Auditor's Report Contents Page"The Relationship Between Assessments of Internal Control Strength and Error Occurrence, Impact and Cause," by A. Wright and S. Wright, Accounting and Business Research (Vol. 27, Number 1, 1996): 5871.
This study examines the occurrence, financial impact and cause of detected misstatements as related to the assessed strength of internal controls. Auditors reported detailed information on 368 audit adjustments, representing 731 misstatements to individual accounts. The results indicated that as assessed internal controls weakened, the frequency of adjustments increased and adjustments were more likely to have an effect on income. However, error magnitude did not differ across control strength settings. Errors were more likely to reflect understatement of assets and liabilities when controls deteriorated, while when controls were strong, assets and liabilities were more frequently overstated. Finally, the causes of adjustments reflect a greater frequency of routine errors as controls deteriorate, although cutoff errors were relatively common across all control settings. These results suggest that different audit strategies are appropriate in response to variations in controls.
"Changes in the International Regulations of Auditors: (In)Stalling the Eighth Directive in the UK," by D. Cooper, T. Puxty, K. Robson and H. Willmott, Critical Perspectives on Accounting (Vol. 7, Number 6, 1996): 589613.
In 1984, the European Commission issued the Eighth Company Law Directive requiring each member State to ensure that its national rules met common standards for the education, training and qualification of statutory auditors. In this article, the authors explore the processes through which the Eighth Directive on the regulation of auditors has been implemented in the U.K. They argue that the Eighth Directive illuminates the effects of political and economic discourses on the development of accounting and auditing regulations and the protocols involved in installing such regulations into particular national contexts. The Eighth Directive represents a revealing moment in the shifts of political discourse in the U.K. and the problems reconciling new modes of economic and political thinking with international regulatory programs and institutions. Moreover, the implementation of the Eighth Directive in the U.K. cannot be comprehended outside of (1) an analysis of the problems the British government has had in "managing" the accountancy profession and (2) understanding the powerful image of the auditing industry as a key contributor to the U.K. economy.
"Audit Pricing in the Pension Plan Audit Market," by C. Cullinan, Accounting and Business Research (Vol. 27, Number 2, 1997): 9198.
In the U.S. pension plan audit market, audit fees are publicly disclosed, eliminating the potential for response bias present in most other audit fee studies. In addition, the pension plan audit market is not dominated by the Big 6 accounting firms, and audit fees in this market are smaller than in the public company audit market. This study examines the generalizability of the audit fee model by applying the model in the pension plan audit context. In accord with other audit fee studies, results indicate that client characteristics, including client size and risk, are associated with pension plan audit fees. In contrast with other studies, findings regarding market factors do not suggest a difference in fee structures between Big 6 and non-Big 6 firms, and the results indicate that auditor changes do not affect pension plan audit fees.
"The Effects of Lowballing on Audit Quality: An Experimental Markets Study," by N. Dopuch and R. King, Journal of Accounting, Auditing & Finance (Vol. 11, Number 1, 1996): 4568.
The purpose of this study is to investigate the potential effects of lowballing on audit quality. Critics of the audit industry often allege that the practice of lowballing provides a potential incentive for auditors to reduce their audit quality in order to be retained for future engagements with a client. The authors investigated this issue using experimental methods that had subjects providing a verification service for sellers of assets. Their results indicate that lowballing did not materially reduce service quality, relative to benchmark settings without lowballing, when subjects interacted in markets. However, lowballing did have a material effect in a setting with the combined conditions of a high degree of lowballing and no competitive market for the services.
"Some Empirical Evidence from Publicly Quoted UK Companies on the Relationship Between the Pricing of Audit and Non-Audit Services," by M. Ezzamel, D. Gwilliam and K. Holland, Accounting and Business Research (Vol. 27, Number 1, 1996): 316.
Using data obtained from a sample of 314 U.K. quoted companies, this paper examines three aspects of the relationship between fees for audit and non-audit services: (a) the extent and nature of the provision of non-audit services to audit clients; (b) whether the positive association between the level of audit fees and non-audit service fees found in the majority of non-U.K. studies holds in the U.K.; and (c) whether it is possible to throw further light on the nature of the relationship between audit fees and non-audit service fees by exploring the interaction between non-audit services and other factors that appear to affect audit pricing. The authors results suggest that (1) income earned by audit firms from non-audit work for quoted clients averaged nearly 90 percent of the levels of audit fee earnings in 199293; (2) the extent of voluntary disclosure of the breakdown of non-audit services was limited and the existing disclosure requirement allowed considerable variety in the manner in which non-audit service fees incurred or paid abroad were disclosed; (3) there was a significant positive association between fees for audit and non-audit services similar to that reported in the majority of U.S. and Australian studies; and (4) four of the nine interaction terms introduced were significant, implying that non-audit service fees may moderate the association between other explanatory variables and audit fees.
