The Impact of Client Strategy Content and Strategy Process on Risk Assessment and Audit Planning

Natalia Kotchetova Assistant Professor School of Accountancy, Faculty of Arts University of Waterloo nkotchet@uwaterloo.ca

This paper is ase! on "y Ph. #. !issertation at $eor%ia State University. & a" in!e te! to 'ill (essier, the )hair of "y #issertation )o""ittee, an! to the co""ittee "e" ers Au!rey $ra"lin%, $alen Sevcik, an! Shaker *ahra for their support an! assistance throu%hout this pro+ect. & thank au!it professionals fro" the four international accountin% fir"s for participatin% in this stu!y. & appreciate the valua le co""ents provi!e! y ,fri" 'orit-, .arry 'rown, .ynn /annan, Karla 0ohnstone, Ken Klassen, Tho"as Ko-loski, (orley .e"on, 'rian (ayhew, (ark Peecher, Steve Salterio, 0oe Schult-, &ra Solo"on, Alan We , an! y the workshop participants at the University of )alifornia12iversi!e, University of &llinois at Ur ana1 )ha"pai%n, $eor%ia State University, University of South )arolina, University of Toronto, University of Waterloo, an! University of Wisconsin1(a!ison.

The Impact of Client Strategy Content and Strategy Process on Risk Assessment and Audit Planning

Abstract )urrent risk1 ase! au!it approaches place stron% e"phasis on un!erstan!in% the client3s in!ustry, re%ulatory, an! "arket environ"ents usin% a set of techni4ues %enerally known as strate%ic analysis 5SA6. & use a ehavioral e7peri"ent to investi%ate whether au!itors who perfor" SA "ake "ore accurate risk assess"ents 5i.e., assess"ents of the risk of "aterial "isstate"ent, inherent risk, an! control risk6 an! select "ore effective au!it proce!ures than au!itors who !o not perfor" SA. The results show that analyses of strate%y content an!8or strate%y process lea! to hi%her accuracy in assessin% the risk of "aterial "isstate"ent at oth the entity an! usiness process level. Analysis of strate%y content results in s"aller !eviations fro" the e7pert panel for inherent risk assess"ents. When au!itors focus on strate%y process, their assess"ents of the stren%th of the control environ"ent are "ore accurate. Finally, the proportion of correctly selecte! au!it proce!ures is si%nificantly lower for the %roup that perfor"e! SA. Keywords: risk assess"ent9 risk1 ase! au!it9 strate%ic analysis9 strate%y content an! process. ata A!ailability: )ontact the author.

The Impact of Client Strategy Content and Strategy Process on Risk Assessment and Audit Planning I" I#TR$ %CTI$# Au!itin% fir"s have !evelope! an! i"ple"ente! risk1 ase! au!it approaches since the "i!1 ;<<=s 5'ell et al. ;<<>9 $ra"lin% et al. :==;9 'allou an! /eit%er :==:9 ?3#onnell an! Schult:==@a, 6.; Such approaches e"phasi-e the link etween usiness risks arisin% fro" client

operations in the conte7t of a %iven in!ustry, an! accountin% choices associate! with "easurin%, recor!in%, an! reportin% the results of these operations 5,lliott et al. ;<<<9 Kinney :===6. A risk1 ase! au!it takes a Atop1!ownB view of the entity, startin% with an un!erstan!in% of the client3s in!ustry, re%ulatory, an! "arket environ"ents usin% a set of techni4ues referre! to as strategic analysis 5SA6. SA is perfor"e! y an au!itor to %ain an un!erstan!in% of client strate%y content an! strate%y process 5'ell et al. ;<<>9 'ell et al. :==:6. Analyses of the client3s strate%y, financial position, an! usiness processes serve as the asis for evaluatin% the specific usiness risks face! y the client, the overall client usiness risk 5)'26, an! the potential for the risk of "aterial

"isstate"ent 52((6 in the financial state"ents. 'ase! on the evaluation of risks, the au!itor plans au!it proce!ures to test the assertions containe! in the financial state"ents 5.e"on et al. :===, ::9 Salterio an! Weirich :==;, ;;6. (y research a!!resses two overall 4uestions. First, !o au!itors who use SA "ake "ore accurate assess"ents of )'2 an! 2((, an! select "ore effective au!it tests than au!itors who !o

&n this paper, & use the ter" risk-based audit to !escri e the approaches ein% !evelope! y "a+or accountin% fir"s. This ter" is consistent with the +oint risk assess"ent pro+ect y the AS' an! &AAS', pu lishe! in two e7posure !rafts 5A&)PA :==:9 &AAS' :==:6. Two other ter"s are use! in the literature. A business risk audit !escri es an au!it approach that e"phasi-es the consi!eration of client usiness risk as Aa "eans of approachin% the au!it an! of !eter"inin% the evi!ential proce!ures to e applie! on a particular en%a%e"ent 5.e"on et al. :===, ::6.B Strategic systems audit refers to an Aau!it approach that focuses the au!itor3s assess"ent of risk throu%h a strate%ic1syste"s lens 1 a lens that !irects the au!itor3s attention to the client3s syste"s !yna"icsC its usiness strate%y an! the econo"ic niches it has chosen to occupy9 the stren%ths of its connections to outsi!e econo"ic a%ents, inclu!in% custo"ers, suppliers, investors, an! re%ulators9 an! the e7ternal an! internal forces that threaten the via ility of its chosen niches an! the achieve"ent of its o +ectivesB 5'ell et al. ;<<>, :6. The research reporte! in this paper is a A%enericB test of strate%ic analysis, without relation to any fir"1specific au!it "etho!olo%y.
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not use SAD Secon!, is the analysis of a client3s strate%y content or strate%y process "ore effective in assessin% riskD &n usin% SA, an au!itor seeks to interpret an! analy-e oth content an! process aspects of the client3s strate%y 5'ell et al. ;<<>6. The answers to these 4uestions are of interest to oth aca!e"ics an! practitioners. Few stu!ies have e7a"ine! how usin% SA helps au!itors assess risks, an! how the risk assess"ents are linke! to financial state"ent assertions 5e.%., 'allou et al. :==:9 )hoy an! Kin% :==@9 ?3#onnell an! Schult- :==@ a, 6. &ncreasin% au!it 4uality y linkin% the au!itor3s un!erstan!in% of the entity an! its environ"ent an! risk assess"ent process to au!it proce!ures is currently at the forefront of the a%en!a for the profession 5A&)PA1AS' :==:9 &AAS' :==:6. & test five hypotheses in a : 5SA1content6 7 : 5SA1process6 etween1su +ects e7peri"ent usin% au!it seniors as participants an! au!it "ana%ers as an e7pert panel. (y "ain focus is on the entity1level +u!%"ents of risks an! choice of au!it proce!ures9 however, & also report results of tests ase! on process1level !ata. The results were as follows. First, the analyses of strate%y content an!8or strate%y process le! to hi%her accuracy in assessin% 2(( at oth the entity an! usiness process level. Secon!, analysis of strate%y content resulte! in s"aller !eviations fro" the e7pert panel for inherent risk assess"ents. Thir!, when au!itors focuse! on strate%y process, their assess"ents of the stren%th of the control environ"ent were "ore accurate. Finally, the proportion of correctly selecte! au!it proce!ures was si%nificantly lower for au!itors who perfor"e! strate%ic analysis. This last fin!in% was surprisin% an! une7pecte!. The paper procee!s y reviewin% the relevant e7tant research in Section && to !evelop testa le hypotheses. Section &&& presents the "etho!olo%y use! in the stu!y. Section &E !iscusses the results, while Section E offers conclusions, the li"itations of the stu!y, an! su%%estions for future research. II" &ACK'R$%# A# ()P$T(*S*S

%nderstanding the Client &usiness and the Risk Assessment &n or!er to properly e7a"ine the vali!ity of financial state"ent assertions, an au!itor "ust have a thorou%h un!erstan!in% of the client usiness 5AS' :==:9 (essier :==@, <>1;=:6. An au!itor o tains an un!erstan!in% of the client usiness in or!er to plan an! perfor" the au!it in accor!ance with %enerally accepte! au!itin% stan!ar!s. Un!erstan!in% the client3s usiness an! its environ"ent shoul! ena le the au!itor to assess the potential effect of )'2s on the financial state"ents 5AU @;;.=GC A&)PA :==:9 A&)PA1AS' :==:6. &t has een ar%ue! that strate%ic analysis overco"es the alle%e! !eficiencies of the

tra!itional approach towar!s un!erstan!in% the client usiness 5U)'6 y treatin% the financial state"ents as the en! pro!uct of the client3s strate%y an! the usiness processes use! to i"ple"ent such a strate%y 5Salterio an! Weirich :==;, >6. : SA views a client entity as an open syste" that is a le to a!apt to chan%es in the e7ternal an! internal environ"ent y coor!inatin% its usiness processes in or!er to attain its %oals 50ackson ;<<;, FG6. Thus, SA allows for the creation of an e7plicit "ental "o!el of a client3s usiness. This "o!el inclu!es the i"pact of the usiness risks on the client3s usiness processes, an! ulti"ately, throu%h i!entification of un"iti%ate! risks, on the client3s financial state"ents 5)hoy an! Kin% :==@9 Knechel :==;, ;@:1;F@.6 When usin% SA, the au!itor perfor"s a ri%orous analysis of )'2. )'2 is the risk that an entity3s usiness o +ectives will not e attaine! or its strate%ies will not e e7ecute! as a result of the e7ternal an! internal factors, pressures, an! forces a!versely i"pactin% the entity an!, ulti"ately, the risk associate! with the entity3s survival an! profita ility 5'ell et al. ;<<>9 Knechel :==;, ;:F9 A&)PA1AS' :==:, <9 (essier :==@, <H6. The au!itor evaluates how well the client3s strate%ic plannin% process "atches environ"ental threats with corporate capa ilities. To assess

