The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm
To what extent does internal control effectiveness increase the value of internal evidence?
Department of Accounting, College of Business, Iowa State University, Ames, Iowa, USA
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 …show more content…
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). 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.
Internal control effectiveness
Professional trends, particularly the demand for faster reporting of ﬁnancial information as suggested by Securities Exchange Commission’s (SEC) recent reporting period change, 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).
Click here to unlock this and over one million essaysGet Access
The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things
Arel, Beaudoin, Cianci, (2011) argue that "executive ethical leadership and an "high-quality" internal audit function, can positively guide accounting managers ' making decisions involving uncertainties."
According to an article in the CPA Journal, the auditor considers reliability of audit evidence collected and the reliability of that evidence to reduce the risk of financial statements containing undetected material errors. Compare and contrast at least two (2) types of evidence, and make a recommendation as to which you believe is the most reliable in reducing risk. Support your position.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate (Louwers & Reynolds, 2007). We believe that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for our opinions.
Legitimacy in accounting practices is ensured by the check and balance of having independent auditors from registered public accountant firms reviewing financial practices. The report features eleven sections and these sections pertain to accounting overview, independence of auditors to reduce interest conflicts, corporate responsibility, financial disclosures, tax returns, criminal fraud and various elements of white collar criminal activity (107th Congress
Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.
The final responsibility for the integrity of an SEC registrant’s internal controls lies on the management team. U.S. companies need to refer to a comprehensive framework of internal control when assessing the quality of financial reporting to determine that financial statements are being presented under General Accepted Accounting Principles, GAAP. The widely used framework is referred as COSO, Committee of Sponsoring Organizations of the Treadway Commission, sponsored by the following organizations American Accounting Association, the American Institute of CPA’s, Financial Executives International, the Institute of Internal Auditors, and the Institute of Management Accountants. COSO’s defines internal control as:
The presence of an external auditor allows creditors, investors or bankers to use financial statements that have been prepared with confidence. Although it does not guarantee the accuracy of a financial statement, it provides users with some reassurance that a company’s financial statements give a true and fair view of its financial position and its business operations. It also provides credibility, where in business, is a major asset. With credibility, the willingness of investors, bankers and others to relate and undertake business projects with a company increases. Credibility is also important to build positive reputations.
An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide
This includes the indirect ability of management to influence the career prospects of internal auditors, as well as the budget and planning of the internal audit function. This is exacerbated by internal auditors themselves using the function as a stepping stone to advance their career objectives. It also can be argued that the independence theory may be lost in such a culture, especially if it is combined with people within the organization perceiving internal auditors as partners, thereby subjecting the internal audit function to pressures threatening its independence, rather than recognizing the internal audit function as an independent assurance function("A Critical Analysis Of The Independence Of The Internal Audit Function: Evidence From Australia: Accounting, Auditing & Accountability Journal: Vol 22, No