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49 AUDITING: A JOURNAL OF PRACTICE & THEORY Vol. 24, No. 2 November 2005 pp. 49–67 The Impact of Management Integrity on Audit Planning and Evidence Timothy G. Kizirian, Brian W. Mayhew, and L. Dwight Sneathen, Jr. SUMMARY: This study uses working paper data from 60 clients of a U.S. Big 4 auditing firm to directly examine the influence of auditor-assessed management integrity on auditor’s assessments of risk of material misstatement, audit planning, and audit out- comes. We hypothesize that management integrity is related to preliminary risk as- sessments, and to the persuasiveness, timing, and extent of planned audit procedures. We also hypothesize that the management integrity assessment influences the auditor’s evaluation of source credibility of management provided evidence beyond its influence via risk assessments (Beaulieu 2001). Finally, we expect the auditor’s management integrity assessment to be associated with the discovery of client misstatements. When we add management integrity to empirical models motivated by Mock and Wright (1993, 1999), we find support for our hypotheses. However, all but two hypoth- esized associations disappear when we add an indicator variable for prior-year errors. We continue to find that management integrity impacts the persuasiveness of evidence sought beyond what is suggested by the auditor’s risk assessment. Interestingly, even after controlling for prior-year errors, we find an inverse association between the au- ditor’s assessment of management integrity and the likelihood of detecting misstate- ments, suggesting the management integrity assessment aids the auditor in ultimately discovering errors. The results support the importance of assessing management in- tegrity in planning the audit and discovering misstatements. Keywords: audit risk model; management integrity; evidence. Data Availability: A confidentiality agreement with the data-granting firm precludes revealing its identity or disseminating the data. INTRODUCTION T his study uses archival data from 60 audits conducted by a U.S. Big 4 accounting firm to examine the association between the external auditor’s assessment of man- agement integrity, and the auditor’s assessment of risk of material misstatement Timothy G. Kizirian is a Professor at California State University, Chico, Brian W. Mayhew is an Assistant Professor the University of Wisconsin–Madison, and L. Dwight Sneathen, Jr. is an Assistant Professor at Georgia Southern University. We appreciate comments from the referees, Bill Messier, Kathy Hurtt, and Larry Rittenberg. We thank the data- granting firm for its generous provision of data. Funding from The University of Arizona Foundation and Depart- ment of Accounting is gratefully acknowledged. Submitted: December 2003 Accepted: June 2005
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50 Kizirian, Mayhew, and Sneathen Auditing: A Journal of Practice & Theory, November 2005 (RMM), audit planning, and the discovery of financial statement misstatements. Prior ar- chival research provides weak support for the linkage between risk assessments and audit- related judgments (Mock and Wright 1993, 1999). Our study provides a stronger test than
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