Throu%hout the paper, the a reviation UCB relates to the tra!itional "etho!olo%y of un!erstan!in% the client usiness 5AU @;;.=>, =HC A&)PA :==:6. When spelle! out, the e7pression understanding the client business refers to the orientation phase of the au!it, for which either the U)' or SA can e use!.
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)'2, the au!itor evaluates an! !ocu"ents "acro1econo"ic, in!ustry1level, an! fir"1specific strate%ic risk factors, as well as "ana%e"ent3s reactions to those risks. Therefore, SA shoul! allow an au!itor to un!erstan! the potential relationship of a client3s strate%y to their accountin% choices, esti"ates, an! financial state"ent !isclosures 5,ilifsen et al. :==;9 Knechel :==;9 'ell et al. :==:6. The au!itor3s assess"ent of )'2 i"pacts +u!%"ents re%ar!in% the 2((. @ Assess"ents of )'2 an! 2(( influence !etection risk, which in turn affects the au!it plan 5see Fi%ure ;6. Au!itors re!uce au!it risk to an accepta le level y "akin% choices re%ar!in% the nature, ti"in%, an! e7tent of su stantive tests 5e.%., tests of transactions, analytical proce!ures, an! tests of account alances6. Thus, if SA enhances au!it effectiveness, the i"prove"ent shoul! e7hi it itself throu%h "ore accurate entity1level risk assess"ents an! au!it plans that "ore appropriately a!!ress the areas of potential "isstate"ents within the client entity3s usiness processes 5.e"on et al. :===9 Salterio an! Weirich :==;6. Insert +igure , Strategic Analysis To ac4uire an un!erstan!in% of a client usiness usin% SA, au!itors perfor" the followin% activities 5 ase! on 'ell et al. ;<<>9 KP($ ;<<>9 .e"on et al. :===9 Knechel :==;9 Salterio an! Weirich :==;9 'ell et al. :==:6C 5;6 !evelop an un!erstan!in% of the client3s strategic position within the conte7t of the e7istin% structure an! !yna"ics of the client3s in!ustry, an! how this position was achieve!9 i!entify core pro!ucts an! services that allow the client to create value an! "aintain a co"petitive a!vanta%e9 i!entify colla orative alliances in which client participates9 un!erstan! the "ain e7ternal usiness risks8threats to the client an! how the client "iti%ates those risks via usiness processes an! "ana%e"ent controls9 5:6 !evelop an un!erstan!in% of the client3s strategic management processes that allow for the attain"ent of a AfitB etween its strate%y an! e7ternal risks in areas of usiness operations, financial reportin%, an! co"pliance9 i!entify critical success factors for strate%y
The au!it risk e7posure !rafts 5AS' :==:9 &AAS' :==:6 point out that the risk of "aterial "isstate"ent inclu!es the inherent risk an! control risk co"ponents of the au!it risk "o!el.
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for"ulation8i"ple"entation an! perfor"ance in!icators use! y "ana%e"ent to assess the attain"ent of strate%ic %oals an! o +ectives9 5@6 use infor"ation o taine! in 5;6 an! 5:6 to !evelop an un!erstan!in% of the client3s usiness processes, an! su se4uently, !evelop e7pectations a out key financial statement assertions an! assess the audit implications at "ore !etaile! levels of analysis, i.e. at the level of processes an! accounts. & assu"e that step one of SA enco"passes the analysis of strategy content, whereas step two involves the un!erstan!in% of strategy process. The thir! step inclu!es the au!itor3s consi!eration of risk areas where "ore !etaile! su stantive testin% will e perfor"e!. The "a+or accountin% fir"s have !evelope! "etho!olo%ies to perfor" SA usin% an entity1 level usiness "o!el 5,.'(6 5'ell et al. ;<<>6, Porter3s Afive1forces "o!elB 5Porter ;<H=6, or the P,ST 5Political1le%al, ,cono"ic, Social, an! Technolo%ical6 fra"ework 5Knechel :==;6 to facilitate the un!erstan!in% of the entity3s strate%y content an! process. As a conse4uence, SA uses a %reater a"ount of infor"ation a out client strate%y, relative to a transaction1 ase! au!it 5U)'6, an! !oes it in a way that incorporates ele"ents of syste"s theory. (ore specifically, it e"phasi-es linka%es to the e7ternal econo"ic a%ents an! a"on%st internal su syste"s8processes 50ackson ;<<;9 'ell et al. :==:, G9 )hoy an! Kin% :==@6.

Information Processing %sing SA !ersus %C& &n this section, & offer three ar%u"ents su%%estin% that SA is "ore likely to %enerate an un!erstan!in% of the client usiness that lea!s to accurate risk i!entification an! risk assess"ent than U)'. These ar%u"ents inclu!e co"parisons of SA an! U)' on !i"ensions of 5;6 task co"ple7ity, 5:6 types of infor"ation sou%ht 5inclu!in% syste"s1thinkin%6, an! 5@6 task structure. Task Complexity and Mental Models

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Un!erstan!in% the client usiness, either via SA or U)', is a task of "e!iu"1to1hi%h co"ple7ity %enerally perfor"e! y au!it seniors 5A !ol"oha""a!i ;<<<, G;, >;1>:9

A !ol"oha""a!i an! Usoff :===6. Task co"ple7ity has een !escri e! as a co" ination of the followin% co"ponentsC input complexity, processing complexity, an! output complexity, where each co"ponent has two !i"ensionsC amount of infor"ation an! clarity of infor"ation 5'onner ;<<F, :;I1:;H6. 'oth SA an! U)' re4uire an au!itor to %ather an! process nu"erous infor"ation cues a out the client an! its usiness environ"ent. &n U)', infor"ation cues co"e in a variety of for"ats, re!ucin% the clarity of input. SA re4uires systematic inclusion of e7ternal infor"ation an! non1financial !ata in the au!itor3s consi!eration of )'2 5Knechel :==;, ;:G1;@>9 'ell et al. :==:6. Thus, oth SA an! U)' possess hi%h input co"ple7ity. At the processin% sta%e, "any infor"ation cues have to e consi!ere! si"ultaneously, placin% hi%h !e"an!s on au!itors3 "e"ory an! a ility to inte%rate an! evaluate the client3s strate%ic position in the conte7t of the in!ustry environ"ent. )larity of processin% "ay e hi%her in SA than in U)' ecause SA re4uires au!itors to apply specific, syste"s theory1 ase! fra"eworks to un!erstan!in% the in!ustry environ"ent an! the client3s usiness o +ectives an! strate%y, an! to !ocu"ent the results of their analyses in work papers 5)a"p ell ;<HH9 .e%ren-i et al. ;<<@6. For e7a"ple, in the analysis of in!ustry structure, au!itors "ay use Athe five forces "o!elB y Porter 5;<H=6 an! !eter"ine the stren%th of the factors affectin% the threat fro" each force. Fra"eworks such as Porter3s Afive forces "o!el,B are likely to assist an au!itor in %eneratin% an e7plicit "o!el of a client usiness y creatin% a focusin% effect on ele"ents of the "o!el. .e%ren-i et al. 5;<<@6 an! .e%ren-i an! $irotto 5;<<G6 show that there is a natural ten!ency for in!ivi!uals to focus on what is e7plicit in their "ental "o!el. &n this conte7t, SA "ay e a le to focus au!itors3 attention on e7plicit, strate%y1!riven "ental "o!els of a client entity, there y re!ucin% processin% co"ple7ity an! possi ly i"provin% their perfor"ance. Unlike SA, U)' relies on an au!itors3 i"plicit "o!el of

a client

usinessC current au!itin% stan!ar!s 5AU @;;.=> an! .=H6 rely solely on au!itors3

professional +u!%"ent an! e7perience with respect to the infor"ation to e o taine! an! processe! in the course of !evelopin% an un!erstan!in% of a client usiness. Unless a strate%y !riven approach to un!erstan!in% a client usiness is a part of the au!itors3 repeate! e7perience 5i.e. part of their i"plicit "ental "o!el6, au!itors are likely to "ake reference to a AnaiveB "ental "o!el of a client usiness an! ne%lect relevant strate%ic infor"ation that is availa le to the" 5.e%ren-i an! Sonino ;<<@6. Thus, processin% co"ple7ity is hi%her in a U)'. At the output sta%e, task clarity is lower in a U)'. Au!itin% stan!ar!s !o not stipulate what the result of this sta%e shoul! e an! how "uch un!erstan!in% is sufficient in or!er to procee! to the risk assess"ent phase of an au!it. When an au!itor uses SA, the output is %enerate! via the application of a strate%y1 ase! fra"ework that allows for the %eneration of an e7plicit "ental "o!el of the client strate%y content an! strate%y process to e applie! in su se4uent risk assess"ents an! analyses of internal usiness processes. &n su", the use of either SA or U)' to ac4uire an un!erstan!in% of a client usiness presents a co"ple7 task for the au!itor. The task is particularly co"ple7 an! inherently uncertain at the processin% an! output sta%es if the au!itor uses U)'. SA re!uces processin% an! output co"ple7ity y provi!in% an au!itor with a strate%y1!riven fra"ework that allows for creation of an e7plicit "ental "o!el. Types of Information Sought and the Systems-Thinking Approach SA an! U)' !iffer with respect to the types of infor"ation sou%ht. 'ystrJ" an! 0Krvelin 5;<<I6 cate%ori-e three types of infor"ationC pro le" infor"ation, !o"ain infor"ation, an! pro le"1solvin% infor"ation. Problem information !escri es the structure, properties, an! re4uire"ents of the pro le" at han! 5'ystrJ" an! 0Krvelin, ;<<I, ;<I6. At the conceptual level, SA an! U)' tar%et a si"ilar pro le"C to o tain an un!erstan!in% of the entity3s usiness that will

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ena le the au!itor to plan an! perfor" the au!it in accor!ance with %enerally accepte! au!itin% stan!ar!s 5AU @;;.=GC A&)PA :==:6. /owever, the tar%et pro le" of an SA au!itor is e" e!!e! in a syste"s1thinkin% approach. &t inclu!es not only the i!entification of forces that "ay create potential usiness risks for the client, ut also the reco%nition of positive an! ne%ative fee! ack loops etween such forces that "ay e7acer ate or alleviate relate! usiness risks 5Kauff"an ;<H=9 0ackson ;<<;9 An!erson an! 0ohnson ;<<>6. U)' !oes not ai" at analy-in% such connections etween the ele"ents of the client or%ani-ation an! its environ"ent. Thus, it posits a "ore narrowly !efine! task for the au!itor than SA. &t also o"its ele"ents of the pro le" infor"ation that "ay eco"e crucial !urin% risk assess"entC risks that are not "iti%ate! y the strate%ic "ana%e"ent process. omain information consists of facts, concepts, laws, an! theories in the pro le" !o"ain 5'ystrJ" an! 0Krvelin ;<<I, ;<I6. SA su%%ests the application of the fra"ework ase! on strate%ic "ana%e"ent theories in a!!ition to au!itin% stan!ar!s, in!ustry au!it an! accountin% %ui!es, an! in4uiry of client "ana%e"ent. Thus, SA uses richer !o"ain infor"ation than U)'. Finally, SA provi!es an au!itor with "ore e7tensive problem-sol!ing information ecause it !irects his8her attention to a %reater nu" er of relevant cues, an! connections etween those cues, throu%h a syste"s thinkin% approach to the analysis of client strate%y. &n su""ary, SA provi!es richer infor"ation environ"ents 5pro le", !o"ain, an! pro le"1solvin%6 than U)'. Task Performance and Task Structure Notwithstan!in% the ar%u"ents a!vance! earlier, a si"plifie! contention of the perfor"ance facilitatin% effect of SA can e !erive! fro" the task structure literature. &f one views SA as a structure! analysis tool !esi%ne! to specify steps un!ertaken in the course of un!erstan!in% a client3s usiness, one can assert that the role of SA eco"es si"ilar to that of a !ecision ai!. Nu"erous stu!ies su%%est an inverse relationship etween task co"ple7ity an! task perfor"ance

