تاثیر ریسک شکایت های قانونی و منبع حسابرسی داخلی در تصمیم گیری های قابل اتکا
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|107||2010||7 صفحه PDF||سفارش دهید||6750 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Advances in Accounting, Volume 26, Issue 2, December 2010, Pages 170–176
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.
The Public Company Accounting Oversight Board (PCAOB) explicitly encourages external auditors in Auditing Standard 5 (AS 5)1 to rely on the work of internal auditors especially in areas of low risk to increase the efficiency and effectiveness of an integrated audit (PCAOB, 2007). Despite this encouragement, external auditors have been reluctant to place reliance on the work of internal auditors perhaps due to their fear of litigation in the case of audit failure. The former chairman of the PCAOB, William McDonough, acknowledged the dilemma facing auditors, “Auditors have to use judgment. They have a great deal of leeway. But in a litigious society, there's no question that some auditors may be protecting themselves by doing work that all of us might think objectively is excessive” (Business Week Staff Writer, 2005). The current liability regime facing auditors concerned the U.S. Treasury Department enough to commission an Advisory Committee on the Auditing Profession to explore and make recommendations regarding the sustainability of the audit profession (Advisory Committee on the Auditing Profession, 2008). The concern over litigation costs may lead auditors to consider the need to be able to defend their actions in court which may lead them to choose to do the work themselves rather than rely on the work of others such as internal auditors. The purpose of this study is to investigate how voluntary reliance on the work of internal auditors is influenced by concerns of perceived litigation risk. Despite unambiguous encouragement from the PCAOB, auditors have been hesitant to rely on the work of internal auditors and instead perform the work themselves resulting in increased audit fees (Leffall, 2007). While research has examined the influence of litigation risk on the voluntary decision to rely on the results of a decision aid (Boatsman, Moeckel, & Pei, 1997), the impact of litigation risk on the decision to rely on the work of internal auditors has not yet been examined. Identifying possible sources of auditors' reluctance to rely on the work of internal auditors will help inform the auditors' planning process and improve audit efficiency. Perceived litigation risk may also influence other determinants of the reliance decision. Prior research has shown that the auditor reliance decision is influenced by characteristics of the internal auditor like competence, objectivity and quality of work2 (Gramling, Maletta, Schneider, & Church, 2004). However, research has not yet examined whether perceived litigation risk is an important determinant of the reliance decision and if it influences any of the other determinants. One such determinant which has been identified in prior research is the internal audit sourcing arrangement (Glover, Prawitt, & Wood, 2008). In the integrated audit environment, the internal audit department has an increased role in corporate governance matters and in producing credible financial reporting especially related to internal control matters (PCAOB, 2007). In fact, the New York Stock Exchange standards require all listed companies to maintain an internal audit function (SEC, 2003). The internal audit function does not, however, have to be performed by an in-house internal audit department. In fact, many companies outsource the activity to Big 4 audit firms other than their external auditor in hopes of reducing costs while still receiving comparable or superior service (Deloitte and Touche, 2005 and PriceWaterhouseCoopers (PwC), 2005).3 Even the Institute of Internal Auditors (IIA) recognizes that companies may outsource the internal audit function when it states: “The IIA believes that a fully resourced and professionally competent staff that is an integral part of the organization, whether insourced or outsourced, best performs the internal audit activity” (IIA, 2005).4 Prior research suggests that internal audit source affects the reliance decision as auditors rely more on the work of outsourced internal auditors when inherent risk is high in a financial statement audit (Glover et al., 2008). The purpose of this study is to extend this research to determine if internal audit source affects the reliance decision in an integrated audit of financial statements and internal control and to determine the impact of perceived auditor litigation risk on the relationship. In addition, because the PCAOB encourages external auditors to take a risk-based approach to the integrated audit and rely more on the work of internal auditors in areas of low risk (PCAOB, 2007), the above relationships are examined under varying levels of risk of material misstatement. To examine these questions, an experimental case was administered to 89 external auditors from one of the Big 4 public accounting firms. Participants were provided with information on a hypothetical audit client in which the internal audit source and account risk levels were manipulated while the participants' perceived auditor litigation risk was measured. The results indicate that auditors' perceived litigation risk and internal audit source interact to influence auditors' reliance decisions. Auditors who perceive lower litigation risk are more willing to rely on the work of outsourced internal auditors but there is no difference in reliance for those auditors that perceive higher litigation risk. In addition, the findings show that the external auditors' approach was consistent with the PCAOB's risk-based approach as they placed more reliance on the work of internal auditors (regardless of source or perceived litigation risk) for the low risk account than for the high-risk account, although the extent of reliance seems low. The next section reviews relevant prior research and develops the hypotheses. Section 3 describes the research method and Section 4 explains the results. The final section summarizes and discusses the findings including potential limitations and avenues for future research.
