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The effect of benchmarked performance measures and strategic analysis on auditors' risk assessments and mental models

Listed author(s):
  • Knechel, W. Robert
  • Salterio, Steven E.
  • Kochetova-Kozloski, Natalia
Registered author(s):

    As the audit environment becomes more demanding and complex, so does the set of analytical tools available to an auditor. The purpose of this paper is to examine the effect of two complex audit technologies commonly used by auditors, benchmarking of performance measures and strategic analysis, on the risk judgments of auditors carrying out the initial planning of an audit. We conduct an experiment that utilizes a Balanced Scorecard for organizing and evaluating analytical evidence about the performance of business units within a large client. Our first principal finding is that external benchmarking can cause an auditor to focus on performance measures that are unique to a business unit and disregard performance measures that are common to multiple business units but not benchmarked. However, our second finding is that an in-depth strategic analysis completed prior to assessing a client's business risk or risk of material misstatement allows an auditor to incorporate more information from performance measures in risk assessments regardless of whether the performance measures are benchmarked. Strategic analysis facilitates a more balanced and accurate assessment of the risks across the business units being evaluated. We also provide evidence that the latter result occurs because in-depth strategic analysis allows auditors to develop a more complete mental model of a client, which has been a long time belief of advocates of business risk audit methodologies and consistent with current and emerging auditing standards on risk assessment.

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    Article provided by Elsevier in its journal Accounting, Organizations and Society.

    Volume (Year): 35 (2010)
    Issue (Month): 3 (April)
    Pages: 316-333

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    Handle: RePEc:eee:aosoci:v:35:y:2010:i:3:p:316-333
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    1. Robson, Keith & Humphrey, Christopher & Khalifa, Rihab & Jones, Julian, 2007. "Transforming audit technologies: Business risk audit methodologies and the audit field," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 409-438.
    2. Markman, Arthur B. & Medin, Douglas L., 1995. "Similarity and Alignment in Choice," Organizational Behavior and Human Decision Processes, Elsevier, vol. 63(2), pages 117-130, August.
    3. repec:bla:joares:v:35:y:1997:i:2:p:295-310 is not listed on IDEAS
    4. Spathis, Charalambos & Doumpos, Michael & Zopounidis, Constantin, 2003. "Using client performance measures to identify pre-engagement factors associated with qualified audit reports in Greece," The International Journal of Accounting, Elsevier, vol. 38(3), pages 267-284.
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    6. repec:bla:joares:v:19:y:1981:i:1:p:120-145 is not listed on IDEAS
    7. Iselin, Errol R., 1988. "The effects of information load and information diversity on decision quality in a structured decision task," Accounting, Organizations and Society, Elsevier, vol. 13(2), pages 147-164, March.
    8. Kida, T. & Smith, J. F. & Maletta, M., 1998. "The effects of encoded memory traces for numerical data on accounting decision making," Accounting, Organizations and Society, Elsevier, vol. 23(5-6), pages 451-466.
    9. repec:bla:joares:v:38:y:2000:i:1:p:165-194 is not listed on IDEAS
    10. Knechel, W. Robert, 2007. "The business risk audit: Origins, obstacles and opportunities," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 383-408.
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