Sally Wright

An Examination of Factors Affecting the Decision to Waive Audit Adjustments

The value of audit services is determined by an auditors ability to both (1) discover misstatements in the clients accounting system and (2) report those misstatements (DeAngelo [1981a, 1981b]). Audit adjustments reflect the auditors discovery of a potential breach in the clients accounting system. The decision to waive an audit adjustment is important, since it can potentially lead to misleading financial statements. Waiving an adjustments) may also result in litigation and loss of auditor reputation. Despite its importance, we have very little empirical evidence on the decision to waive an adjustment. The purpose of this study is to initiate an understanding of the importance placed by auditors on a number of factors noted in the literature in determining whether a proposed audit adjustment is waived. The study reported here utilizes archival data gathered from actual audit engagements to examine variables that may explain the decision to waive an audit adjustment. The findings reveal that in addition to materiality, a number of factors appear to be considered, including directional impact on income, the nature of the adjustment (objective versus subjective), and size of the client. Finally, a number of adjustments exceeding materiality were waived, highlighting the need for future research to more fully understand factors affecting this important decision and to ensure that business decisions (e.g., client pressures) do not overly influence the auditor.

Are Financial Auditors Overconfident in Their Ability to Assess Risks Associated with Enterprise Resource Planning Systems

The first objective of the current study is to examine the extent to which financial auditors recognize heightened risks associated with an enterprise resource planning (ERP) system, as compared to a non‐ERP (legacy) system, in the presence of a control weakness over access privileges. The second objective is to assess the propensity of financial auditors to consult with information technology (IT) audit specialists within their firm when assessing ERP and non‐ERP system risks during the planning stage of an audit. One hundred sixty‐five auditors participated in an experiment in which we manipulated system type (ERP versus non‐ERP) and measured auditor type (IT audit specialists versus financial auditors). Both auditor types indicate significantly higher business interruption, process interdependency, and overall control risks with the ERP, as compared to the non‐ERP, system. Additionally, while IT audit specialists assess significantly higher network, database, and application security risks with the ERP...

A cooperative organizational form for hospitals.

Hospitals face severe financial pressures at the same time that patients and physicians are demanding quality medical care and the latest technology, which is becoming increasingly costly. Hospitals must consider adopting cooperative organization system, which groups physicians, nurse and administrators together in teams to plan jointly and allocate resources

The Impact of Changes in the Reporting Environment on the Disposition of Proposed Audit Adjustments

We present evidence on the resolution of proposed audit adjustments during a unique period of time immediately following several US financial scandals and surrounding the passage of the Sarbanes-Oxley Act (SOX). During this period auditors and clients both faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, annual inspections and a new external regulator (i.e., the PCAOB). In comparison with prior studies we also consider a broader range of factors potentially impacting the resolution of proposed adjustments including the affect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find a dramatic reduction in the proportion of waived audit adjustments when compared to prior studies, suggesting calls for greater auditor and client responsibilities increased conservatism. Results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although there is no pattern of favoring such clients. We also find that adjustments are more likely to be waived for clients with stronger internal controls, especially larger clients, and for repeat adjustments. Overall, the results suggest that there is increased conservatism in the resolution of proposed adjustments.