Wally Smieliauskas

Sensitivity Analysis Of The Realized Risks Of Auditing With Uncertainty Concerning Internal Control Evaluations

Recent developments in the auditing literature indicate increasing concern about the relationships among different audit procedures in controlling ultimate risk in auditing. Ultimate risk can be defined as the risk of material errors remaining undetected after the audit is completed. For example, the AICPAs SAS No. 39 [1981], the CICAs Extent of Audit Testing Study [1980], Kinney [1983], and a 1983 University of Georgia symposium on the extent of audit testing all reflect concern for the risk implications of combining various sources of audit evidence. Specifically, the concern is that realized ultimate risks can be greater than planned when combining various audit procedures and sources of evidence. Since the reliability of the audit process itself may be in question, this is an important issue of auditing theory and practice. In this paper I focus on the ultimate risk implications of combining internal control evaluations with substantive testing of details. In conformity with the professional literature (e.g., SAS No. 39), I focus on risk control and do not consider a more complete decision-theoretic approach that incorporates a total expected cost function. Consistent with much of the literature, I focus on the risks at the account or balance level and not on financial statements as a whole. Thus my objective is

A Proposal to Replace ‘True and Fair View’ With ‘Acceptable Risk of Material Misstatement’

This article examines argumentation factors which affect the truth of an audit opinion. We propose that the auditors report be revised to replace the words ‘true and fair view’ with ‘acceptable risk of material misstatement’. This would better align the communication of auditors with the characteristics of accounting information upon which they report. Adoption of the wording ‘acceptable risk of material misstatement’ will facilitate a better appreciation by users of financial statements of the accounting estimates in financial statements.

Total Shareholder Return (TSR) and Management Performance: A Performance Metric Appropriately Used, or Mostly Abused?

This article identifies the complex issues associated with the unconsidered use of total shareholder return (TSR) as a metric to represent the gains (or otherwise) in shareholder wealth and in contexts such as long-term incentive compensation and proxy voting by shareholders (including “say on pay�?). Not all TSR is created equal. Other measures, such as economic profit (EP), return on invested capital (ROIC), and future value (FV), need to be introduced to effectively interpret the quality of TSR. There are not one but eight states of the quality of TSR, and this has implications for effectively evaluating true pay-for-performance alignment and considered say-on-pay voting by institutional investors everywhere, including under the new Dodd–Frank legislation in the United States.

Influence factors analysis of online auditing performance assessment: A combined use between AHP and GIA

Purpose – Consistent with the requirements of online auditing performance assessments, the purpose of this paper is to propose an influence factors analysis method using analytic hierarchy process (AHP) and grey incidence analysis (GIA) to analyze the importance degree of influence factors on online auditing performance quantitatively.Design/methodology/approach – A grey incidence model is developed to analyze the influence factors of online auditing performance based on the characteristics of online auditing. Then, the AHP is used to compute the weights of each assessment criterion of online auditing, and the performance of online auditing are computed. Finally, representing the performance assessment results computed by AHP and values of each assessment criterion as two sequences, GIA is used to analyze the importance degree of influence factors of online auditing performance quantitatively.Findings – The main, secondary and minor influence factors of performance assessment of the online auditing projec...

Principles-Based Reasoning about Accounting Estimates†

This article proposes a key principle and related concepts for reasoning about accounting estimates. The reasoning is consistent with a principles-based professional judgment framework proposed by Ross Skinner and the Institute of Chartered Accountants of Scotland. The principle deals with reasonable ranges and related risk assessments in the audit of accounting estimates. It does so by using concepts first introduced by Boritz and Skinner and updates them for the requirements of CAS/ISA No. 540 and International Financial Reporting Standards. The article identifies the conditions for the existence of the benchmark ranges proposed by Smieliauskas in identifying fairly presented estimates. The need for a professional judgment framework and related guidance has been recognized recently by the International Federation of Accountants, a 2010 EU Green Paper, and the Public Company Accounting Oversight Board as a result of challenges auditors have been facing in the current reporting environment. This recognition echoes calls first made by Ross Skinner in his pioneering 1995 article, and reinforced by the FASB/IASB 2006 proposal for principles-based accounting standards.