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for skill1intensive tasks 5'onner ;<<F9 'ystrJ" an! 0Krvelin ;<<I9 )a"p ell an! &l%en ;<>G9 &selin ;<HH9 (asha an! (iller :===9 Pa4uette an! Ki!a ;<HH6. /u"an infor"ation processin% research propose! the use of structurin% techni4ues as a "eans of overco"in% co%nitive overloa! in perfor"in% a co"ple7 task 5#ona!io ;<<:9 /o%arth ;<<;9 Klein"unt- ;<<=9 Si"on ;<>@6. Au!itin% stu!ies have !ocu"ente! the perfor"ance1increasin% effects of structure in co"ple7 tasks 5'utler ;<HI9 Kachel"eier an! (essier ;<<=9 (c#aniel ;<<=9 (essier et al. :==;9 *i" le"an ;<<>6. Thus, even fro" a naive viewpoint of SA as a !ecision ai!, "ore accurate risk assess"ents can e e7pecte! ase! on the previously !ocu"ente! perfor"ance1facilitatin% effects of task

structure. The afore"entione! results of prior research su%%est that SA shoul! facilitate infor"ation processin% an! yiel! a etter outco"e9 i.e., a "ore accurate assess"ent of )'2. Therefore, & propose the followin% hypothesisC (,: Au!itors usin% SA will assess )'2 "ore accurately than au!itors usin% U)'. Assessment of the Risk of Material Misstatement 2isk of "aterial "isstate"ent 52((6 is a co" ine! construct that inclu!es oth inherent an! control risk 5/askins an! #irs"ith ;<<I9 Waller ;<<@9 (essier an! Austen :===6. To the e7tent that au!itors are a le to relate client usiness con!itions an! "ana%e"ent controls to their potential financial state"ent effects, the assess"ent of 2(( shoul! e stron%ly influence! y the evaluation of )'2 5Knechel :==;, >H9 Kinney :===, ;<;9 .e"on et al. :===9 A&)PA1AS' :==:9 (essier :==@, <I6. For e7a"ple, a client3s financial position an! usiness environ"ent "ay affect future1oriente! aspects of the client financial state"ents, such as the allowance for uncollecti le receiva les, inventory valuation, the ti"in% of revenue reco%nition, an! contin%ent lia ilities !ue to pen!in% liti%ation 5Kinney :===, ;H<6. Au!itors assess whether client1specific usiness risks create con!itions for co"ple7 non1routine transactions an!, su se4uently, for the suscepti ility of accountin% !ata to ein% "isstate! 5/uss et al. :===6. Since SA focuses au!itors3 attention on the
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link etween a client3s strate%y an! relate! potential financial state"ent effects, it shoul! lea! to a "ore accurate assess"ent of 2(( relative to U)'C (-C Au!itors usin% SA will assess 2(( "ore accurately than au!itors usin% U)'. Audit Planning Upon co"pletin% the assess"ent of )'2 an! the evaluation of 2((, the au!itor !evelops an au!it strate%y. An au!it strate%y inclu!es !ecisions a out the nature, ti"in%, an! e7tent of au!it tests, an! their !ocu"entation 5(essier :==@6. ,7tant research offers "i7e! results on whether au!it plans are influence! y 2(( assess"ents 5(ock an! Wri%ht ;<<@, ;<<<9 'e!ar! et al. ;<<<9 'e!ar! an! Wri%ht :===6. The nature of au!it tests refers to the type of tests use! to %ather evi!ence a out an account or a class of transactions. Au!itors respon! to 2(( throu%h the a!+ust"ent of !etection risk an! the selection of au!it proce!ures. #ecisions a out the nature of au!it tests are likely to e "ore responsive to )'2s an! relate! risks of "aterial "isstate"ents when SA is applie!. /i%her levels of !o"ain an! pro le"1solvin% infor"ation an! the perfor"ance1facilitatin% syste"atic nature of SA shoul! lea! to the selection of "ore effective su stantive tests in those areas where there is a hi%h e7pectation of un"iti%ate! risks than U)'. This lea!s to the followin% hypothesisC (.C Au!itors usin% SA will select a %reater proportion of effective au!it proce!ures than au!itors usin% U)'. Strategy Content and Strategy Process To a!!ress the secon! research 4uestion, & investi%ate whether the analysis of client strate%y content or strate%y process is "ore helpful when assessin% )'2, 2((, an! plannin% the au!it. Strate%y is !efine! herein as a "ana%e"ent syste" within a 5client6 usiness or%ani-ation that for"ulates its %oals with respect to "arkets8"arket se%"ents an! pro!ucts8services, an! specifies the "eans to achieve those %oals for each function of the value chain in a way that

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!istin%uishes the co"pany fro" others 5An!rews ;<H=6. 'y !oin% so, "ana%e"ent ai"s to achieve the "ost effective "atch etween the entity3s skills an! resources an! the opportunities an! threats in the e7ternal environ"ent 5)hris"an et al. ;<HH, F;F6. Strate%ic "ana%e"ent in a client or%ani-ation has two !i"ensionsC content an! process 5Ketchen et al. ;<<G6. SA au!itors see" to interpret an! analy-e oth the content an! process aspects of the client3s strate%y to a varia le !e%ree, !epen!in% on the fir" "etho!olo%y. F )urrently, no evi!ence e7ists as to whether there is an opti"al "i7 of these aspects of strate%y for the purposes of SA. Strategy content inclu!es the outco"e of client3s "ana%e"ent3s !ecisions a out the %oals, specific strate%ies, their "a%nitu!e, an! ti"in% at the corporate or usiness unit level, an! how those !ecisions affect a co"pany3s econo"ic perfor"ance 5)hris"an et al. ;<HH9 Fahey an! )hristensen ;<HG6. &n or!er to perfor" SA1content, au!itors nee! to %ather an! interpret infor"ation a out the client or%ani-ationC its in!ustry an! %lo al usiness environ"ent, co"petitive forces, client "ana%e"ent3s responses to those forces, an! the "a%nitu!e an! ti"in% of strate%ic responses. Strategy process, on the other han!, focuses on the "ana%erial actions, plannin% "etho!s, an! !ecision1"akin% processes that %enerate an! i"ple"ent strate%y 5)hakravarthy an! #o- ;<<:9 /uff an! 2e%er ;<H>6. &n or!er to perfor" SA1process, au!itors nee! to i!entify, interpret, an! un!erstan! how the client3s "ana%e"ent arrives at !ecisions re%ar!in% specific strate%ies, an! how it e7ecutes these !ecisions. & hypothesi-e that SA1content captures inherent risk factors of the client entity, whereas SA1process relates !irectly to the control environ"ent co"ponent of control risk. Strategy Content and Inherent Risk Assessment

&n "ost cases, fir"1specific %ui!ance !oes not e7plicitly !istin%uish etween the content an! process aspects of SA 5e.%., the 'usiness (easure"ent Process use! y KP($6. /owever, oth aspects are e" e!!e! in SA as it a!!resses specific 4uestions that, in the strate%ic "ana%e"ent research, fall un!er the u" rella of either strate%y content or strate%y process.
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The %eneral 4uestion of strate%y content is as followsC &f a fir" operates un!er e7ternal con!itions A, an! it e"ploys strate%y ', what is likely to e the effect of this co" ination on its perfor"ance )DI & e7pect that an analysis of strate%y content lea!s to creation y the au!itor of an e7plicit "ental "o!el of what the client3s strate%y is, there y facilitatin% the un!erstan!in% of )'2 arisin% fro" its strate%ic position an! its environ"ent. Therefore, the application of SA1content will !irect participants3 attention to 2(( arisin% fro" the client3s strate%ic position, an! help the" anticipate the potential i"pact of inherent risk factors, such as in!ustry con!itions, operatin% characteristics an! financial sta ility, an! the co"ple7ity of inventory accountin%, on the financial state"ents of the entity !epicte! in the e7peri"ental case. Thus, & hypothesi-e that participants in the SA1content con!ition will "ake etter9 i.e., "ore accurate assess"ents of inherent riskC (/: Au!itors usin% SA1content will assess inherent risk "ore accurately than au!itors not usin% SA1content. Strategy Process and Strength of the Control En ironment Strate%y process relates to two issuesC the process of strate%y for"ulation 5how !ecisions are %enerate! y the client3s "ana%e"ent6 an! the process of strate%y i"ple"entation 5how

!ecisions are put in action6 5/uff an! 2e%er ;<H>, :;:6. Strate%ic !ecisions arise as a +oint pro!uct of rational1analytic an! political processes within or%ani-ations 5Narayanan an! Fahey ;<H:, :>6. G 2esearch has shown that the e7tent to which an or%ani-ation atte"pts to e e7haustive or inclusive in "akin% strate%ic !ecisions is positively relate! to fir" perfor"ance in sta le environ"ents, an! ne%atively in unsta le environ"ents 5Fre!rickson ;<HF, Fre!rickson an! (itchell ;<HF6. Strate%y

The focus of strate%y content research is on aspects of strate%y such as "arket con!itions in which the usiness operates, the co"petitive position of a usiness in its "arketplace 5Fahey an! )hristensen ;<HG9 2u"elt ;<>F, ;<H:6, the strate%ic %oals of a usiness or%ani-ation, the "etho!s of achievin% these %oals 5internal %rowth, ac4uisitions, an! !ivest"ents6, an! the type an! scope of strate%ic !ecisions 5!iversification, vertical inte%ration, strate%ic alliances, an! %eo%raphical e7pansion6 5e.%., 'ettis ;<H;9 'u--ell an! $ale ;<H>9 )hristensen an! (ont%o"ery ;<H;9 /awes an! )ritten!en ;<HF9 Palepu ;<HI9 S"ith et al. ;<<:6. G The rational1analytic !ecision process views strate%y for"ulation as a set of proce!ures that inclu!e analysis of the environ"ent an! fir" resources, i!entification an! evaluation of strate%ic alternatives alon% selecte! criteria, choice of a strate%y, an! !eli erate i"ple"entation 5An!rews ;<H=9 /itt an! Tyler ;<<;6.
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process research has also !e"onstrate! that strate%ic !ecision processes are influence!

