Can unpacking risk information in a group audit engagement increase auditors’ sensitivity to qualitative risk?

• In Event: Group Audits: Insights, Strategies, and Evidence for Standard Setting

Abstract

Regulatory inspection reports indicate that auditors do not always sufficiently assess and respond to the risks of material misstatement that arise in a group audit engagement (i.e., an audit of a reporting group that consists of multiple components). In this study, we investigate whether a decomposed risk assessment process, in which quantitative and qualitative risk factors are separately considered, increases auditors’ risk sensitivity compared to a holistic approach, in which quantitative and qualitative risks are jointly considered. We find that auditors following a decomposed approach are more likely to categorize qualitatively risky components as individually significant, plan to perform more substantive tests on these risky components (but a similar amount of planned work overall), and set component and group materiality at significantly lower levels. In other words, we find that decomposed processing results in more effective group planning decisions. Our findings should assist standard setters in their revision of the group audit standards.

Authors

• Ann Backof, University of Virginia

• Brant E. Christensen, University of Oklahoma

• Steven M Glover, Brigham Young University

• Jaime J Schmidt, University of Texas at Austin