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Unformatted text preview: tecting and preventing ﬁnancial statement
The auditing standards include management integrity and control consciousness as key
attributes to which auditors should be attentive (SAS No. 47, 53, 78, 82, 96; AICPA 1983,
2 The ﬁrm refers to their assessment as ‘‘management tone.’’ We use the more descriptive ‘‘management integrity’’
label throughout the paper. Auditing: A Journal of Practice & Theory, November 2005 52 Kizirian, Mayhew, and Sneathen 1988, 1995, 1997, 2002a). SAS No. 47 discusses the association between management
integrity and IR and CR in greater detail, where inherent risk is deﬁned as the ‘‘susceptibility of an assertion to a material misstatement, assuming that there are no related controls.’’
The assessment of inherent risk considers the client’s operations, industry, the engagement,
and characteristics of management. The inherent risk assessment takes management integrity into consideration as it pertains to the full and fair disclosure of ﬁnancial information.
When management integrity is assessed as high (i.e., high integrity), ceteris paribus, we
expect inherent risk to be assessed at a lower level.
SAS No. 47 deﬁnes control risk as ‘‘the risk that a material misstatement that could
occur in an assertion will not be prevented or detected on a timely basis by internal controls.’’ Factors considered in the internal control assessment include the degree of competence of personnel, levels of oversight (i.e., board of directors and audit committee activities), the assignment of authority and responsibility, and management’s commitment to the
process of providing accurate ﬁnancial information.3 The control environment promoted by
management sets the tone of an organization, inﬂuencing the control consciousness of the
entity’s employees, and is the foundation for all other components of internal control
(AICPA 2000). Therefore, control risk should be negatively related to management integrity.
SAS No. 99 (AICPA 2002b) provides a...
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This note was uploaded on 11/11/2010 for the course MIS BMBM31101 taught by Professor Ms.sara during the Spring '10 term at Asian Institute of Management.
- Spring '10