Using flowcharts to teach audit reports: an update

In the August 1991 issue of the Journal of Accounting Education, Groomer and Heintz (1991) presented an overview and detailed flowcharts for use in teaching audit reports. This article updates those flowcharts to reflect the reporting requirements of SAS No. 79 and SAS No. 82 ( AICPA, 1997), improve pedagogy, and provide a more efficient presentation. The utilization of flowcharts is a particularly effective way to communicate to the auditing student the operative logic of determining audit report types and format for GAAP-based financial statements.     

A microcomputer application for attribute sampling

A microcomputer application for applying attribute sampling to internal control and the audit process is explained and illustrated. The application allows the auditing student to design an attribute sampling plan, create a unique sample for each application and evaluate the results in terms of deviations from desirable internal control procedures. The application is constructed through a software package that enhances students' learning of attribute sampling and its relationship to the entire audit process.     

The lack of uniformity in statistical audit sampling terminology

There is currently no standard terminology in statistical audit sampling that is commonly accepted and used in all auditing textbooks. As a result, students and professionals are faced with the frustrating and arduous task of learning new symbols and terms when attending advanced auditing classes and continuing professional education courses and the public accounting profession has difficulty in testing adequately CPA candidates' proficiency in the statistical sampling area.This article examines the extent of the problem of lack of uniformity and suggests a possible solution.     

A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting*

This commentary analyzes the relationship of fraud risk assessments to other risk assessments by auditors. The Public Company Accounting Oversight Board notes that this is a problem area of current practice. Effective detection of fraudulent financial reporting requires an integrative accounting/auditing conceptual framework. As a result, this paper is as much about accounting theory as it is about auditing. To simplify the development of such an integrated framework, this paper uses an expanded risk model. This effectively results in a risk perspective on fraudulent financial reporting. There are many potential implications but the major findings are as follows. First, the study identifies the crucial role of benchmarks based on acceptable levels of risk to help differentiate between intentional and unintentional misstatements. Such differentiation is critical to successfully implementing the American Institute of Certified Public Accountants' Statement on Auditing Standards (SAS) No. 99 and international standards ISA Nos. 240, 540, and 700. Second, the paper shows the importance of not allowing the major categories of risks identified here from getting too high. This paper explains the need to set acceptable levels of these risks, either by standard‐setters as a matter of broad policy, or by individual practitioners as part of the terms of specific engagements. I propose that a major factor in the concept of “present fairly” be the acceptable levels of accounting risks that are defined here, especially the risks due to intentional forecast errors. Third, this paper clarifies how the fraud risk of SAS No. 99, and similar international standards, relates to the current audit risk model framework.     

Comparative Classical and Bayesian Interpretations of Statistical Compliance Tests in Auditing

Within the theory of statistics there are three main schools. The two longest established are based on the works of Fisher and of Neyman and Pearson, these often being loosely grouped together under the heading ‘classical’ statistics. The third and oldest in terms of historical development rather than broad acceptance is the school of ‘non-classical’ or, more precisely, Bayesian statistics. The philosophical and methodological structures of these three distinct brands of statistical thinking have some points of intersection but ultimately differ from one another irreconcilably. In practical terms, this divergence leads to incompatible and, in some cases, diametrically opposite inferential outcomes, at the level of substance and not merely form, all on the same data. In auditing, such inconsistencies can be shown, for example, in the case of a standard statistical compliance test (attribute sampling) of the test prescribed in nearly all audit sampling textbooks. From the outset, auditors have interpreted this kind of test in the way proposed and popularised by Neyman and Pearson. On comparing the Neyman-Pearson standpoint with its Fisherian and Bayesian alternatives, only the Bayesian view is seen to withstand logical criticism.     

Teaching audit reports: A flowchart approach

The effective and efficient communication of audit report material for historical generally accepted accounting principles (GAAP)-based financial statements is a challenging task for auditing educators. A sizable number of auditing standards focus on this subject matter. Moreover, several recent expectation-gap standards, notably Statement on Auditing Standards (SAS) No. 58, impact directly on the reporting issue. Two instructional issues are of concern with regard to audit report materials. They are (a) the complexity of the material and (b) timing-when this material should be presented. With respect to the complexity issue, SAS No. 58 and related standards are so complex that many auditing students are overwhelmed by the topic. With regard to timing, some instructors feel a need to communicate an overview of the reporting process when the topic is first introduced and then deliver a more detailed discussion later in the course. To address the complexity and timing issues, this paper illustrates two different levels of flowcharts. These materials may be used in the classroom by accounting educators to effectively communicate the set of reporting conditions and the related audit report responses.     