or%ani-ational politics 5Nutt ;<HF9 /uff an! 2e%er ;<HG9 Fre!rickson an! &a4uinto ;<H<6. The particular strate%ic !ecision eventually rests on the power8influence !istri ution within an! across relevant coalitions, an! is achieve! throu%h ar%ainin% an! ne%otiatin% 5Narayanan an! Fahey ;<H:6. & e7pect that analysis of the co"prehensiveness of the client strate%ic process helps au!itors uil! a "ental "o!el of the client3s hi%her level "ana%e"ent controls an! entity3s risk assess"ent process. Analysis of the for"ality of the client3s strate%y for"ulation process shoul! ena le SA1process au!itors to etter evaluate ele"ents of the client3s control environ"ent,

inclu!in% "ana%e"ent3s philosophy an! operatin% style, or%ani-ational structure, an! assi%n"ent of authority an! responsi ility. Therefore, analysis of the client3s strate%y process will !irect SA1 process participants to "ake "ore accurate assess"ents of the stren%th of the client3s control environ"entC (0C Au!itors usin% SA1process will assess the stren%th of the client3s control environ"ent "ore accurately than au!itors not usin% SA1process. Panel A of Ta le ; presents a su""ary of the pre!ictions a!vance! in /;1 /I. Insert Table , III" 1*T($ $2$') Research esign & use a : 5SA1content6 7 : 5SA1process6 etween1su +ects factorial !esi%n to test the hypotheses. Fi%ure : shows four cells in the e7peri"ental !esi%nC cell ; 5U)'6 is a control cell 5i.e., no SA was perfor"e!69 cell : containe! the SA1content treat"ent, cell @ inclu!e! the SA1process, an! cell F 5SA1 oth6 ha! oth treat"ents fro" cells : an! @ co" ine!. &n the U)' con!ition, participants rea! the case "aterials9 "a!e assess"ents of )'2, 2((, inherent an! control risk9 an! selecte! au!it tests for the client3s lo%istics an! !istri ution process.
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&n or!er to ascertain the A%enericB 5i.e., non1fir"1specific6 nature of SA in the e7peri"ent, SA treat"ents 5SA1content an! SA1process6 were ase! on prior research in strate%ic "ana%e"ent ut a!apte! for an au!it settin%. &n the SA1content con!ition, participants perfor"e! an analysis of client strate%y content y 5a6 respon!in% to a 4uestionnaire re%ar!in% the client3s key usiness o +ectives, strate%y, an! its effectiveness an! sustaina ility usin% "easures of strate%ic rea!th fro" Ketchen et al. 5;<<G6 an! (c#ou%all et al. 5;<<F69 5 6 i!entifyin% key environ"ental threats 5 usiness risks6 to the sustaina ility of the client3s strate%y usin% "easures of environ"ental uncertainty fro" (iller an! #rJ%e 5;<HG69 5c6 consi!erin% the characteristics of the client3s "arket con!itions an! its co"petitive position 5'u--ell an! $ale ;<H>69 5!6 applyin% Porter3s Afive forces "o!elB to the client3s in!ustry in or!er to reco%ni-e potential in!ustry threats to the client3s strate%ic position9 an! 5e6 analy-in% an entity1level usiness "o!el of a client 5'ell et al. ;<<>6. They "a!e assess"ents of )'2, 2(( an! its co"ponents 5inherent an! control risk6, an! selecte! au!it tests for the client3s lo%istics an! !istri ution process. Participants in the SA1process con!ition perfor"e! an analysis of the sa"e client, ut with an e"phasis on the client3s strate%ic "ana%e"ent process. They 5a6 i!entifie! the client3s key usiness processes an! their o +ectives9 5 6 evaluate! the !e%ree to which the client3s inter1 or%ani-ational politics influence the attain"ent of those o +ectives9 an! 5c6 assesse! the co"prehensiveness of the client strate%ic process usin% "easures fro" Fre!rickson 5;<HF, ;<HI6 an! Fre!rickson an! (itchell 5;<HF6. Ne7t, SA1process participants "a!e assess"ents of )'2, 2(( an! its co"ponents 5inherent an! control risk6, an! selecte! au!it tests for the client3s lo%istics an! !istri ution process. Finally, participants in SA1 oth perfor"e! oth SA1content an! SA1process, ran!o"i-e! in ter"s of or!er. They also "a!e assess"ents of )'2, 2(( an! its co"ponents, an! selecte! au!it proce!ures for the client3s lo%istics an! !istri ution process. Insert +igure -

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*3perimental Task and Administration Participants $iven that the purpose of this stu!y is to investi%ate the effectiveness of SA in "akin% risk assess"ents, the appropriate participants for the e7peri"ental task are au!it seniors 5A !ol"oha""a!i ;<<<9 A !ol"oha""a!i an! Usoff :===6. Accor!in% to A !ol"oha""a!i3s 5;<<<6 inventory of au!it tasks, the "a+ority 5@; out of FI6 of au!it tasks at the orientation sta%e are perfor"e! y au!it seniors 5p. G;6.> Ninety1four au!it seniors fro" three of the A'i% FB pu lic accountin% fir"s participate! in the stu!y. Si7 au!itors reporte! that they !iscusse! e7peri"ental "aterials with their peers an!8or ha! seen the case efore. ?ne participant !i! not provi!e the re4ueste! risk assess"ents. Thus, ei%hty1seven responses were inclu!e! in the final analyses. 'ase! on the !ata provi!e! in post1 e7peri"ental 4uestionnaire, participants avera%e! :.G= years of e7perience in au!itin% an! assurance practice 5ran%e ;.I to G years6. Their "ean au!it plannin% e7perience was H.>= en%a%e"ents, where each client, re%ar!less of its si-e, was consi!ere! one en%a%e"ent. Appro7i"ately I>L of participants reporte! havin% a )PA certification.H Au!itor participants were not specialists in the foo! !istri ution or retail in!ustries 5avera%e e7perience .GH an! ;.<< en%a%e"ents, respectively6.< The three "ost fre4uently reporte! speciali-ation cate%ories wereC consu"er "arkets 5FH.<L6, "anufacturin% 5;;.FL6, an! no speciali-ation 5<.;L6. Participants reporte! that they perfor"e! strate%ic analysis of their clients3 usiness as well as the analysis of the client3s "ana%e"ent an! !ecision1"akin% processes on a typical en%a%e"ent 5I.G> an! I.G;, respectively, on a scale fro" A;B 5never6 to A>B 5always66. The
A !ol"ohha""a!i3s 5;<<<6 !ata were %athere! circa ;<<G, i.e. when senior au!itors use! U)' !urin% the orientation phase. &n the a sence of evi!ence to the contrary, & assu"e that the sa"e level of personnel currently perfor"s the orientation phase usin% SA. &n4uiries of four "ana%ers an! one senior re%ar!in% this issue !urin% the 4uestionnaire !evelop"ent sta%e in!icate! that au!it senior is the appropriate level of personnel for the e7peri"ental task. H 2esults are not sensitive to the presence of )PA certification. < The client !epicte! in the case operates in foo! !istri ution in!ustry.
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participants also in!icate! that they typically !ocu"ente! results of such analyses in a "e"o or fir"1specific application 5"ean I.>I for strate%ic analysis an! I.G> for analysis of the client3s "ana%e"ent an! !ecision1"akin% process, oth on a scale fro" A;B 5never6 to A>B 5always66.

Case Materials and Experimental Task ,7peri"ental "aterials were !elivere! to the participants y e1"ail or at a national trainin% session.;= Prior to the receipt of e7peri"ental "aterials, au!it professionals who took part in the stu!y via e1"ail receive! an electronic "e"o fro" a partner or recruitin% "ana%er of their fir" encoura%in% the" to participate, an! supplyin% a char%e co!e for the ti"e spent co"pletin% the 4uestionnaire. Participants who co"plete! the case "aterials at a trainin% session were supervise! y the coor!inators fro" their fir" an! y the researcher. ,ach participant was ran!o"ly assi%ne! to one of the four e7peri"ental cells. The e7peri"ental "aterials inclu!e! the followin% ite"s. First, every participant receive! a cover letter fro" the researcher e7plainin% the purpose of the stu!y, its i"portance, an! provi!in% %eneral instructions a out participatin% in the e7peri"ent. For au!itors who participate! y e1"ail, the cover letter referre! to the partner3s or recruitin% "ana%er3s earlier re4uest to take part in the stu!y. Ne7t, all participants rea! Part ", Background #nformation about $ational %oods, #nc& This part containe! ack%roun! infor"ation a out the client entity, its in!ustry environ"ent, strate%ic %oals, an! "ana%e"ent processes. All participants also receive! National Foo!s, &nc.3s financial state"ent infor"ation 5 alance sheets for : years an! inco"e state"ents for @ years6. ;;Ne7t, participants receive! Part '(, (dditional )ask #nstructions& These instructions containe! a set of
The e7peri"ental "aterials were first pre1teste! for realis" an! un!erstan!a ility usin% un!er%ra!uate au!itin% stu!ents. The e7peri"ental "aterials were revise! an! reviewe! y three "ana%ers, one senior "ana%er, an! one e7perience! senior associate at three A'i% FB fir"s. 'ase! on the au!itors3 co""ents, chan%es to the e7peri"ental "aterials were "a!e. Secon!, e7peri"ental "aterials were pilot1teste! usin% F= senior au!itors as participants. 'ase! on their responses, "aterials were "o!ifie!, an! the final versions !evelope!. ;; Part ; of e7peri"ental "aterials was ase! on a case y $reenwoo! an! Salterio 5:==:6, an! was approve! y KP($ an! y the authors of the case for use in the e7peri"ent.
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4uestions an! visual "o!els for the analysis of client strate%y content in the SA1content con!itions, an! for the analysis of strate%y process in the SA1process con!itions. &n the U)' con!ition, no specific 4uestions8"o!els were provi!e! to assist this un!erstan!in%. Thus, U)' participants procee!e! !irectly fro" Part ; to Part :'. Part 'B, *isk (ssessment and (udit Planning, containe! a 4uestionnaire re4uestin% 5a6 assess"ents of )'2, inherent risk, control risk, an! 2(( at the financial state"ent an! process levels, an! 5 6 selection, fro" a su%%este! "enu, of au!it proce!ures for of the client3s lo%istics an! !istri ution process. Finally, Part +, ebriefing

,uestionnaire, re4ueste! !e"o%raphic an! ack%roun! infor"ation a out participants, as well as their opinion of case realis", the 4uality of e7peri"ental "aterials, an! the usefulness of SA for the purpose of risk assess"ent an! au!it plannin%. Participants foun! the e7peri"ental "aterials to e realistic 5"ean I.>< on a >1point scale6 an! un!erstan!a le 5"ean I.FF on a >1point scale6. They reporte! that case "aterials were useful for the purpose of perfor"in% either the analysis of strate%y content or strate%y process 5"ean I.=I on a >1point scale, stan!ar! !eviation ;.@F6, an! for risk assess"ents 5"ean I.:; on a >1point scale, stan!ar! !eviation ;.:G6. The participants foun! strate%ic analysis "o!erately useful for the purpose of "akin% risk assess"ents an! selectin% au!it proce!ures 5"ean F.G< on >1point scale, stan!ar! !eviation ;.FI6. ?n avera%e, participants took F<.GF "inutes to co"plete the stu!y "aterials 5stan!ar! !eviation ;:.FG6. The "ean ti"e taken to co"plete the stu!y y cell was as followsC FG.== "inutes in cell ;, I=.H@ "inutes in cell :, FH.I= "inutes in cell @, an! II.@@ "inutes in cell F. ?n avera%e, participants took lon%er to co"plete e7peri"ental "aterials if they perfor"e! SA1content 5cells : an! F6 relative to perfor"in% no strate%ic analysis or SA1process 5cells ; an! @, respectively6 5pM.=@G6. ependent 4ariables

