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Unformatted text preview: ures in the revenue cycle (the persuasiveness score is given on a three-level scale: 3 for outside
information, 2 for outside / inside information, and 1 for inside information). TIMING is the percentage of audit
testing conducted at the end of the ﬁscal year of the client. EXTENT is the total hours spent performing test of
controls and substantive testing in the revenue cycle during the audit divided by total audit hours. DIFF is an
indicator variable where 1 indicates that the auditor discovered an audit difference during the evidential process.
The control variables are: natural log of revenue (REVENUE), tenure as auditor (TENURE), prior year, revenue
cycle, audit differences (PYERR), public or private ownership (PUBLIC), and industry categorization
(INDUSTRY). TOTALREVENUE is total revenue, and is included for descriptive purposes only. as one would expect (r – 0.58, p 0.001). These results suggest that the main driver of
risk assessment is prior-year error. Prior-year error is a key determinant of MI, and it
dominates MI when both variables are included in the RMM model.
Equations (2)–(4) indicate that when PERSUASIVENESS is the dependent variable MI
is signiﬁcantly negative ( 0.092, p 0.019), however when TIMING ( 1.154, p 0.252)
0.175) are the dependent variables the coefﬁcient on MI is
and EXTENT (0.005, p
insigniﬁcant. RMM is signiﬁcant when PERSUASIVENESS (0.136, p 0.019) and EXTENT
0.001) are dependent variables, but not when TIMING (3.153, p
the dependent variable. This ﬁnding indicates that the auditor responds to low MI by varying
the persuasiveness of audit tests requiring more independent (i.e., persuasive) evidence
beyond what RMM would suggest. This evidence provides support for H2p. Examination
of the change in adjusted R2 when MI is removed from the model supports our inferences
concerning the marginal impact of MI beyond the effect of RMM (adjusted R2 decreases
from 66.39 percent to 60.5 percent).16 Due to the...
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- Spring '10