独立审计定价悖论问题研究——论审计产品经济属性与其定价机制的关系

审计产品的经济属性从私人产品发展到准公共产品,然而,其定价机制并未随之改变,具体定价过程仍由私人谈判确定。因此,审计产品的经济特性与定价机制的不匹配,本文将其称为审计定价悖论。     

Interprofessional conflict, accommodation, and the flow of capital: The ASB vs The securities industry and its lawyerS

In an earlier paper, Martens and McEnroe (1991) found that the Auditing Standards Board (ASB) substantially rewrote major sections of the exposure draft (ED) of Statement on Auditing Standards (SAS) No. 54 to accommodate the wishes of a special interest group, the legal profession. This study involves a similar examination of the development of SAS 72, from its status as an ED to its release as an official auditing promulgation. Specifically, an analysis is made of the positions existing in the ED for SAS 72, the comments submitted to the ASB, and the changes made to the final SAS in light of those comments. The results indicate that the ASB once again accommodated the desires of a special interest group; in this case, the securities industry and its lawyers. A reason for the accommodation is proposed in the context of certain sociological theories of the professions. It is suggested that the ASB, acting as an agent of capital, was convinced that a less restrictive standard was necessary in order to facilitate the role that underwriters play in the flow of investment capital.     

How can we explain internal auditing? The inadequacy of agency theory and a labor process alternative

This paper draws on labor process theory (LPT) to explain how capitalism creates conditions that give rise to a demand for internal auditing. Internal auditing developed from the metamorphosis of capitalism during the twentieth century, when capital gradually succeeded in institutionalizing structural control of labor processes to address the problem of control in inherently antagonistic capital-labor relationships. In this control context employees, management, and the board of directors are responsible for achieving the required rate of return on capital. With the premise that the literature has not adequately theorized the role of internal auditing in this context, this paper proposes an initial theorization of the role of internal auditing as a mechanism employed by management and the board of directors to control the labor process in the generation and realization of surplus value. Internal audit's assurance services to execute business activities according to management's conceptions, and its advisory services to enhance efficiency and effectiveness, are interpreted within the firm's overarching goal of maximizing the rate of return on capital employed. Future research agenda and methodological considerations are discussed.     

An Analysis of Comment Integration Involving SAS 54

The process by which auditing standards are established in the United States was criticized by the late Senator Metcalf (1977) and more recently by the Treadway Commission (1987). Their allegations involving the Auditing Standards Board (ASB) encompass many perceived deficiencies, ranging from the charge that the large accounting firms dominate the standard-setting process, to the notion that the auditing standards currently promulgated do not address emerging policy issues on a timely basis. However, despite these criticisms, there is a paucity of empirical research involving the actual formulation of auditing standards in the United States. Accordingly, this research investigates certain behavioural facets involving the evolution of Statement on Auditing Standards No. 54, Illegal Acts by Clients , along certain dimensions, including audit-firm size. Specifically, the paper examines reactions to the exposure draft of SAS 54 and the extent to which written suggestions were incorporated into the final standard. The results do not support the proposition that either audit firm size or an employee's membership on the ASB has a significant impact on achieving the integration of a respondent's comments into the final audit statement.     

Model-based auditing using REA

The recent financial crisis has renewed interest in the value of the owner-ordered auditing tradition that starts from society's long-term interest rather than management interest. This tradition uses a model-based auditing approach in which control requirements are derived in a principled way. A problem with this approach is that it has been proven hard to apply it in modern complex organizations. Making it feasible requires at least an adequate enterprise modeling approach. In this paper, it is shown that the REA ontology fulfills most of the requirements for such a model-based approach. The analysis also suggests some directions in which REA can be extended.     

The role of auditing in the fight against corruption

The purpose of this paper is to analyze how various types of auditing may contribute to fight corruption. While previous literature has primarily addressed auditing's ability to prevent corruption, this paper systematically explores auditing's potential to detect corruption. It argues that financial auditing has excluded corruption from the definition of fraud and instead classified it as ‘non-compliance with laws and regulations’. The main arguments for this exclusion is that corruption leaves no material errors in financial statements and no evidence for the auditor to follow. The paper refutes this, arguing that commercial and political corruption creates misstatements in the financial statements of the corruption giver's organization as well as the corruption receiver's organization. Thus, if auditing is to gain a more prominent role in the fight against corruption, auditing standards must include corruption in the definition of fraud, private and public sector auditors need to cooperate and exchange information, auditing techniques to detect corruption should be employed, and the auditing profession must embrace effective preventive measures such as anti-corruption certifications.     

Explaining attributes-sampling concepts: A hypothesis-testing framework

In most auditing texts, there is minimal explanation of the rationale supporting attributes sampling. A mechanical approach is often presented that lends little toward understanding why the steps are being performed. This paper utilizes a hypothesis-testing framework to explain the foundation underlying attributes sampling, the concepts involved, and the rationale supporting the procedures.     

The impacts of electronic commerce on auditing practices: an auditing process model for evidence collection and validation

The main purposes of this paper are twofold. First, the paper identifies and discusses the potential impacts of electronic commerce on auditing practices in the emerging paperless on-line transaction environment. Second, it provides two auditing process models that incorporate modern network security techniques and show how an audit can be conducted in an EC environment. A periodical auditing process model (PAPM) is proposed to demonstrate how secure electronic technologies can be used to facilitate the auditor's evidence collection and validation process for annual and semi-annual audits. We also present a continuous auditing process model (CAPM) which extends the functions of PAPM for continuous auditing. In CAPM, a real-time transaction monitoring system is used to link to firms' accounting information systems for assisting the auditor to detect abnormal activities and generate exception reports on a continuous basis. The CAPM approach intends not only to ensure integrity and effectiveness of the entire accounting system, but also to guarantee the correctness and usefulness of the constantly generated financial statements for public dissemination. The main contribution of this paper is that it illustrates a conceptual framework which shows the feasibility of continuously auditing electronic transactions in the EC environment. Copyright © 2000 John Wiley & Sons, Ltd.     

