H2t h2e misstatements we trace the management

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Unformatted text preview: anagement integrity is inversely related to the timing of audit procedures (the proportion of audit testing performed at year-end) incremental to the risk of material misstatement assessment. H2e: The auditor’s assessment of management integrity is inversely related to the extent of audit procedures incremental to the risk of material misstatement assessment. Misstatements We trace the management integrity assessment through the audit process to address our final question: Is management integrity associated with the magnitude and discovery of material misstatements? We expect management integrity to be associated with the likelihood and magnitude of misstatements for two reasons. First, the auditors perform a management integrity assessment to evaluate the likelihood of misstatements. We expect more misstatements when the auditor believes management to be of low integrity. Second, low management integrity assessments result in higher RMM assessments. Auditors adjust the audit plan accordingly, and therefore are more likely to find misstatements. In other words, the auditor tests more transactions or uses more persuasive audit tests, thereby increasing the probability of identifying more misstatements. Both explanations produce the same predictions, potentially compounding the effect. This leads to the last hypothesis: H3: The auditor’s assessment of management integrity is inversely associated with the likelihood of detected misstatements. PROPRIETARY DATA, VARIABLE MEASUREMENT, AND MODEL SPECIFICATION Proprietary Data The financial statement audit documentation used in this study was acquired from a U.S. Big 4 firm. The firm granted access to its archived audit working paper records for a practice office that has a primarily technology client base.5 Sample audits were selected, by one of the authors, from a list of archived engagements using a random number generator. The archives contain audit files from 1996 to 1999. The firm provided audit data for 78 audit engagements from 78 different clients.6 The firm did not document a management integrity assessment on...
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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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