To What Extent Does Internal Control Effectiveness Increase the Value of Internal Evidence?

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MAJ 23,3

To what extent does internal control effectiveness increase the value of internal evidence?
Diane Janvrin
Department of Accounting, College of Business, Iowa State University, Ames, Iowa, USA
Abstract
Purpose – This research seeks to examine whether two relevant characteristics, source objectivity and internal control effectiveness, influence how auditors evaluate evidence items supporting accounting estimates. Design/methodology/approach – A controlled experiment approach with a sample of 24 auditors from one large international firm. Findings – Results indicate that effective internal controls reduce the impact of
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For example, an evidence item, such as a report on the client’s major delinquent customer, may vary in both source objectivity (e.g. internal evidence prepared by audit client vs external evidence provided by independent credit bureau) and internal control effectiveness (e.g. weak vs strong)[1]. Few prior studies examine whether and how changes in multiple evidence characteristics impact auditor judgment (Goodwin, 1999). If auditors do not properly adjust how they evaluate evidence persuasiveness to reflect changes in multiple characteristics, judgment deficiencies (i.e. judgment performances that need improvement, Bonner (1999)) may occur. Weber (1999, p. 849) summarizes the state of audit evidence evaluation research as follows:
In spite of substantial research, we are only just beginning to understand how the various pieces (e.g. characteristics) of evidence that auditors collect should be weighted and combined to make the decision and the types of judgment pitfalls they must seek to avoid.

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Professional trends, particularly the demand for faster reporting of financial information as suggested by Securities Exchange Commission’s (SEC) recent reporting period change[2], put pressure on auditors to rely on internal rather than more persuasive external evidence items (CICA, 1999; Bierstaker et al., 2001; Helms, 2002; Hunton et al., 2003; LeGrand, 2002; SEC, 2002, 2005).

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