The Importance of Account Relations when Responding to Interim Audit Testing Results*

Scott D. Vandervelde

Contemporary Accounting Research, 2006, vol. 23, issue 3, 789-821

Abstract: Auditors are expected to plan and adapt audit programs in response to changes in risk associated with each client. Results in the existing research have been mixed regarding whether auditors respond to changes in risk. Two possible explanations for the lack of responsiveness to changes in risk found in the existing research are that auditors succumb to profit pressure, and that researchers only analyze responses in the risky accounts without considering related accounts. This paper experimentally tests how auditors respond to changes in risk of material misstatement identified by means of interim audit testing results. The response to changes in risk of material misstatement is analyzed using planned audit hours across related financial statement accounts and at varying levels of profit pressure. Results indicate the following primary findings: (a) auditors respond to changes in risk of material misstatement by increasing planned audit hours in accounts related to the risky account, and (b) profit pressure does not affect the auditor's response to changes in risk. These results indicate that the relations between accounts must be considered in order to identify the auditors' response to changes in risk of material misstatement. In addition, the results are consistent with audit firms decreasing the emphasis on profit pressure due to the current importance that the market places on audit quality.

Date: 2006
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https://doi.org/10.1506/FCRW-18UC-1LRB-PHJA

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Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:23:y:2006:i:3:p:789-821

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