Coordination Effects on Audit Risk Allocation in Group Audits

23 Pages Posted: 26 May 2023

See all articles by Marcel Steller

Marcel Steller

University of Innsbruck - Department of Accounting, Auditing and Taxation

Erich Pummerer

University of Innsbruck - Department of Accounting, Auditing and Taxation

Date Written: May 26, 2023

Abstract

Financial accounting is designed to provide decision-useful information. An auditor’s task is to assure the information provided by the management. In audit reality the items of a financial statement represent aggregated business cases. This aggregate can be influenced by several sources of errors. For the overall audit opinion, it is essential to consider potential de-pendencies between different sources of errors, especially in the context of (multinational) group audits.

Based on a simplified auditing model assuming two error sources we illustrate the crucial nature of correlated audit risks in the audit effort decision. Therefore, we compare the situation if an audit is carried out either as a well-coordinated audit or as a less coordinated audit and error-sources may correlate. The results provide evidence that in case of correlated error-sources neglecting the correlation might cause inefficiencies. This is reasoned by the fact that the same post audit (overall) expected damage is reached at higher costs when the insur-ance effect of correlation is neglected by determining the optimal level of audit effort. The overall assessment however strongly depends on the investor’s perspective and especially if investors and auditors have different loss functions the assessment might turn either way.

Keywords: audit task-sharing, audit risk, correlation of risks, joint audit, audit quality

JEL Classification: M42, M48

Suggested Citation

Steller, Marcel and Pummerer, Erich, Coordination Effects on Audit Risk Allocation in Group Audits (May 26, 2023). Available at SSRN: https://ssrn.com/abstract=4460001

Marcel Steller (Contact Author)

University of Innsbruck - Department of Accounting, Auditing and Taxation ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Erich Pummerer

University of Innsbruck - Department of Accounting, Auditing and Taxation ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria
+43/512/507-7264 (Phone)

HOME PAGE: http://www.pummerer.at

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