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The participants "a!e separate assess"ents of 5a6 client usiness risk 5varia le )'26, 5 6 risk of "aterial "isstate"ent 5varia le 2((6, 5c6 inherent risk 5varia le &26, an! 5!6 stren%th of the client3s control environ"ent 5varia le S),6, at the entity level. ,ach assess"ent was "a!e usin% a <1point scale where ; correspon!e! to Avery low riskB, I 1 to A"o!erate riskB, an! < 1 to Avery hi%h risk.B The 4uestions re4uestin% risk assess"ents containe! !efinitions of each type of risk. &n a!!ition, participants "a!e assess"ents of 2((, &2, an! control risk for the client3s lo%istics an! !istri ution usiness process. To "easure the !epen!ent varia le Aaccuracy of risk assess"entsB for each type of risk, a panel of e7perts consistin% of twelve e7perience! au!it "ana%ers 5three per cell6, assesse! the e7peri"ental case. Their avera%e assess"ents of each type of risk were re%ar!e! as ench"arks within each cell.;: ?n avera%e, the "e" ers of the e7pert panel possesse! H.;@ years of %eneral au!it e7perience 5ran%e of I to ;=.H@ years6 an! ha! worke! on F; en%a%e"ents 5ran%e of := to ;I=6. They also reporte! su stantial e7perience in au!it plannin%C @I en%a%e"ents. ,7pert1"ana%ers in!icate! that they ten! to perfor" an! !ocu"ent strate%ic analysis on a typical en%a%e"entC the respective "eans were F.H@ an! F.>I, on a scale fro" ; AneverB to > Aalways.B They in!icate! that they fre4uently perfor" an! !ocu"ent an analysis of their clients3 "ana%e"ent an! !ecision processesC the "eans were G.== an! G.== on a >1point scale. Ta le : shows the !escriptive statistics for "ana%ers3 responses to the 4uestions that were use! to calculate the key !epen!ent varia les in the stu!y. & calculate! the accuracy of participants3 risk assess"ents as a scale! !ifference etween their response to a risk assess"ent 4uestion an! the "atchin% cell e7pert1panel ench"arkC )'2#&F, 2((#&F, &2#&F, an! S),#&F 5see Ta le :, Panel A6.

An alternative approach woul! e to use a #elphi panel techni4ue in or!er to !erive ench"ark risk assess"ents. /owever, %iven the len%th of the e7peri"ental "aterials, it was not feasi le to o tain "ore than one iteration of responses fro" participatin% e7pert "ana%ers. Also, usin% an internal control syste" evaluation task, Trot"an et al. 5;<H@6 show that interactin% %roups !o not !ifferentially wei%ht %roup "e" ers3 contri utions. &nstea!, they act as if they avera%e "e" ers3 +u!%"ents to !erive a %roup +u!%"ent.
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The !epen!ent varia le for /@ is Aproportion of effective au!it tests selecte!B 5T,ST6. The participants selecte! seven su stantive au!it tests 5fro" a su%%este! list of twelve6 that woul! e "ost appropriate in the au!it of the client3s lo%istics an! !istri ution process. Two ran!o" or!ers of tests were use!. To control for participants3 perception of overall test effectiveness, & aske! participants to rate the effectiveness of all tests on a >1point scale 5*i" le"an ;<<>6. This "easure was use! as a covariate in the statistical analyses. & calculate! the !epen!ent varia le T,ST y co"parin% each participant3s response to the e7pert1provi!e! list of tests. ;@ The proportion of tests that appeare! on oth lists out of seven selecte! was consi!ere! to e the participant3s Aproportion of effective tests selecte!.B Ta le :, Panel ' reports !escriptive statistics for the !epen!ent varia les. Insert Table I4" R*S%2TS Tests of (ypotheses !eneral Approach To test the hypotheses, & use! the followin% %eneral approach. First, & perfor"e! a series of ANN)O?EAs usin% )?NT,NT an! P2?),SS as in!epen!ent varia les, each "easure of risk assess"ent accuracy as !epen!ent varia les, an! the followin% control varia les as covariatesC participant3s %eneral au!itin% e7perience in nu" er of years an! in nu" er of au!it en%a%e"ents9 au!it plannin% e7perience in nu" er of en%a%e"ents9 au!itin% e7perience in the foo! !istri ution in!ustry an! in the retail in!ustry in nu" er of au!it en%a%e"ents9 perfor"ance of strate%ic analysis an! analysis of client3s "ana%e"ent an! !ecision1"akin% processes on a typical en%a%e"ent9 participant3s accountin% fir"9 level within a fir"9 e!ucational ack%roun!, an! for"al trainin% in

A proce!ure si"ilar to the one use! for e7pert risk assess"ents was use! to !evelop the ench"ark list of effective tests.
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strate%ic analysis. &n cases when these covariates were statistically si%nificant, & controlle! for the" in perfor"in% tests of in!ivi!ual hypotheses. & perfor"e! tests of in!ivi!ual hypotheses usin% analyses of 5co6variance with )?NT,NT an! P2?),SS as in!epen!ent varia les, appropriate !epen!ent varia les, an!, if necessary, covariate5s6.;F & then calculate! contrasts to co"pare in!ivi!ual cells or co" ination of cells as su%%este! y the respective hypotheses 5see Ta le ; for su""ary of pre!ictions6. For each of the hypotheses ;, :, an! @, & teste! a AweakB for" an! a Astron%B for". &n the AweakB for", & teste! whether the au!itors who perfor" SA 5content, process, or oth6 "a!e +u!%"ents a out )'2, 2((, an! au!it proce!ures in a%ree"ent with the e7pert panel. &n the Astron%B for", & e7a"ine! if SA1 oth was associate! with s"aller !eviations fro" the e7pert panel than SA1content or SA1 process, or U)'.;I Accuracy of Client "usiness Risk Assessment at the Entity #e el /ypothesis ; pre!icts that au!itors will assess )'2 "ore accurately when they perfor" SA. Thus, & e7pecte! an interaction etween )?NT,NT an! P2?),SS when Aaccuracy of client usiness risk assess"entsB 5)'2#&F6 is use! as a !epen!ent varia le. As pre!icte!, the AN?EA in Ta le @ shows a si%nificant interaction effect of )?NT,NT an! P2?),SSC FM>.;:=, p M.==< 5Ta le @, Panel A6. To investi%ate this interaction, & calculate! interaction contrasts 5Panel )6. The au!itors3 assess"ents of )'2 at the entity level are "ore accurate when they perfor" either U)' 5cell ;6 or SA1 oth 5cell F6 5pM.==I6. /owever, in!ivi!ually perfor"e! SA1content 5cell :6 an! SA1 process 5cell @6 are associate! with a lower accuracy of )'2 assess"ents relative to U)' 5cell ;6

& also perfor"e! a (AN?EA with )?NT,NT an! P2?),SS as fi7e! factors an! )'2#&F, 2((#&F, &2#&F, an! S),#&F as !epen!ent varia les. The "ain effect of P2?),SS an! )?NT,NTPP2?),SS interaction are statistically si%nificant 5Wilk3s M .H=@, pM.==@9 an! Wilk3s M@G>, pM.===, respectively6. ;I &n a!!ition, & repeate! all tests usin% alternative specifications of the !epen!ent varia les, i.e., usin% 5a6 an arcsine transfor"ation, an! 5 6 s4uare! !eviation fro" the e7pert panel 5)ohen an! )ohen ;<H@, :GI1:G>6. 2esults o taine! usin% these alternative specifications !o not 4ualitatively !iffer fro" those reporte! in the paper.
;F

::

5pM.=;>6. Post hoc tests in!icate that the accuracy of )'2 assess"ents is hi%her in SA1 oth than in SA1content or SA1process separately 5pM.=;G6. Thus, & fin! that when participants perfor" either U)' or SA1 oth, their assess"ents of )'2 are closer to the e7pert panel than either SA1content or SA1process alone. & !o not fin! support for the AweakB for" of / ; 5Ta le @, Panel )C pM.=HI69 however, & fin! support for the Astron%B for" of /; 5Ta le @, Panel )C pM.=I@6. Insert Table . Accuracy of the Risk of Material Misstatement Assessment at the Entity #e el /ypothesis : pre!icts that 2(( assess"ents are "ore accurate when au!itors perfor" strate%ic analysis. & perfor"e! an AN?EA with )?NT,NT an! P2?),SS as in!epen!ent varia les an! 2((#&F as a !epen!ent varia le 5Ta le F6. Panel A shows a si%nificant interaction of )?NT,NT an! P2?),SS 5FM>.=@<, pM.=;6. &nteraction contrasts reveal that participants perfor"in% SA1content, SA1process, or SA1 oth, assesse! the 2(( at the financial state"ent level "ore accurately than participants in U)' con!ition 5Panel )C pM.=;> for AweakB for" of / :9 pM.;>H for Astron%B for"6. As in the case of / ;, post hoc tests show that au!itors who !i! either SA1 oth or U)' assesse! 2(( closer to the e7pert panel than their peers who !i! either SA1 content or SA1process 5Panel )C pM.==I6. Therefore, /: is supporte! in its AweakB for". Insert Table / Selection of Audit Tests /ypothesis @ asserts that au!itor1participants usin% SA will select a %reater proportion of effective tests than their peers usin% a U)'. As pre!icte!, an AN?EA with Aproportion of effective testsB 5T,ST6 as the !epen!ent varia le, an! )?NT,NT, P2?),SS, an! ?2#,2 as in!epen!ent varia les in!icates a si%nificant effect of an interaction etween )?NT,NT an!

