Structure Versus Judgement in the Audit Process: A Test of Kinney's Classification

CoBAR Working Paper 2000-02

19 Pages Posted: 8 Apr 2000

See all articles by Malcolm Smith

Malcolm Smith

University of South Australia - School of Accounting and Information Systems

Brenton Fiedler

University of South Australia - School of Accounting and Information Systems

Joanne Kestel

Murdoch University

Bruce Brown

University of South Australia - School of Mathematics and Statistics

Date Written: January 2000

Abstract

Sullivan (1984) suggests that the alternative audit approaches adopted by accounting firms be expressed in terms of 'structure' and 'judgement', with a division provided by the degree to which auditor judgement is replaced by structured quantitative algorithms. Cushing and Loebbecke (1986) attempt to operationalise this division by examining the guidance provided to practising auditors by their firms. Kinney (1986) extends this study by classifying accounting firms as 'structured', 'intermediate' or 'unstructured' in terms of their audit methodologies.

This study provides a test of Kinney's classification by examining the tolerance of accounting firms to accounting policy choices which have an income effect in their clients' financial statements. The paper argues that those firms with a structured audit approach will manage audit risk through a greater reliance on mechanistic procedures, resulting in a greater tolerance of income manipulation. The results are confirmatory for the period under study, but evidence is provided to suggest that audit firms have subsequently become less diversified in their approach.

JEL Classification: M49, M41, M44

Suggested Citation

Smith, George Malcolm and Fiedler, Brenton and Kestel, Joanne and Brown, Bruce, Structure Versus Judgement in the Audit Process: A Test of Kinney's Classification (January 2000). CoBAR Working Paper 2000-02, Available at SSRN: https://ssrn.com/abstract=219308 or http://dx.doi.org/10.2139/ssrn.219308

George Malcolm Smith (Contact Author)

University of South Australia - School of Accounting and Information Systems ( email )

Australia
+61 8 8302 0053 (Phone)
+61 8 8302 0102 (Fax)

Brenton Fiedler

University of South Australia - School of Accounting and Information Systems ( email )

GPO Box 2471
Adelaide, Sth Aust, 5075
Australia
+61 8 8302 0516 (Phone)
+61 8 8302 0992 (Fax)

Joanne Kestel

Murdoch University ( email )

South Street
School of Business
Murdoch 6150, Western Australia
AUSTRALIA
+61 8 9360 6041 (Phone)
+61 8 9310 5004 (Fax)

Bruce Brown

University of South Australia - School of Mathematics and Statistics ( email )

Australia
+61 8 8302 0527 (Phone)
+61 8 8302 0765 (Fax)

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