The Role of Task Subjectivity and Risk of Material Misstatement on Auditors’ Configural Processing in Internal Audit Reliance Judgments

Posted: 25 May 2014 Last revised: 23 Sep 2014

See all articles by Sudip Bhattacharjee

Sudip Bhattacharjee

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Mario J. Maletta

Northeastern University - Accounting Group

Kimberly Moreno

Northeastern University - Accounting Group

Date Written: May 23, 2014

Abstract

Using a field-based questionnaire administered to practicing auditors, we examine how auditors simultaneously combine the key planning variables, client-level misstatement risk (comprised of inherent risk and control risk) with account-level subjectivity, when utilizing internal audit as a cost management tool. We contend that auditor use of internal audit will reflect a balance between the potential for efficiency gains and the implications regarding audit effectiveness. Prior internal audit research has primarily focused on lower and higher risk conditions with relatively few studies examining the implications of moderate risk scenarios on internal audit use. Data on actual audits from an instrument administered to external auditors reveal significant differences in reliance decisions across lower, moderate, and higher misstatement risk levels. Our results reveal that increases in account-level subjectivity have no effect on auditors’ internal audit reliance judgments when risk of material misstatement is at lower levels. However, auditors increase their internal audit reliance when account-level subjectivity increases across moderate misstatement risk. Finally, our results suggest that auditors decrease their internal audit reliance when account subjectivity increases across higher misstatement risk. By examining these risk variables in combination, we provide insight into the complexities associated with external auditors’ internal audit usage decisions in the post-SOX era. This research should be of interest to practitioners given PCAOB’s limited guidance on how multiple risk factors should be combined when utilizing internal audit.

Suggested Citation

Bhattacharjee, Sudip and Maletta, Mario J. and Moreno, Kimberly, The Role of Task Subjectivity and Risk of Material Misstatement on Auditors’ Configural Processing in Internal Audit Reliance Judgments (May 23, 2014). Available at SSRN: https://ssrn.com/abstract=2441206

Sudip Bhattacharjee (Contact Author)

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Mario J. Maletta

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
617-373-8374 (Phone)
617-373-8814 (Fax)

Kimberly Moreno

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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