Influence factors analysis of online auditing performance assessment based on AHP and GIA

An influence factors analysis method for online auditing performance assessment based on AHP (analytic hierarchy process) and GIA (grey incidence analysis) is proposed in this paper according to the requirements of online auditing performance assessments. In this method, a grey incidence model is developed to analyze the influence factors of online auditing performance based on the characteristics of online auditing. Then, the AHP is used to compute the weights of each assessment criterion of online auditing, and the performance of online auditing are calculated. Finally, representing the performance assessment results computed by AHP and values of each assessment criterion are set as two sequences, and GIA is used to analyze the importance degree of influence factors of online auditing performance quantitatively. The results of this study provide useful decision information to implement online auditing projects in China. Additionally, an effective method for analyzing the importance degree of influence factors of online auditing performance quantitatively is provided in this study.

Performance assessment of online auditing in China from the perspective of audit cost control

Continuous auditing is an increasingly important topic in todays audit environment. This paper reviews online auditing research in China from the perspective of audit cost control. First, we introduce the concept of informationization environment on audit cost control. Then, we review the positive and negative cost effects of implementing online auditing in China. Finally, the importance of online auditing performance assessment in China is discussed, and characteristics of online auditing performance assessments are summarized. In our discussion we review some of the research on performance assessment of online auditing. This paper provides a foundation for future research on performance assessment of online auditing based on developments in China.

Empirical Analysis of Accounting Estimates When Predictions are Poor

This study empirically analyzes the reliability of a significant class of accounting estimates by focusing on forecast errors in estimated pension returns for the period 2001-2010. These estimates have a major impact on the reporting of pension costs and income for even the largest and most solvent of plan sponsors, and hence they are a good example of the effect of accounting estimates on financial reporting. We find substantial evidence that these estimates are frequently not a faithful representation of actual returns in a given year, management’s reasonable ranges concerning them are poorly calibrated, the resulting accounting risk from forecast errors is unacceptably high in many instances, and, consequently, auditors cannot provide reasonable assurance on them. This has major implications for the use of these and similar estimates in financial reporting and accounting standards, and their verification by auditors.

An audit evidence gathering model in online auditing environments

Auditing is a continuous process that involves collection of audit evidences. Continuous auditing (CA) is an active research domain of computer assisted auditing in an informationization environment. Online auditing as used in China is one mode of continuous auditing. Electronic audit evidence (EAE) is a main form of audit evidence in an informationization environment. Quick and accurate electronic audit evidence in an online auditing environment has become an important decision problem for auditors in todays economy. Studies on this issue are very limited. This paper provides alternative quantitative tools to assist audit evidence gathering in online auditing environments. First, the concept of online auditing is analyzed; then, according to the characteristics of online auditing, an audit evidence gathering model is proposed. In addition, audit risk assessment methods of the audit evidence gathering model are proposed. Finally, we analyzed the benefits and drawbacks of this audit evidence gathering model.

Dynamic analysis of Bayesian audit strategies with tests of controls and reliability modeling

Purpose – The purpose of this paper is to summarize a simulation study that analyzed the performance of Bayesian audit strategies in a novel fashion – dynamically and with varying sample sizes depending on the extent of an auditors prior information.Design/methodology/approach – The prior information for the Bayesian strategies arises from a set of control tests that are evaluated making use of reliability theory. The entire audit strategy is simulated under systematically different control reliabilities and related amounts of total misstatements in an accounting population.Findings – The major finding is that robust Bayesian audit strategies that have recently been developed in auditing research are more sensitive to non‐sampling errors than existing strategies of audit practice.Practical implications – The authors find that there are differential effects of sampling error vs non‐sampling error on the Bayesian strategies and that controls testing does not need to be extensive to get full internal contro...