed that there exists audit expectation-performance gap and that the gap is as result of the following factors in different levels of percentages. Deficiency standards and deficient performance gaps constitute 49% and 15%, respectively, of the audit expectation-performance gap. The audit expectation-performance gap derives from society having unreasonable expectations of auditor’s significant proportion 36% of the gap. As result of the following interviews demonstrated that the objectives of auditing are not as clear to the financial statement users as they are to the auditors and the financial statement preparers in Libyan business environment. Further, we observe that reducing the expectations gap is to improve knowledge responsibilities between the auditors and user groups and understanding of the auditor’s role and responsibilities through the provision of auditing illegal acts.     

PERFORMANCE AUDITING AND THE NARRATING OF A NEW AUDITEE IDENTITY

This paper analyzes how performance auditing affects the auditee in different and sometimes unexpected ways. On the basis of a detailed case study of the Danish Ministry of Transport's encounter with performance auditing we argue that performance audit is a practice that generates multiple effects and that some of these effects can be characterized as a reconfiguration of the organizational identity of the auditee. In this process, accountabilities are reformulated and reallocated which sometimes lead to ‘blame games’ and strong feelings of discomfort. We draw on actor‐network theory and a narrative approach to study how performance audit reports produce narratives that picture new possible identities that the auditee in question must take into consideration. We argue that auditee identities are partly shaped by relations to ‘significant others’, such as the National Audit Office, the politicians and the press who all give accounts of who the Ministry is and ought to be. Furthermore, we argue that accounting and management information systems are enrolled as important ‘nonhuman’ actors that enable the suggested identity positions.     

The Regulation of Public Company Auditing: Evidence from the Transition to AS5

The replacement of Auditing Standard No. 2 (AS2) by Auditing Standard No. 5 (AS5) creates a natural experiment that sheds light on (1) potential inefficiencies caused by regulatory responses to a political crisis and (2) audit efficiency and effectiveness improvements resulting from the risk‐based approach embodied in AS5. We study these effects by examining the impact of AS5 on audit fees. We find that AS5 audit fees are aligned with auditee fraud risk, but not AS2 audit fees. Second, relative to AS2 benchmark levels, AS5 audit fees are, on average, lower for all auditees. Third, relative to AS2 benchmarks, AS5 fees are lower for lower‐fraud‐risk auditees but greater for higher‐fraud‐risk auditees. Overall, the evidence is consistent with (1) initial overregulation (via AS2) followed by reform (via AS5) and (2) auditors deploying a risk‐based audit approach to obtain both efficiency and potential effectiveness gains in audit production.     

A survey of models for determining optimal audit strategies

The problem studied in this survey is how to optimize the allocation of audit resources over an auditee population with respect to available population statistics. The auditees are assumed to optimize their expected utility based on information about the audit strategy. This survey is limited to models where the auditee can vary the fraud amount along a continuous scale.If the auditor is not able or willing to announce the audit strategy, a Nash equilibrium can be derived in which the auditor and auditee correctly anticipate each other's strategies. If the auditor announces the audit strategy in advance, the problem is formulated as a sequential game with perfect information which is solved as an optimization problem.Early models in the literature resulted in unrealistically high degrees of fraud. Later models have incorporated a split into one group of inherently honest auditees and another group of potentially dishonest auditees. The fraction of inherently honest auditees is exogenous.In this paper, the four combinations of non-announcing/pre-announcing the strategy and all potentially dishonest/some inherently honest auditees are studied. For the case of pre-announcing the strategy with some inherently honest auditees, two new solution methods are presented.Two main conclusions are as follows. First, models with some inherently honest auditees have greater external validity. Second, when a pre-announced strategy is feasible, as it often is with tax and benefit audits, the pre-announced strategy is preferred by the auditor over the non-announced strategy.     

Determinants of audit fees in Bangladesh

This paper reports the results of an analysis of the determinants of audit fees of both financial and non-financial companies in Bangladesh. The Bangladeshi audit services market is unusual in that there is no direct involvement of international audit firms in it. The results of the regressions show that the size of the auditee has the greatest influence on audit fees. Whilst there was no international Big Six grouping, it was possible to construct a group of Bangladeshi audit firms which commanded a price premium, based on their size and whether they had a link with an international firm of auditors. Financial services companies were found to have higher audit fees relative to non-financial companies. Subsidiaries of multi-national holding companies also had higher audit fees. The surprising result was that auditees which employed at least one qualified accountant had higher audit fees.     

The impact of audit penalty distributions on the detection and frequency of fraudulent reporting

We investigate how the distribution of the penalties incurred by auditors for failing to detect fraud influences their effort to detect fraud and auditees’ commission of fraud. We compare a probabilistic, skewed audit penalty to a penalty that automatically imposes the expected penalty of the probabilistic distribution (hereafter, a deterministic penalty). Our experiments show that a deterministic penalty with the same expected value of a probabilistic, skewed penalty increases audit effort to detect fraud and decreases fraudulent reporting by auditees and that these benefits hold in a game involving both auditee and auditor players.     

