Obtaining Assurance for Financial Statement Audits and Control Audits when Aspects of the Financial Reporting Process are Outsourced

71 Pages Posted: 1 Apr 2012 Last revised: 12 Jul 2014

See all articles by James Lloyd Bierstaker

James Lloyd Bierstaker

Villanova University - School of Business

Long Chen

George Mason University - Department of Accounting

Margaret H. Christ

University of Georgia - Terry College of Business

Matthew Ege

Texas A&M University - Department of Accounting

Natalia M. Mintchik

University of Cincinnati - Department of Accounting

Date Written: December 1, 2012

Abstract

Businesses increasingly outsource organizational functions that have financial reporting implications which requires auditors to adjust their risk assessment and audit procedures for this practice. However, PCAOB inspection reports cite deficiencies indicating that external auditors frequently do not perform proper procedures before relying on controls maintained by service organizations. In this paper, we examine the audit implications of client use of service organizations. Using the audit risk and control risk models and drawing on the extant research on using the work of others and internal audit outsourcing, we develop a framework that describes how clients’ use of service organizations affects financial statement and internal control audits. We propose that characteristics of outsourcing, the client, the service organization and the auditor of the service organization affect the inherent, control and control detection risk for clients who outsource these functions. Based on this model, we develop specific research questions to guide future auditing research. We also use this model to provide insights for future research on external auditors’ reliance on outsourced internal audit functions.

Keywords: Outsourcing, SAS 70/SSAE 16/ SOC report, service organizations, audit quality

JEL Classification: M41, M42, L24

Suggested Citation

Bierstaker, James Lloyd and Chen, Long and Christ, Margaret H. and Ege, Matthew and Mintchik, Natalia M., Obtaining Assurance for Financial Statement Audits and Control Audits when Aspects of the Financial Reporting Process are Outsourced (December 1, 2012). Auditing: A Journal of Practice & Theory, Vol. 32, No. Supplement 1, 2013. Available at SSRN: https://ssrn.com/abstract=2031706 or http://dx.doi.org/10.2139/ssrn.2031706

James Lloyd Bierstaker

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Long Chen

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

Margaret H. Christ (Contact Author)

University of Georgia - Terry College of Business ( email )

Athens, GA 30602-6254
United States
706-542-3602 (Phone)

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Natalia M. Mintchik

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
349
Abstract Views
1,485
rank
85,915
PlumX Metrics