Academic Research 3
Do client-prepared internal control documentation and business process flowcharts help or hinder an auditor’s ability to identify missing controls?
a. What is the issue being addressed in the paper?
It is challenging for auditors to adequately process the significant amount of internal control information provided by management, which can impair their ability to develop accurate mental models for the internal control systems. As a result, auditors’ ability to identify missing internal control systems in the presence of voluminous client-prepared internal control documentation might be adversely affected.
The first research objective of the current study is to examine whether the provision of client-provided internal control documentation negatively affects the auditors’ ability to identify missing internal controls. And the second objective is to test the extent to which schematic structuring decision aid can improve auditors’ ability to identify missing internal controls.
b. What are the findings in the paper?
The research findings indicate that auditors who received a blank internal control matrix and a business process flowchart identified significantly more missing controls than auditors who received (1) a client-prepared internal control matrix only, (2) a blank matrix only; or (3) a client-prepared matrix and a business process flowchart. The results of this study are important to both audit theory and audit practice. With respect to theory, results from the current study suggest that providing auditors access to client-prepared internal control documentation before they perform their own independent assessment of internal controls appears to adversely affect their ability to identify missing internal controls.
The current study further examines the effect of a potential remedy: business process flowcharts. The flowchart did increase the identification of missing controls when auditors were provided with a blank internal control matrix. The findings suggest that the flowcharts facilitate the access and transfer of relevant task knowledge that is stored in memory.
The results imply that when auditors are evaluating the effectiveness of a clients’ internal control system for a significant process, they should be aware that the clients’ documentation (designed to support its own assessment of internal control effectiveness) may inhibit the identification of missing controls.
Also, findings suggest that auditors should be provided with a business flowchart evaluating the effectiveness of a clients’ internal control system design, but they should not read client-prepared internal control documentation beforehand.
c. Why is this paper important to auditors, and what are the implications of this paper for the auditing profession?
The purposes of the current study are to examine the extent to which client-prepared internal control documentation might cognitively impede auditors from identifying missing internal controls, and study the degree to which business process flowcharts can help auditors to recognize missing internal controls. Therefore, a flowchart type decision aid, such as a business process flowchart, holds potential to help auditors identify missing internal controls. And it is an important and available means by which auditors may improve the effectiveness of their internal control evaluation and documentation process.
The research suggests that the auditing profession should strive to continuously improve the audit process in general, and identification of missing controls in particular. While we recognize the need for increased audit efficiency, we believe that the professional skepticism and focus on quality that has characterized the audit profession in the post-SARBOX era must remain. And when novice auditors receive training that helps them organize their mental models in a way that is more consistent with the way decision information is presented, they are able to identify more control issues.
d. Describe the research mythology used as a basis for the conclusions?
Participants in the experiment represented 395 experienced auditors who were newly hired by one of the BIG 4 CPA firms. First, participants were told that they needed to complete the internal control matrix for the featured business process. Completion of the control matrix was accomplished by making sure that all control activities were properly identified and included on the internal control matrix, and by correctly identifying the internal control objective (e.g., completeness, accuracy and validity) was addressed by the identified control activity. Importantly, this task was explicitly designed to correspond to an auditors’ internal control evaluation of a business process. Second, participants were asked to assess control risk, and third, participants were asked to draw conclusions about managements’ anti-fraud program and list fraud risk factors, and forth, participants were asked to assess fraud risk Other test included an independent variable (MATRIX) that was operationalized as either receiving a client prepared or a blank internal control matrix, and an independent variable (FLOWCHART) was operationalized as the absence or presence of a business process flowchart in the background information. Also, there were three hypothesis test conducted, and the conclusions indicated that there is significant integration between matrix and flowchart conditions.
e. Describe the limitations of the research?
The research findings do not indicate a significant part-list interference effect between a blank internal control matrix and client prepared matrix. While the benefits of a business process flowchart appear to be clear, it remains unclear whether the cost of creating such a flowchart is justified by the benefit. The researchers acknowledge that some readers might be concerned about the relatively low absolute value of the means across treatment condition, and of course there will always be critical and controversial reviews of the findings.
Retrieved September 11, from
Bierstaker, J. L., Hunton, J. E., & Thibodeau, J. C. (2009). Do Client-Prepared Internal Control Documentation and Business Process Flowcharts Help or Hinder an Auditor’s Ability to Identify Missing Controls?. Auditing: A Journal Of Practice & Theory, 28(1), 79-94.