P2?),SS, while ?2#,2 effects are not statistically si%nificant 5Panel AC FM;@.:@H, pM.===6. ;G
Two ran!o" or!ers of au!it proce!ures were use! for the "enu fro" which participants "a!e selections in the e7peri"ent.
;G

:@

/owever, the pattern of "eans for the proportions of effective tests selecte! 5Panel '6, an! interaction contrasts 5Panel )6 in!icate that au!itors in the U)' con!ition 5cell ;6 selecte! a %reater proportion of au!it proce!ures in a%ree"ent with the e7pert panel than au!itors in the SA con!itions 5cells :, @, an! F6 5Panel )C pM.===6. Thus, the AweakB for" of / @ is not supporte!. Tests of the Astron%B for" of /@ an! post hoc contrasts show that althou%h in the SA1 oth con!ition au!itors still selecte! less tests in a%ree"ent with the e7perts 5pM.=@I for the contrast FQ ;, not ta ulate!6, their selections were in %reater a%ree"ent with the e7pert list than in either SA1 content an! SA1process con!itions 5Panel )C pM.=FI6. Thus, & !o not fin! support for the Astron%B for" of /@9 however, si"ilarly to /; an! /:, results in!icate that either SA1 oth or U)' pro!uce etter +u!%"ents than SA1content or SA1process 5panel )C pM.==;6. Insert Table 0 Assessments of Inherent Risk and the Strength of the Control En ironment /ypothesis F pre!icts that participants in the SA1content 5cell :6 an! SA1 oth 5cell F6 con!itions will e a le to assess inherent risk "ore accurately than participants in the U)' 5cell ;6 an! SA1process 5cell @6 con!itions. Thus, & e7pect a "ain effect for )?NT,NT when &2#&F is use! as the !epen!ent varia le. To test / F, & perfor"e! an AN)?EA with )?NT,NT an! P2?),SS as in!epen!ent varia les, &2#&F as a !epen!ent varia le, an! F??#,RP, 2(( as covariates. Ta le G reports a si%nificant "ain effect of the varia le P2?),SS 5Panel AC FMI.=F>, pM.=:H6, whereas the "ain effect of )?NT,NT an! )?NT,NTPP2?),SS interaction are not statistically si%nificant 5Panel AC pM.GHH an! pM.:F=, respectively6. )ontrasts of SA1content versus other cells, in!ivi!ually an! in the a%%re%ate, su%%est that when au!itors perfor" SA1content alone, their scale! !eviations of inherent risk assess"ents fro" the e7pert panel are s"aller than in other con!itions 5Panel )C pM.=@@6. Thus, /F is supporte! only for cell :, SA1content. Insert Table 5

:F

/ypothesis I pre!icts that participants in the SA1process 5cell @6 an! SA1 oth 5cell F6 con!itions will e a le to assess the stren%th of the control environ"ent "ore accurately than participants in the U)' 5cell ;6 an! SA1content 5cell :6 con!itions. Thus, / I pre!icts a "ain effect for P2?),SS when S),#&F is use! as !epen!ent varia le. Ta le > reports AN)?EA tests of / I. As pre!icte!, they reveal a si%nificant "ain effect of P2?),SS 5Panel AC FMF.GI@, p M.=@F6. They also show a si%nificant )?NT,NTPP2?),SS interaction 5Panel AC FMFH.:>;, pM.===6. &nteraction contrasts su%%est that the perfor"ance of SA1process is associate! with s"aller !eviations fro" the e7pert panel in assessin% the stren%th of the control environ"ent 5Panel )C pM.=;>6. Post hoc contrasts reveal that that SA1process 5cell @6 !rives this resultC the "ean of S),#&F in cell @ 5SA1process6 is si%nificantly s"aller than in poole! cells ; 5U)'6, : 5SA1 content6, an! F 5SA1content1an!1process6 5Panel )C pM.==:6. Thus, /I is supporte!. Insert Table 6 Additional Analysis at the "usiness Process #e el & investi%ate the pervasiveness of the effects of SA on other ele"ents of the risk assess"ent at the level of a usiness process. &n or!er to separate the i"pact of SA on process1 level risk assess"ents fro" the i!entification an! analysis of the critical usiness processes, & provi!e! each participant with a !escription of the lo%istics an! !istri ution process as a key process for the client !epicte! in the case. & aske! each participant to "ake an assess"ent of the risk of "aterial "isstate"ent, inherent risk, an! control risk, ase! on the results of their SA an! the infor"ation a out the usiness process.;> Analyses of the interaction contrasts for the assess"ents of 2(( at the process level show that au!itors are "ore accurate in their assess"ent when they perfor" SA1 oth 5cell F versus other cellsC FM:.H>@, pM.=F> one1taile!6.;H Thus, at the process level, SA1 oth is associate! with
;> ;H

The !escription of the usiness process was hel! constant across e7peri"ental con!itions. Not ta ulate!. :I

closer assess"ents of 2(( to those provi!e! y the e7pert panel than either SA1content or SA1 process perfor"e! separately 5cell F versus cells : an! @C FM:.GI<, pM.=IF6. /owever, either SA1 content or SA1process is not associate! with "ore accurate 2(( assess"ents than U)' 5cells : an! @ versus cell ;C FM.I@:, pM.:@F6. Thus, & o serve that while at the entity level any of the three versions of SA is helpful in rin%in% the 2(( assess"ents closer to those provi!e! y the e7pert panel, at the process level 2(( assess"ents are "ore accurate only when au!itors con!uct SA1 oth. To e7a"ine process level assess"ents of inherent risk, & perfor"e! an AN?EA with scale! !eviations of inherent risk assess"ent fro" the e7pert panel ench"ark as a !epen!ent varia le. & fin! a si%nificant "ain effect of )?NT,NT 5FM@:.FIH, pM.===6, while the "ain effect of P2?),SS an! )?NT,NTPP2?),SS interaction are not statistically si%nificant 5FM=.;;, pM.<;> an! FM.G>;, pM.F;I, respectively6. Tests of si"ple "ain effects corro orate this resultC when participants perfor" an SA1content or SA1 oth, their process1level assess"ents of inherent risk are "ore accurate than assess"ents in the SA1process an! U)' con!itions 5FM@:.FIH, pM.===6. These results in!icate that results of tests of /F are pervasive an! hol! at the process level.;< 4" ISC%SSI$#7 C$#C2%SI$#S7 A# 2I1ITATI$#S iscussion This stu!y investi%ate! whether the analysis of strate%y content an!8or the analysis of strate%y process i"prove the effectiveness of au!itors3 risk assess"ents. First, au!itors3 )'2 assess"ents were "ore accurate when they perfor"e! SA1 oth. As e7pecte!, SA1 oth ena le! au!itors to process infor"ation a out the client internal an! e7ternal environ"ent in way that their risk assess"ents were closer to the e7perts than assess"ents "a!e y au!itors in SA1content, SA1
When & perfor"e! si"ilar tests with control risk at the process level, neither P2?),SS nor )?NT,NT or their interaction is si%nificant. This coul! e !ue to the !ifficulty of capturin% infor"ation a out process controls in the short !escription of the usiness process. & a!!ress this issue when & !iscuss li"itations of the stu!y.
;<

:G

process, or U)' con!itions. An i"plication of this result is that partial SA is not as eneficial to the au!itor an! the au!it as SA1 oth. Secon!, with respect to the accuracy of 2(( assess"ents, the perfor"ance of SA is associate! with "ore accurate +u!%"ents at the entity level. At the process level, when au!itor participants perfor"e! SA1content an! SA1process, their assess"ents of 2(( !eviate! less fro" the e7pert panel than assess"ents "a!e y au!itors in U)' con!ition. These results len! cre!ence to the ar%u"ent that SA focuses au!itors3 attention on the link etween a client3s strate%y in the conte7t of the in!ustry environ"ent an! relate! risks e" e!!e! in the financial state"ents. Thir!, when au!itors analy-e! the content of the client strate%y, their assess"ents of inherent risk were "ore accurate at the entity level an! the usiness process level relative to the con!itions where such analysis was not perfor"e!. This fin!in% supports the theoretical contention that systems-thinking1 ase! analysis of the client3s in!ustry con!itions, other "acro1 an! "icro1 level forces affectin% the client usiness environ"ent, an! the client3s strate%ic o +ectives an! specific strate%ies, is associate! with an enhance! un!erstan!in% of the 2(( at the usiness process level, possi ly throu%h uil!in% a "ore co"prehensive "ental "o!el of relevant risk factors. Thus, & conclu!e that SA1content is "ore helpful to the au!itor for the purpose of "akin% assess"ents of inherent risk than no strate%ic analysis 5U)'6 or SA1process. Fourth, results su%%est that analysis of strate%y process is associate! with "ore accurate assess"ents of the stren%th of the client3s control environ"ent than U)'. /owever, & !i! not fin! a si"ilar result with respect to control risk assess"ents at the process level, possi ly !ue to the fact that specific process1level controls were not varie! across e7peri"ental con!itions. Nevertheless, these fin!in%s su%%est that provi!in% au!itors with a fra"ework for un!erstan!in% the client3s strate%ic "ana%e"ent an! !ecision1"akin% processes is linke! to %reater appreciation of top1level controls at the entity level.

:>

Finally, participants who perfor"e! strate%ic analyses selecte! a s"aller proportion of au!it tests that correspon!e! with e7pert panel. This fin!in% warrants future investi%ation.

(o!ifications of "etho!olo%ies use! to un!erstan! a client usiness an! "ake risk assess"ents cannot e consi!ere! fully successful if they !o not i"prove the linka%e etween assesse! risks an! appropriate au!it proce!ures. A possi le e7planation to this fin!in% is reliance on au!it support software in selection of au!it proce!ures in participants3 practice. &n su", results of this stu!y provi!es preli"inary evi!ence in support of Asyste"s thinkin%B !riven analyses of client strate%y content an! strate%y process !urin% the orientation phase of an au!it. Au!itors who perfor"e! analyses of a client3s strate%y i"prove their assess"ents of 2((. Au!itors who perfor"e! an analysis of strate%y content were "ore successful in esti"atin% the client3s inherent risk than their peers who !i! not perfor" such an analysis. SA1 process appears to facilitate assess"ents of the stren%th of the client3s control environ"ent at the entity level. .astly, au!it seniors3 selections of au!it proce!ures !i! not i"prove in con!itions where they perfor"e! strate%ic analyses. 2imitations and +uture Research This stu!y is su +ect to a nu" er of li"itations. First, the e7peri"ent use! a A%enericB version of strate%ic analysis. Therefore, there is li"ite! %enerali-a ility of the results to the au!it "etho!olo%ies use! y accountin% fir"s. Secon!, it is possi le that so"e participants in U)' con!itions who ha! e7tensive trainin% an! e7perience in SSA "ay have applie! strate%ic analysis techni4ues use! y their fir". Thir!, au!itor1participants !i! not perfor" the analysis of a usiness process that woul! nor"ally follow strate%ic analysis of a client usiness an! prece!e process1level risk assess"ents. & "a!e this !esi%n choice in or!er to ensure co"pletion of the e7peri"ental "aterials without causin% e7cessive participant fati%ue.

:H

Future research shoul! focus "ore !irectly on "easurin% "ental "o!els that are, ceteris paribus, create! y strate%y !riven fra"eworks provi!e! to au!itors y SA. Such stu!ies will allow for the e7a"ination of how "ental "o!els are for"e!, an! what aspects of such "o!els affect risk assess"ents pervasively, i.e. oth at the entity an! at the process level. 2elate! to "ental "o!el uil!in%, future research coul! investi%ate how au!itors process counterfactual infor"ation in the course of strate%ic analysis. Finally, research concernin% the application of strate%ic analyses for various types of clients 5e.%., lar%e vs. s"all an! "e!iu"1si-e!, first1year vs. continuous6 is also warrante!.