From common sense to expertise: Reflections on the prehistory of audit sampling

This essay argues that sampling emerges as a claimed “technique” in auditing in both the U.K. and U.S.A. much later than is commonly imagined. While practical auditing texts provide evidence that auditors were selective in testing prior to 1900, this is not explicitly articulated as sampling at least until the 1930s. Accordingly, statistically based sampling develops to rationalise practices that had been in place for some years and to invest auditing with a new scientific authority. The essay further suggests that the history of development in auditing technique may be decoupled from changes in audit objectives. Overall, the argument represents a preliminary stage in a wider programme for understanding auditing in its social and organisational context.     

Auditors' Liability, Vague Due Care, and Auditing Standards

This paper expands the set of previously considered liability rules to include a negligence liability rule with a vague specification of due care. Auditors who are negligent in conducting their audit are liable for losses that result from reliance on misstated financial statements. However, what constitutes negligence for auditors is not clearly specified in the law. Consequently, courts often resort to Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) as benchmarks for determining due care. A liability regime that consists of a vague negligence rule supports and amplifies the credibility of auditing standards. While auditing standards alleviate some of the vagueness that is inherent in the legal standard, they also form a lower bound on due care, since an audit of a quality that is lower than the quality that auditing standards require would be considered negligent. Thus, the vague specification of due care enables auditors to commit to audit quality as pronounced in auditing standards. This paper explores this link between professional standards and auditors' legal liability. It establishes that the commitment to auditing standards could not have been as credible as it is, if auditors' liability was determined based on the strict liability rule, or based on a negligence rule with a clearly specified due care, since under these two liability rules courts would not need to refer to auditing standards to establish fault. The paper also demonstrates that a legal regime where audit standards are used as a benchmark to evaluate negligence is not the same as a legal regime where due care is defined clearly. Therefore, previous studies that assumed a negligence regime with clear due care may have overstated the effort level that is induced by legal liability.     

Government audit supervision,financialization, and executives' excess perks: Evidence from Chinese state-owned enterprises

In recent years, the phenomenon of corporate financialization has become increasingly prevalent in China. This paper uses data from Chinese state-owned listed firms from 2006 to 2018 to investigate whether large-scale financial investments by companies facilitate executives' excess perk consumption, and whether government auditing, as an important component of the national governance system, can play a governance role in this behavior. The results show that corporate financialization behavior significantly exacerbates executives' excess perks, and government auditing can mitigate the effect of corporate financialization on executives' excess perk consumption. We find that increased cash flow is the mechanism by which financialization behavior positively affects executives' excess perks. Furthermore, this study reveals that the implicit corruption of state-owned enterprise executives through corporate financialization is primarily based on compensation psychology, which will reduce the effectiveness of monetary compensation contracts. However, government auditing can effectively constrain this influence.     

审计报告的不同解读

对审计职业来说,审计报告的标准化可减少审计成本和避免审计法律诉讼,还可约束恣意和为理性选择提供合理保障;而对社会公众来说,审计报告留下了太多职业保护的痕迹。审计报告如何权衡设计职业保护与社会公众利益间的关系,本文提出了三种建议。     

Natural Language Processing in Accounting,Auditing and Finance: A Synthesis of the Literature with a Roadmap for Future Research

Natural language processing (NLP) is a part of the artificial intelligence domain focused on communication between humans and computers. NLP attempts to address the inherent problem that while human communications are often ambiguous and imprecise, computers require unambiguous and precise messages to enable understanding. The accounting, auditing and finance domains frequently put forth textual documents intended to communicate a wide variety of messages, including, but not limited to, corporate financial performance, management's assessment of current and future firm performance, analysts’ assessments of firm performance, domain standards and regulations as well as evidence of compliance with relevant standards and regulations. NLP applications have been used to mine these documents to obtain insights, make inferences and to create additional methodologies and artefacts to advance knowledge in accounting, auditing and finance. This paper synthesizes the extant literature in NLP in accounting, auditing and finance to establish the state of current knowledge and to identify paths for future research. Copyright © 2016 John Wiley & Sons, Ltd.     

Initial Public Offerings on the Unlisted Securities Market: The Impact of Professional Advisers

This paper tests two hypotheses developed in the context of information asymmetry between companies making initial public offerings (IPO) on the Unlisted Securities Market and potential investors. It is argued that the status of the sponsor and audit firm are interpreted by potential investors as signals of an IPO's quality. The results indicate that for IPOs made during 1986–87 the level of discount and the status of the associated auditing firm are significantly related. Higher quality auditing firms are associated with lower levels of discount. A similar relationship for IPOs made during the period 1988–89 is not detected. The paper suggests that there were significant changes in the IPO market between these two periods. No relationship in either period is detected between the level of discount and the status of the sponsor.