نتیجه گیری انگلیسی
This study examines the effects of perceived auditor litigation risk and internal audit source (in-house vs. outsourced) on auditor reliance decisions in an integrated audit environment under various levels of account risk of material misstatement. The results suggest that external auditors exhibit prospective rationality cognition. Auditors who perceive lower litigation risk increased planned reliance on the work of internal auditors while auditors who perceive higher litigation risk decreased their planned reliance to increase the defensibility of their actions. However, those who perceive lower litigation risk were also influenced by the internal audit source. Lower litigation risk auditors indicated a significantly greater willingness to rely on outsourced internal auditors than in-house internal auditors. Further analyses indicated that the results are consistent with source credibility theory as outsourced internal auditors were perceived as significantly more competent and more objective than in-house internal auditors. The results also found that external auditor reliance decisions are sensitive to account risk as more reliance was placed on the work of internal auditors in an account with a low risk of material misstatement than in an account with a high risk. Before discussing the implications of this study's results, several limitations should be noted. As with any experimental study, there were limits to the realism of the case. The participants were given limited information about the internal audit department and did not interact with the internal auditors described in any manner. In practice, personal reactions to the internal auditors may also impact the reliance decision. In addition, all participants were from one Big 4 public accounting firm. Participants from other Big 4 firms may evaluate internal auditors differently however the use of only firm allows the study to control for firm effects on auditors' perceived litigation risk. Finally, this study only examined two types of account risk and auditor evaluations may be different for other levels of account risk. The findings of this study will be of interest to audit firms as they consider their current practices for internal auditor evaluations. Given the increased audit work associated with an integrated audit, opportunities to appropriately place reliance on the work already performed by competent and objective internal auditors can benefit the audit firm as reliance frees resources to perform other audit tasks. These results will also be of interest to management of public companies. If decreased audit fees can result from increased external auditor reliance on work of internal auditors and the results show auditors more willing to rely on outsourced internal auditors, then outsourcing the internal audit function to another Big 4 firm may be a cost effective decision for public companies. The fact that external auditors react in the expected direction to account risk factors in an integrated audit is relevant to standards setters. External auditors placed more reliance on the work performed in a low risk account compared to a high-risk account. The extent of reliance, however, is still an issue. For the high-risk account, the extent of reliance was appropriately low for all conditions but for the low risk account, the extent of reliance was moderate, at best. This result may support the suggestion of DeZoort, Houston, and Peters (2001) that there is some threshold to the extent of reliance external auditors will place on the work of internal auditors. However, it is not clear whether the mean response levels obtained are “appropriate” in that there is no measure of actual audit effectiveness for the work of the internal auditors. The results of this study present opportunities for future research. An examination of the effect of other types of outsourced internal audit providers (e.g., Non Big-4 Firms, Protiviti) or other sourcing arrangements (e.g., partial outsourcing, only Section 404 testing) on the reliance decision could be performed. Because auditor perceived litigation risk has an influence on the reliance decision, future research is needed to determine if judicial decision makers increase auditor liability when reliance is placed on the work of internal auditors during an apparent audit failure.