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Unformatted text preview: It appears that auditors adjust to their management integrity assessment by seeking more external evidence when management integrity is low. Finally, we find that the likelihood of discovered misstatements is higher for clients with low auditor-assessed management integrity, even after controlling for prior period errors and RMM. The paper proceeds as follows. The next section outlines our hypotheses. The third section describes the data and the empirical tests. The fourth section provides results and the fifth section summarizes our findings. HYPOTHESES We use the audit risk model to link the auditor’s assessment of management integrity to RMM, then link the auditor’s RMM assessment to the persuasiveness, timing, and extent of audit procedures. We then hypothesize that the impact of management integrity on the reliability of management-supplied evidence leads to an effect on audit planning beyond RMM. Finally, we look at whether the auditor’s management integrity assessment is associated with the magnitude of audit differences discovered. Management Integrity and Risk Assessments The auditors in our study arrive at a management integrity measure by investigating factors relating to management’s attitude toward reporting, controls, and the external audit, as well as their reputation in the business community. The firm’s guidance states: ‘‘Our evaluation [of management integrity and control consciousness] provides an indication of whether management is reliable and reputable, and therefore, whether representations and disclosure may reasonably be expected to be meaningful.’’2 The Committee of Sponsoring Organizations (COSO) frames the ‘‘tone at the top’’ as arguably the most important component of an internal control structure (COSO 1999). Without management’s willingness to lead and conduct follow-up procedures to ensure compliance with a strong internal control structure, it is unlikely that even the most proficient internal controls will be effective in de...
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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.

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