Early debt extinguishment transactions and auditor materiality judgements: a bounded rationality perspective

Article Abstract:

Relationships between auditor materiality judgements and early debt extinguishment transactions are examined using data from 212 partner, manager and senior practitioners. During periods of increasing interest rates, transactions such as in-substance defeances and bond refundings result in overstated earnings, and thus, must be subjected to stricter materiality criteria. The study views the formation of audit judgments as a cognitive, social-behavioral process. The results suggest that the effects of the size and nature of such transactions, the trend of client profits and auditor experience on materiality judgements are boundedly-rational phenomena. The effectiveness of such a perspective is demonstrated by interview-based evidence.

Extinguishment of debts, Debt cancellation, Accounting and auditing, Disclosure statements (Accounting)

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Inherent risk assessment and audit firm technology: a contrast in world theories

Article Abstract:

The ways in which world theories affected auditors' assessment of clients' inherent risks were examined. The subjects were 146 partners from the Big 8 accounting firms. The subjects were asked to rate the relevance of 48 randomly ordered client dimensions in assessing inherent risk. The results indicated that firms with organic, rather than mechanistic, world theories used several factors when assessing inherent risk, including the involvement of top management, employee training, and internal accounting controls. Research on the way in which world theories help auditors understand clients may provide insight not offered by conventional audit research.

Accounting, auditing, & bookkeeping, Methods, Analysis, Management, Usage, Accounting firms, Accounting services, Organizational research, Design, Mechanism (Philosophy)

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Control and inherent risk assessments in client engagements: an examination of their interdependencies

Article Abstract:

An empirical study was conducted on the interdependence of control and inherent risks in auditor practice. Forty-eight client attributes were used in the control environment for client engagements. Results indicated that auditors tended to reduce testing and underspecify inherent risk whenever favorable attribute conditions appear. The Auditing Standards Board's SAS No. 55 (AICPA 1988) was found to increase the interdependence of control and inherent risks.

Auditors

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