:<

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Ketchen, #. 0., 0r., 0. '. Tho"as, an! 2.2. (c#aniel, 0r. ;<<G. Process, content, an! conte7tC syner%istic effects on or%ani-ational perfor"ance. 1ournal of 5anagement ::5:6C :@;1:I>. Kinney, W. 2., 0r. :===. #nformation ,uality (ssurance and #nternal Control for 5anagement ecision 5aking& The (c$raw1/ill )o"panies, &nc. Klein"unt-, '. ;<<=. Why we still use our hea!s instea! of for"ulasC towar! an inte%rative approach. Psychological Bulletin ;=>5(ay6C :<G1@;=. Knechel, W.2. :==;. (uditing. (ssurance and *isk& )incinnati, ?/C South1Western )olle%e Pu lishin%. KP($ ..P. :==:& Cases in Strategic-Systems (uditing& ,!s., 'ell, T. '., an! &. Solo"on. U.S.A.C KP($ ..P. .e%ren-i, P., an! E. $irotto. ;<<G. Focusin% an! !e1focusin% in infor"ation selection. &n 5ental 5odels in Cogniti!e Sciences& ,!s., ?akhill, 0., an! A. $arnha". ,ast Susse7, U.K.C Psycholo%y Press. .e%ren-i, P., $irotto, E., an! P. N. 0ohnson1.air!. ;<<@. Focussin% in reasonin% an! !ecision1 "akin%. Cognition F<C @>1GG. .e%ren-i, P., an! (. Sonino. ;<<@. The content of "ental "o!elsC A co""entary to APrUcis of #e!uction.B Beha!ioral and Brain Sciences ;G5:6 C @IF1@II. .e"on, W. (., Tatu", K. W., an! W. S. Turley. :===. e!elopments in the (udit 5ethodologies of 0arge (ccounting %irms& UKC A'$ Professional &nfor"ation. (asha, (. F. an! ). .. (iller :===. The effect of task co"ple7ity an! a !ecision ai! on !ecision ai! accuracy, consensus, an! efficiency. /orking paper. ,l"hurst )olle%e. (c#aniel, .. S. ;<<=. The effects of ti"e pressure an! au!it pro%ra" structure on au!it perfor"ance. 1ournal of (ccounting *esearch :HC :G>1:HI. (c#ou%all, P. P., )ovin, 0. $., 2o inson, 0r., 2. '., an! .. /erron. ;<<F. The effects of in!ustry %rowth an! strate%ic rea!th on new venture perfor"ance an! strate%y content. Strategic 5anagement 1ournal ;IC I@>1IIF. (essier, W. F., 0r. :==@. (uditing and (ssurance Ser!ices. ( Systematic (pproach& (c$raw1/ill )o"panies, &nc. The

@@

(essier, W. F., 0r., an! .. A. Austen. :===. &nherent risk an! control risk assess"entsC evi!ence on the effect of pervasive an! specific risk factors. (uditing. 1ournal of Practice and )heory ;<5Fall6C ;;<1;@;. (essier, W.F., 0r., Kachel"eier, S. 0., an! K. .. 0ensen. :==;. An e7peri"ental assess"ent of recent professional !evelop"ents in nonstatistical au!it sa"plin% %ui!ance. (uditing. 1ournal of Practice and )heory :=5Sprin%6C H;1<G. (iller, #., an! ). #rJ%e. ;<HG. Psycholo%ical an! tra!itional !eter"inants of structure. (dministrati!e Science ,uarterly @;5#ece" er6C I@<1IG=. (ock, T. 0., an! A. (. Wri%ht. ;<<@. An e7ploratory stu!y of au!itor evi!ential plannin% +u!%"ents. (uditing. 1ournal of Practice and )heory ;:5Fall6C @<1G;. (ock, T. 0., an! A. (. Wri%ht. ;<<<. Are au!it pro%ra" plans risk1a!+uste!D (uditing. 1ournal of Practice and )heory ;H5Sprin%6C II1>F. Narayanan, E. K., an! .. Fahey. ;<H:. The "icro1politics of strate%y for"ulation. (cademy of 5anagement *e!ie7 >5;6C :I1@F. Nutt, P. ). ;<HF. Types of or%ani-ational !ecision processes. (dministrati!e Science ,uarterly :<C F;F1FI=. ?3#onnell, ,. an! 0. Schult-. :==@a. The influence of a strate%ic1syste"s lens on au!itor risk assess"ents. /orking paper. Arisona State University. ?3#onnell, ,. an! 0. Schult-. :==@ . Strate%ic assess"ents !urin% usiness1risk au!itsC A curse of knowle!%e for au!itor +u!%"ent a out evi!ence of financial "isstate"ent. /orking paper. Arisona State University. Palepu, K. ;<HI. #iversification strate%y, profit perfor"ance an! the entropy "easure. Strategic 5anagement 1ournal GC :@<1:II. Pa4uette, .., an! T. Ki!a. ;<HH. The effect of !ecision strate%y an! task co"ple7ity on !ecision perfor"ance. 2rgani3ational Beha!ior and 9uman ecision Processes F;C ;:H1;F:. Porter, (. ,. ;<H=. Competiti!e Strategy& New Sork, NSC The Free Press. Porter, (. ,. ;<HI. Competiti!e (d!antage& New Sork, NSC The Free Press. Porter, (. ,. ;<<H. 2n Competition& 'oston, (AC /arvar! 'usiness School. 2u"elt, 2. P. ;<>F. Strategy, Structure, and ;conomic Performance& 'oston, (AC /arvar! 'usiness School. 2u"elt, 2. P. ;<H:. #iversification strate%y an! profita ility. Strategic 5anagement 1ournal @C @I<1@G<.

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Salterio, S. ,., an! T. 2. Weirich. :==;. A pri"er on the strate%ic syste"s approach to au!itin%. /orking paper& University of Waterloo. Si"on, /. A. ;<>@. The structure of ill1structure! pro le"s. (rtificial #ntelligence FC ;FI1;H=. S"ith, K. $., ). (. $ri"", an! (. 0. $annon. New ury Park, )AC Sa%e Pu lications. ;<<:. ynamics of Competiti!e Strategy&

Trot"an, K. T., Setton, P. W., an! &. 2. *i""er. ;<H@. &n!ivi!ual an! %roup +u!%"ents of internal control syste"s. 1ournal of (ccounting *esearch :;5;6C :HG1:<:. Waller, W. S. ;<<@. Au!itors3 assess"ents of inherent an! control risk in fiel! settin%s. )he (ccounting *e!ie7 GH 5?cto er6C >H@1H=:. *i" le"an, (. F. ;<<>. The effects of SAS No. H: on au!itors3 attention to frau! risk factors an! au!it plannin% !ecisions. 1ournal of (ccounting *esearch @I5Supple"ent6C >I1<>.

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+igure , Risk Assessment and Audit Planning

Client Acceptance8 Retention

*ngagement Risk

Audit Risk

%nderstanding the Client &usiness %sing $C" or SA

Client &usiness Risk

Risk of 1aterial 1isstatement

IR
Inherent Risk Control Risk

etection Risk

Preliminary Audit Plan

@G

+igure *3perimental esign SA9C$#T*#T

#o )es

S A : P R $ C * S S

Cell "
#o %C&

Cell '
SA9Content

)es

Cell +
SA9Process

Cell =
SA9 &oth ;Content and Process<

@>

Table , Summary of Predicitions and 1easures of ependent 4ariables Panel A% Summary of Predictions:= 9ypothesi ependent -ariable s /; Accuracy:; of )lient 'usiness 2isk Assess"ent 5)'2#&F6 Accuracy of 2isk of (aterial (isstate"ent Assess"ent 52((#&F6 Predictions AStron%B for"C F Q 5;V:V@6W@ AWeakB for"C 5:V@VF6W@ Q ; AStron%B for"C F Q 5;V:V@6W@ AWeakB for"C 5:V@VF6W@ Q ; AStron%B for"C F X 5;V:V@6W@ AWeakB for"C 5:V@VF6W@ X ; 5:VF6W: Q 5;V@6W: 5@VF6W: Q 5;V:6W:

/:

/@

Proportion of ,ffective Tests Selecte! 5T,ST6 Accuracy of &nherent 2isk Assess"ent 5&2#&F6 Accuracy of Assess"ents of the Stren%th of the )lient3s )ontrol ,nviron"ent 5S),#&F6

/F /I

Panel "% Measures of the &ependent 'aria(le )Risk Assessment Accuracy* 9ypothesis 5easure of *isk (ssessment (ccuracy /; /: 5Participant3s )lient 'usiness 2isk Assess"ent1 ,7pert )lient 'usiness 2isk Assess"ent6 ,7pert )lient 'usiness 2isk Assess"ent 5Participant3s Assess"ent of 2isk of (aterial (isstate"ent 1 ,7pert Assess"ent of 2isk of (aterial (isstate"ent6 ,7pert 2isk of (aterial (isstate"ent Assess"ent 5Participant3s &nherent 2isk Assess"ent1 ,7pert &nherent 2isk Assess"ent6 ,7pert &nherent 2isk Assess"ent 5Participant3s Assess"ent of the Stren%th of the )lient3s )ontrol ,nviron"ent Y ,7pert Assess"ent of the Stren%th of the )lient3s )ontrol ,nviron"ent6 ,7pert Assess"ent of the Stren%th of the )lient3s )ontrol ,nviron"ent

/F /I

Please refer to Fi%ure : for cell nu" ers. Accuracy is "easure! as the scale! !ifference etween participants3 responses an! the e7pert1panel ench"ark. Thus, si%ns A Q B an! A X B are reverse! in the ta le relative to the wor!in% of respective hypotheses when accuracy is a !epen!ent varia le.
:= :;

@H

Table escripti!e Statistics for the ependent 4ariables Panel A% Mean Risk Assessments (y Expert Panel +Standard &e iation, -ariable )'2 &2 S), 2(( Cell". UCB >n?+@ I.==== 5;.====6 G.==== 5;.====6 @.GGG> 5;.;IF>6 G.@@@@ 5;.;IF>6 Cell . S(-content >n?+@ F.@@@@ 5;.I:>I6 I.@@@@ 5;.I:>I6 I.GGG> 5;.;IF>6 I.GGG> 5;.====6 Cell +. S(-process >n?+@ F.GGG> 5;.I:>I6 G.==== 5;.====6 I.@@@@ 5;.I:>I6 I.==== 5=.====6 Cell =. S(-both >n?+@ I.@@@@ 5;.I:>I6 G.@@@@ 5:.=H;>6 @.@@@@ 5=.I>>F6 I.GGG> 5:.I;GG6

Panel "% Mean Participants- .udgments +Standard &e iation, -ariable Cell ". UCB >n?'A@ Cell '. S(-content >n?'=@ Cell +. S(-process >n?'B@ Cell = . S(-both >n?"C@ 2!erall >n?CD@

