Factors That Influence Auditors During Risk Assesment

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Industry specialization

Industry specialization is becoming an important factor of the audit quality. The industry specific knowledge has an improving effect on the effectiveness and efficiency in de audit field.

Research indicates a significant relationship with industry specialization and audit quality and find a positive relationship. The investigation shows that the existence of industry expertise has a direct influence on the performance of the auditor during the audit assessment (Al-Khaddas, Nawas, & Ramadan, 2013). According to Low (2004) auditor’s specialized knowledge of the client’s industry has a direct effect on the assessment of audit risks, detect errors, abnormalities and misstatements in the financial statement. Given the fact there exists huge differences between incidence, magnitude, income effect and method of detection of misstatements between various industries, the knowledge that is accumulated from serving the same clients has a significant impact on the audit (Al-Khaddas, Nawas, & Ramadan, 2013). Auditors with industry specialization, build up with a certain experience in a field, are better equipped to detect errors then auditors without such specialization (Low, 2004).

In another study Taylor (2000) reports that non-specialized auditors were more conservative in risk estimates and had less confidence in the estimates carried out compared with specialized auditors. In addition, Taylor reports that specialized Auditors deliver a better performance in assessing the inherent risk of an industry specific accounts post compared with accountants who do not specialize. The research results can be explained by the fact that the auditor may found traditionally more familiar with control systems and business risks and knowledge concerning internal control systems that are also applicable in other client situations.

In addition to industry specialization improving the audit procedure, there is also evidence that specialist auditors attempt to protect their reputation through increased compliance with generally accepted auditing standards relative to non-specialist auditors (Al-Khaddas, Nawas, & Ramadan, 2013). Because auditors are in compliance with the regulations will be more independently drafting during the audit.

The potential need for improvement in the area of industry specialization

After the auditing scandals such as Enron and WorldCom, and financial crisis of 2009, has audit quality never been important as now. Current expectations are getting higher and the rules are more and more tightened. The evidence above indicates the specialization in a certain industry of an auditor has a great effect on the audit assessment.

So, it turns out that industry specialists identify risks more effective than non -specialized auditors. Because of this, it is important that in order to create improvement during audit risk assessments, audit firms should focus more to the broadening of knowledge in certain industrial areas.

Further evidence shows that the specialization of an auditor affect the design and performance of the audit. Based on this knowledge the auditor will design in the early stages audit procedures to the, such as risk assessments. Wrong risk assessments in this stages can result in misdirected the audit resource allocation and ultimately in an ineffective audit. Low (2004) claims that an industry specialization of the auditor have a positive effect on the ability to assess risk correctly.

Conclusion

Risk assessment is a key element of audit quality. This paper describes three factors that may impact the risk assessment. The paper also investigates potential improvement in the area of these three factors.

The first factor discussed in this paper that influences the risk assessment is the understanding of the entity and its environment by the auditor. Part of that understanding is the understanding of the entity’s internal control. The information systems, one of the internal controls, is relevant to financial reporting and also affects the risk based audit, especially the use of an IT auditor. Prior research have shown that risk assessment clarity is significantly increased when a specialist is used. The involvement of an IT-specialist is important and an effective working relationship among team members can have a significant impact on positive professional judgments. There are three frequent predictors of quality determined: an adequately planned audit, all team members have high ethical standards, and all team members communicate effectively.

The risk assessment is also affected by the contrast effect. The contrast effect is one effect of auditors’ operating in multiple client audit environments. This effect imply that the information associated with a given decision task will be evaluated differently depending on the nature of the prior contextual information. A study of Bhattachar concluded that the auditor’s judgement and their documentation for the target client were influenced by the existence of a prior client. The contrast effect weakens an auditor’s objectivity and could also reduce the audit efficiency.

Industry specialization is also an important factor of the audit quality. Research has found a positive significant relationship between industry specialization and audit quality. It has been shown that the existence of industry expertise has a direct influence on the performance of the auditor during the audit assessment. Specialized auditors deliver a better performance in assessing the inherent risk of an industry specific accounts post compared with accountants who do not specialize. There is also evidence that specialist auditors attempt to protect their reputation through increased compliance with generally accepted auditing standards relative to non-specialist auditors. This indicates that the specialization in a certain industry of an auditor have a great effect on the audit assessment. In order to create improvement during audit risk assessments, audit firms should focus more to the broadening of knowledge in certain industrial areas.

Bibliografie

Al-Khaddas, H., Nawas, R. A., & Ramadan, A. (2013). Factors affecting the quality of Auditing: The Case of Jordanian Commercial Banks. International Journal of Business and Social Science , 206-222.

Bauer, T., & Estep, C. (2014). The IT Auditor Function on Financial Statement and Integrated Audits: Description of Practice and Avenues for Future Research. Urbana-Champaign: University of Illinois.

Bauer, T., & Estep, C. (2015). One Team or Two Teams?