An Examination of Audit Partners’ Judgments and Decision Making Processes in the Audit for Internal Control over Financial Reporting

• In Event: Audit partners, Legal Disputes & Auditor-Client Relationships

Abstract

ABSTRACT: The audit for Internal Control over Financial Reporting (ICFR) has been the subject of intensive examination by the PCAOB as well as researchers. However, the process through which auditors actually make ICFR judgments and decisions has largely remained a “black box” and one that has been relatively unexplored. To better understand how auditors make ICFR judgments, we conducted in-depth semi-structured interviews with twenty highly experienced audit partners. Using case studies to establish context, we examine the key components of the ICFR judgment process including the importance of evaluating management review controls, the role of internal factors of the audit firm such as the importance of the national office, and the role that external factors such as the strength and quality of the audit committee and regulators have on the ICFR judgment and decision making process. Results indicate that the ambiguity inherent in the ICFR evaluation task often leads auditors to rely on the national office for support. Also, management tends to give pat answers on how management review controls will inevitably catch any material errors, which may be reflective of their own experiences. Finally, auditors closely adhere to PCAOB guidelines in order to perhaps avoid a negative inspection report and the resultant consequences. Implications for research, practice and public policy are then discussed.

Authors

• Jeffrey R Cohen, Boston College

• Jennifer R Joe, University of Delaware

• Jay C. Thibodeau, Bentley University

• Gregory M Trompeter, University of Central Florida