)'2 &2 S), 2(( )'2#&F &2#&F S),#&F 2((#&F T,ST

I.;G 5;.:H6 I.:; 5;.@H6 I.I= 5;.IF6 I.@< 5;.@H6 I.@= 5;.@>6 I.;: 5;.IF6 I.:< 5;.G=6 F.<I 5;.F=6 I.== 5;.@:6 I.;= 5;.FG6 I.;: 5;.@<6 I.;@ 5;.I>6 I.I> 5;.F>6 I.I@ 5;.>>6 I.@; 5;.I@6 F.HH 5;.FI6 I.:; 5;.@H6 F.H; 5;.F=6 F.GI 5;.FG6 F.<; 5;.F;6 .=@:= 5.:IG;6 .:=;< 5.@;<;6 .;>HG 5.@:<H6 .=;=F 5.:IHF6 .;=H; 5.@==;6 1.;FG> 5.:IG=6 1.==>H 5.@==:6 1.;>FG 5.:@:G6 1.:;=I 5.:=H<6 1.;:>G 5.:G:<6 .@<GF 5.@H=:6 1.=<IG 5.:>G<6 .=FF> 5.:>IF6 .GIHH 5.I@;G6 .::>= 5.FG;<6 1.:@=@ 5.::<G6 1.=H=< 5.:F@<6 1.=@H; 5.:H=;6 1.;><< 5.:IGH6 1.;@;> 5.:I<I6 .>>@H 5.;:IH6 .G@G< 5.;@@;6 .G:F; 5.;:><6 .G<GF 5.;@GH6 .GHI= 5.;F:F6

$ote. )'2 is the assesse! client usiness risk for the co"pany !epicte! in the e7peri"ental case at the entity level on a scale fro" ; Avery low riskB to < Avery hi%h riskB &2 is the assesse! inherent risk for the co"pany !epicte! in the e7peri"ental case at the entity level on a scale fro" ; Avery low riskB to < Avery hi%h riskB S), is the assesse! stren%th of the conrol environ"ent the e7peri"ental case at the entity level on a scale fro" ; Avery weakB to < Avery stron%B 2(( is the assesse! risk of "aterial "isstate"ent 5risk of "aterial "isstate"ent6 for the co"pany !epicte! in the e7peri"ental case at the entity level on a scale fro" ; Avery low riskB to < Avery hi%h riskB See Ta le ; for the !efinition of varia les )'2#&F, &2#&F, S),#&F, an! 2((#&F. T,ST represents a proportion of tests, out of seven selecte! for the au!it of lo%istics an! !istri ution process that were selecte! y "ana%er e7pert panel an! y an au!itor1participant

@<

Table . Tests of (,: Accuracy of Client &usiness Risk Assessment ;C&R I+< Panel A% A/0'A 1ith C0/TE/T and PR0CESS as Independent 'aria(les Source of -ariation )?NT,NT P2?),SS )?NT,NTPP2?),SS ,rror Sum of S:uares .==; .=;; .G;; >.;;> df ; ; ; H@ %-statistic .=== .;:G >.;:= p E!alue .<H< .>:F .==<

Panel "% Mean C"R&I2 +Standard &e iation, 3n4 S(- Process $o $o Fes Combined Panel C% Contrasts Contrast AWeakB for"C 5:V@VF6W@ Q ; AStron%B for"C FQ 5;V:V@6W@ Post1hoc )ontrastsC 5:V@6W: Q ; FQ 5:V@6W: 5FV ;6 W: Q5:V@6W: Contrast ;stimate .:<I 1.@H; %-statistic :.=== :.GHF p-!alue >one-tailed@ .=HI .=I@ .=@:= 5.:IG;6 N:IO .;>HG 5.@:<H6 N:=O .=<>; 5.:<G<6 NFIO S( E Content Fes .:=;< 5.@;<;6 N:FO .=;=F 5.:IHF6 N;HO .;;<< 5.@=GG6 NF:O Combined .;;I: 5.:<H:6 NF<O .=<H< 5.@=G:6 N@HO .;=H; 5.@==;6 NH>O

.@;> 1.@G= 1.@@H

F.GF: F.H=G >.;:=

.=;>P .=;GP .==IPP

$ote. Psi%nificant at .=I level9 PPsi%nificant at .=; level

F=

Table / Tests of (-: Accuracy of the Risk of 1aterial 1isstatement Assessment ;R11 I+< Panel A% A/0'A 1ith C0/TE/T5 PR0CESS as Independent 'aria(les Source of -ariation )?NT,NT P2?),SS )?NT,NTPP2?),SS ,rror Sum of S:uares .=== .=FG .FF> I.:=G df ; ; ; H: %-statistic .==I .>:= >.=@< p E!alue .<FI .@<< .=;=

Panel "% Mean RMM&I2 +Standard &e iation, 3n4 S(- Process $o $o Fes Combined Panel C% Contrasts Contrast AWeakB for"C 5:V@VF6W@ Q ; AStron%B for"C FQ 5;V:V@6W@ Post hoc )ontrastsC 5:V@6W: Q ; FQ 5:V@6W: 5FV ;6 W: Q5:V@6W: Contrast ;stimate 1.@<: 1.;<; %-statistic F.G:F .HGG p-!alue >one-tailed@ .=;>P .;>H 1.:@=@ 5.::<G6 N:FO 1.=@H; 5.:H=;6 N:;O 1.;F=G 5.:G<I6 NFIO S( E Content Fes 1.=H=< 5.:FF=6 N:FO 1.;><< 5.:IGH6 N;>O 1.;::= 5.:I;;6 NF;O Combined 1.;IIG 5.:FG:6 NFHO 1.;=;G 5.:>IH6 N@HO 1.;@;> 5.:I<I6 NHGO

1.@F: .:F; 1.:<;

>.;>H :.H;G >.=@<

.==IPP .=FHP .==IPP

$ote. Psi%nificant at .=I level9 PPsi%nificant at .=; level

F;

Table 0 Tests of (.: Proportion of *ffecti!e Tests Selected ;T*ST< Panel A% A/0'A 1ith C0/TE/T and PR0CESS as Independent 'aria(les Source of -ariation )?NT,NT P2?),SS )?NT,NTPP2?),SS ,rror Sum of S:uares .=;> .=@> .::F ;.:G> df ; ; ; >I %-statistic ;.=@= :.:;I ;@.:@H p E!alue .@;@ .;F; .==;

$ote. (ain effect of ?2#,2 an! interactions of ?2#,2 with )?NT,NT an! P2?),SS are not statistically si%nificant at the conventional levels 5pM.@<G, pM.;F<, pM.@=;, an! pM.>GH, respectively6.

Panel "% Mean TEST +Standard &e iation, 3n4 S(- Process $o $o Fes Combined Panel C% Contrasts Contrast AWeakB for"C 5:V@VF6W@ X ; AStron%B for"C FX 5;V:V@6W@ Post hoc )ontrastsC 5:V@6W: X ; FX 5:V@6W: 5FV ;6 W: X 5:V@6W: Contrast ;stimate 1.@GF .=II 1.:H> .;@: .:=< %-statistic ;F.G:F .:I= ;H.F>H :.<GI ;:.<I= p-!alue >one-tailed@ .===PP .@;= .===PP .=FIP .==;P .>>@H 5.;:IH6 N:FO .G:F; 5.;:><6 N;<O .>=>G 5.;:><6 NF@O S( E Content Fes .G@G< 5.;@@;6 N:FO .G<GF 5.;@GH6 N;GO .GG=> 5.;@G;6 NF=O Combined .>=IF 5.;FIG6 NFHO .GI>; 5.;@I;6 N@IO .GHI= 5.;F:F6 NH@O

$ote. Psi%nificant at .=I level9 PPsi%nificant at .=; level

Table 5
F:

Tests of (/: Accuracy of Inherent Risk Assessment ;IR I+< Panel A% A/C0'A 1ith C0/TE/T5 PR0CESS as Independent 'aria(les and RMM and 200&E6P as Co ariates Source of -ariation )?NT,NT P2?),SS )?NT,NTPP2?),SS 2(( F??#,RP ,rror Sum of S:uares .=H< .:>< .>>I .IG: .FIF F.:I: df ; ; ; ; ; >> %-statistic .;G@ I.=F> ;.F=@ ;=.;>: H.:;G p E!alue .GHH .=:H .:F= .==: .==I

Panel "% Mean IR&I2 +Standard &e iation, 3n4 S(- Process $o $o Fes Combined Panel C% Contrasts Contrast 5:VF6W: Q 5;V@6W: Post hoc )ontrastsC :Q5;V@VF6W@ :Q 5;V@6W: Contrast ;stimate 1.=F@ .F=G .::F %-statistic .;G@ I.F>I @.FFG p-!alue >one-tailed@ .F:: .=;;P .=@@P 1.;FIH 5.:G;I6 N:FO 1.;>I= 5.:@HG6 N:=O 1.;I<; 5.:FH<6 NFFO S( E Content Fes 1.==>H 5.@==:6 N:FO 1.::;= 5.:=:;6 N;IO 1.=H<H 5.:H@<6 N@<O Combined 1.=>GH 5.:H>;6 NFHO 1.;<F> 5.::;>6 N@IO 1.;:GI 5.:GGI6 NH@O

$ote. F??#,RP is the participant3s e7perience in the foo! !istri ution in!ustry, in nu" er of au!it en%a%e"ents. Psi%nificant at .=I level9 PPsi%nificant at .=; level

F@

Table 6 Tests of (0: Accuracy of Strength of Control *n!ironment Assessment ;SC* I+< Panel A% A/C0'A 1ith C0/TE/T5 PR0CESS as Independent 'aria(les and E/!E6P as a Co ariate Source of -ariation )?NT,NT P2?),SS )?NT,NT P P2?),SS ,N$,RP ,rror Sum of S:uares .=>= .G;> G.F== .@H: ;=.G=G df ; ; ; ; H= %-statistic .I:G F.GI@ FH.:>; :.HHI p E!alue .F>= .=@F .=== .=<@

Panel "% Mean SCE&I2 +Standard &e iation, 3n4 S(- Process $o $o Fes Combined Panel C% Contrasts Contrast 5@VF6W: Q 5;V:6W: Post hoc )ontrastC @Q5;V:VF6W@ Contrast ;stimate 1.@F> 1.H<; %-statistic F.GI@ <.<IF p-!alue >one-tailed@ .=;>P .==:PP .@<GF 5.@H=:6 N:IO .=@;: 5.:>IF6 N:=O .:@F; 5.@H;;6 NFIO S( E Content Fes 1.=<IG 5.:>G<6 N:FO .G@;@ 5.I@G@6 N;GO .;<I: 5.I@F>6 NF=O Combined .;IIF 5.F;@:6 NF<O .:<>< 5.I=I<6 N@GO .:;IH 5.FI>F6 NHIO

$ote. ,N$,RP is the participant3s au!it e7perience in nu" er of en%a%e"ents 5where each clinet is consi!ere! one en%a%e"ent6. Psi%nificant at .=I level9 PPsi%nificant at .=; level

FF