"Original and Cumulative Prospect Theory: A Discussion of Empirical Differences," by H. Fennema and P. Wakker, Journal of Behavioral Decision Making (Vol. 10, Number 1, 1997): 5364.
This paper discusses the differences between prospect theory and cumulative prospect theory. It shows that cumulative prospect theory (CPT) is not merely a formal correction of some theoretical problems in prospect theory, but it also gives different predictions. Some experiments by Lola Lopes are re-analyzed, and are demonstrated to favor cumulative prospect theory over prospect theory. It turns out that the mathematical form of CPT is well suited for modeling the psychological phenomenon of diminishing sensitivity. The key feature of CPT is that it permits a satisfactory modeling of diminishing sensitivity, not only with respect to outcomes but also with respect to changes in probabilities. A major motivation for this paper has been to demonstrate the central role of diminishing sensitivity in human decision making.
"The Provision on Non-Audit Services and the Pricing of Audit Fees," by M. Firth, Journal of Business Finance & Accounting (Vol. 24, Numbers 3 & 4, 1997): 511525.
The purpose of this paper is to add to the empirical literature on audit pricing by examining audit fees paid by companies listed on the Oslo Stock Exchange. This study examines the determinants of audit fees and the derived explanatory models that can be used to predict future fees and the fees of non-listed companies. Some concern has been expressed over the provision of other services to the audit client by the auditor and there is some speculation that low audit fees are being used to procure clients who then give lucrative consultancy business to the accounting firm. The size of the client, measured as total assets, is the major force in determining the audit fee. Non-audit services appear to be on-going assignments. There appears to be no plausible reason for the positive association between audit fees and consultancy fees. Further research using larger or longer time period data sets is needed to investigate the relationship between audit fees and consultancy fees.
"Functionalist and Conflict Views of AICPA Code of Conduct: Public Interest vs. Self Interest," by C. Lindblom and R. Ruland, Journal of Business Ethics (Vol. 16, Number 5, 1997): 573582.
The sociological models of functionalism and conflict are introduced and used to analyze professionalism in accounting as it is manifest in the AICPA Code of Conduct. Rule 203 of the Code and provisions of the Code related to the public interest are examined using semiotic analysis to determine if they are most consistent with the functionalist or conflict models. It is determined that the Code contains semantic defects which result in different interpretations of the Code to different readers. The defects found are most consistent with the conflict model of professionalism. This has implications for the public and for individuals within the profession, making the Code less useful to both groups. The defects are seen as a potential battleground for the self-interest vs the public interest orientation of the accounting profession.
"Allocating Audit Resources to Detect Fraud," by P. Newman, S. Rhoades and R. Smith, Review of Accounting Studies (Vol. 1, Number 2, 1996): 161182.
This paper addresses the allocation of audit resources across different auditable units when misstatements may occur in any or all of the units. The authors consider two benchmark scenarios. In the first, the extent of overstatement affects only the cost of detection, but not the effectiveness of audit inputs in determining the likelihood of detection. In the second, overstatement directly affects the likelihood of detection but not audit cost. In a two location setting, if overstatement affects only audit effectiveness, the realized value at one location has no impact on the reported value at the other. In addition, the auditor allocates an identical number of audit resources to each location. In contrast, if overstatement affects only audit cost, the agents reporting strategy reflects interdependencies between both realized values and audit costs across locations.
"Expertise and the Construction of Relevance: Accountants and Environmental Audit," by M. Power, Accounting, Organizations and Society (Vol. 22, Number 2, 1997): 123146.
This essay describes the strategies by which accountants in environmental auditing have attempted to represent themselves as relevant experts. A shift in regulatory style has stimulated experimentation with new instruments of control, including voluntary schemes for environmental auditing which emphasize a management control system. Subsequent attempts to define the relevant knowledge base of environmental auditing and to accredit verifiers have created a stage on which accountants can promote their claims. The paper draws attention to the construction of an overlap between the skills required for financial and environmental auditing. In turn, this strategy requires that other forms of expertise, such as in the field of the applied sciences, must be subordinated within an audit process which is controlled by the accountant.
Auditor's Report Contents Page