Performance Audit Scope and the Independence of the Australian Commonwealth Auditor-General

The introduction of performance auditing through the 1979 Australian Audit Act amendments continues to challenge the Australian Commonwealth Auditor-General's independence. By international consensus, performance auditing includes effectiveness issues. In contrast, the Australian amendments omit reference to 'effectiveness' issues and do not define 'efficiency' audit. Interpretation of these omissions varies. The Australian National Audit Office sees no prohibition on including effectiveness audit. But successive governments have attempted to curb the CAG's independence by excluding effectiveness auditing as a forbidden intrusion into policy areas; an exclusion that the ANAO rejects in relation to audit of effectiveness at operational levels. This study investigates the practical effect of these conflicts on performance audit scope. The results show that the ANAO consistently goes beyond audit of economy and efficiency to make substantive recommendations on effectiveness issues.     

Quis Auditoret Ipsos Auditores? Can Auditors Be Trusted?

This article explores the extent to which the audit profession and its practices promote public trust in audits. Differences between auditors and non‐auditors as to beliefs about the role of a financial report audit have long been discussed under the term ‘expectations gap’. However, this prior debate has tended to focus on non‐auditors’ alleged misunderstanding of audit processes without a corresponding understanding on the part of the profession as to why the public might place its trust in auditors. The study explores the nature of trust in an auditing context and notes that like any profession, auditing faces practical limitations but the inability to directly observe the conduct of audits combined with professional status create an ‘over trust’ expectation in the public. Changes in audit practices and culture have also exposed the profession to criticism. The article seeks to offer one approach by which the auditing profession can restore public confidence; namely, evidence‐based practice, which has proven effective in improving the quality of practice in medicine. Adoption of a reflective evidence‐based approach to audit practice offers the promise of greater audit quality and an improvement in the profession's accountability and public confidence.     

AUDITOR'S SKILL,AUDITING STANDARDS,LITIGATION, AND AUDIT QUALITY

This paper introduces a model of the market for audit services in which auditors differ in their levels of skill, which may or may not be observable and capture differences in ability. The model captures the interplay amongst auditing standards, litigation, and auditors’ levels of skill, which determines auditors’ responses to auditing standards. The paper shows that the quality of audit supplied by any auditor is increasing in the auditor's level of skill regardless of whether or not auditors’ levels of skill are observable. An increase in the quality of audit prescribed by auditing standards is shown to induce some auditors endowed with low levels of skill to decrease the quality of their audits so that the average quality of audit and economic welfare may actually decline as auditing standards are raised. Auditors’ choices of audit quality are furthermore shown to be increasing in trial awards. Incentives for trials and out-of-court settlements are shown to depend crucially on whether or not auditors’ levels of skill are observable. Only when auditors’ levels of skill are unobservable do trials obtain with some probability. When auditors’ levels of skill are unobservable, the introduction of either restrictions on costs awarded by the courts or an imperfection in the courts’ technology is shown to lead the most skilled auditors to supply audits of a quality strictly exceeding the quality prescribed by the prevailing auditing standards. When the courts err often enough, the most skilled auditors having exercised due care furthermore make offers to settle when sued.     

Internal control audits: Judges' perceptions of the credibility of the financial reporting process and likely auditor liability

This paper reports the results of a study in which fifty-seven sitting United States judges participated in a behavioral experiment to assess the perceived credibility of the financial reporting process and the legal risk auditors bear under conditions where they provide an internal control audit report (vs. no report) under two corporate governance environments. We find that participating judges believe internal control audits provide enhanced assurance that intentional misstatements do not exist and also serve to provide elevated protection to the public, but only under conditions of a strong corporate governance environment beyond current regulatory requirements. We also find that, after being informed of an undetected material fraud, judges who currently have high expectations of the auditing profession find auditors more liable when an internal control audit report has been issued (as compared to when no such report has been issued).     

浅议涉外税务审计工作

涉外税务审计是税务机关的一项重要税收管理工作。本文阐述了审计人员在审计过程中必须正确处理目的与手段、管理与服务、效率与程序之间的关系。同时建议应从提高对涉外税务审计工作的认知度,提高税务审计人员的专业素质,提高税务审计的信息化水平和完善涉外税务审计制度四个方面来完善我国涉外税务审计工作。     

Balance between auditing and marketing: An explorative study

This study explores how auditors’ attitudes toward marketing and their views on the importance of marketing affect how they balance their time spent on auditing and marketing activities. The purpose is to understand how changes in the business environment for auditors affect the relationship between the auditing profession and marketing. The study is based on a survey of 672 auditors in Sweden. Findings suggest that auditors with a positive attitude toward marketing spend significantly more time on marketing activities compared to those with a less positive attitude. Furthermore, auditors who view marketing activities as important spend significantly more time on marketing activities. The study controlled for the number of years as an auditor, age of the auditor, and firm affiliation. The results indicate that the theoretical distance between the auditing profession and marketing does not exist in practice to the same degree as in the past. These findings have implications for international auditing theory and practice in illuminating the relationship of marketing and auditing in a wider business context.     

Auditors as modern pharmakoi: Legitimacy paradoxes and the production of economic order

Despite a continuous flow of audit failure episodes the auditing profession keeps on being seen as technically and morally legitimate. This paper seeks to better understand how the paradox that surrounds the legitimacy of financial auditing develops. Relying on René Girard's theoretical developments on scapegoating, sacrificial rituals and mythification, we argue that auditors are often (but not always) selected as sacrificial victims in the wake of major corporate scandals. Rationalized mythologies are mobilized in the process by which auditors are morally and/or legally condemned, in a way which maintains or strengthens the legitimacy of the financial audit function. Fundamentally speaking, we contend that financial auditors can be conceived of as modern pharmakoi, constituting a reservoir of victims to sacrifice whenever fraudulent financial statements surfacing in the public arena threaten to severely disrupt the credibility and smooth-functioning of capital markets. We confront our theoretical translation of Girardian theory to the empirical domain through an analysis of the breakdown of accounting firm Arthur Andersen, in which we examine how the legitimacy paradox surrounding the financial audit function is produced and reproduced. One of our key conclusions is as follows: despite claims which commonly celebrate the rationality of capital markets, the latter's functioning and the sustaining of economic order are predicated on the production and reproduction of mythologies.     

A meta-analysis of factors affecting acceptance of information technology in auditing

Technology advancements provide opportunities for auditors to use new tools in the audit process. This study presents a synthesis of technology-related auditing research to identify factors affecting the use of technology in auditing. We analyze 88 studies in identifying 21 factors relevant to technology acceptance in auditing based on country of origin (developed or developing), user type (external or internal), type of technology (traditional or advanced), firm size (Big 4 or non-Big 4), and publication time (before and after 2013). Our results show that the most important factors in accepting technology from an individual perspective are facilitator conditions, perceived usefulness, and understanding of ease of use. Technology acceptance factors relevant to an organizational perspective are cost-benefit technology, competitive pressure, company readiness, and matching technology-task. Results suggest that perceived usefulness and subjective norm are more important in developed countries and Big 4 audit firms, while auditors in developing countries and non-Big 4 audit firms are more influenced by perceived ease of use, facilitating conditions, and organizational factors. Adopting traditional technologies is also more influenced by understanding the ease of use, subjective norms, and top management support than advanced technologies. This study contributes to the literature by assessing technology acceptance factors in auditing and thus provides policy, practice, and research implications.     

The dominant senior manager and the reasonably careful, skilful, and cautious auditor

This paper examines a paradox in corporate audit history that threatens the credibility of the current audit as a means of protecting stakeholders from corrupt senior managers. Using a historical analysis of legal cases of fraudulent reporting and subsequent public accountancy responses, the study reveals the paradox of a corporate auditor denying or limiting responsibility to detect material accounting misstatement (MAM) facilitated by dominant senior managers (DSM), while relying on the honesty of senior managers. The primary finding of the legal case analysis is the persistent presence of a DSM or team of DSM in the context of various contributing features, and the creation by Victorian lawyers of a model of excuses for the corporate auditor. The primary finding from the responses of public accountants is, within the context of the model of excuses and the assumption of managerial honesty, continuous denial, or limitation of auditor responsibility for detecting MAM facilitated by DSM. The consequence of this history is that DSM intent on MAM currently face corporate auditors generally untrained to assess the audit risk of managerial domination facilitating MAM. The paper's single recommendation is that corporate auditors be educated and trained to assess the audit risk associated with DSM facilitating MAM. The paper's contribution to corporate auditing is its use of historical analysis to bring together previously known but relatively disparate matters into a coherent whole that signals a fatal flaw in existing practice.     

Audit Labor Usage and Fees under Business Risk Auditing

The adoption of business risk audit (BRA) approaches during the 1990s by several leading audit firms has been the subject of considerable scrutiny and commentary. Under BRA, the auditor responds to the increasing complexity of auditee financial reports by acquiring a deep and comprehensive understanding of the auditee's industry, strategy, business models, and processes—tasks best accomplished by higher-ranked labor—and by employing this understanding to make audit labor allocations. Using proprietary data for 165 audits conducted in 2002, we investigate three propositions about audit labor use under BRA. First, relative to pre-BRA benchmarks for the same auditor, we expect BRA audits to use a greater proportion of higher-ranked labor. Second, we expect engagements with high assessed auditor business risk (ABR), a summary risk assessment that reflects the BRA auditor's rich understanding of the auditee, to be allocated more labor and more higher-ranked labor than pre-BRA benchmarks. Third, at all ranks of labor, we expect a positive association between assessed ABR and levels of labor use. We find empirical evidence consistent with these propositions. We also find that total labor use in our sample is only modestly lower than pre-BRA norms. Analysis of fee data from these engagements suggests that audit fees in 2002 are substantially less than would be expected under pre-BRA benchmarks. After controlling for audit labor use, both total fees and fees per hour increase with assessed ABR for first-year auditees but not for continuing auditees. Overall, our results provide evidence on the impact of the BRA audit regime and speak to the likely impact of BRA on audit effectiveness and efficiency.