Of additional interest is the difference between

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Chapter 12 / Exercise C1
Fraud Examination
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lowest expected risk is when audit procedures are insourced onshore. Of additional interest is the difference between outsourced onshore versus insourced offshore. The participants perceive the risk is lower if the work is outsourced onshore rather than shipped overseas and completed by the firm’s 5 Paired sample t-tests indicate that participants’ quality and risk assessments were significantly different. Paired sample t-tests also indicate that their assessments of quality and risk for the four scenarios were not significantly correlated with the experimental condition to which they were assigned for the case study. 112 Lyubimov, Arnold, and Sutton Auditing: A Journal of Practice & Theory May 2013
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Chapter 12 / Exercise C1
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TABLE 4 Summary of Overall Quality and Risk Perceptions Panel A: Overall Quality Perceptions Onshore Offshore Average Insource (1) (2) 4.3176 4.0068 4.1622 Outsource (3) (4) 4.2297 3.7432 3.9865 Average 4.2736 3.8750 Panel B: Within-Subjects Contrasts for Overall Quality Perceptions df Mean Square F-Ratio p-value (two- tailed) Sourcing (insource versus outsource) 1 4.568 8.348 0.004 Error 147 0.547 Location (onshore versus offshore) 1 23.520 11.029 , 0.001 Error 147 2.133 Sourcing ² Location 1 1.142 4.681 0.032 Error 147 0.244 Panel C: Overall Risk Perceptions Onshore Offshore Average Insource (1) (2) 4.3378 3.7838 4.8919 Outsource (3) (4) 4.8142 4.2770 5.3514 Average 4.0304 5.1216 Panel D: Within-Subjects Contrasts for Overall Risk Perceptions df Mean Square F-Ratio p-value (two- tailed) Sourcing (insource versus outsource) 1 33.583 44.012 , 0.001 Error 147 0.763 Location (onshore versus offshore) 1 176.231 144.308 , 0.001 Error 147 1.221 Sourcing ² Location 1 0.042 0.116 0.734 Error 147 0.365 Overall, quality (risk) perceptions are the participants’ perceptions of each of the four possible scenarios. Perceptions are measured on a scale of 1 (Extremely Low) to 7 (Extremely High) with higher numbers representing higher quality (risk). 1. How do you assess the average risk(quality) of an audit that involves work being outsourced to another office of thesame firm located in the United States? 2. How do you assess the average risk(quality) of an audit that involves work being outsourced to another office of thesame firm located overseas? 3. How do you assess the average risk(quality) of an audit that involves work being outsourced to another firm in theUnited States? 4. How do you assess the averagerisk(quality) of an audit that involves work being outsourced to another firm locatedoverseas?
office of the same firm). Rather, an alternative explanation seems more plausible. Jurors judge theauditor more harshly when the performance does not live up to expectations. In essence, a situationexists where the juror can easily apply counterfactual reasoning and create a scenario where theauditor should have caught the error and applied corrective action. Failure to fulfill those highexpectations leads to higher penalties.SUMMARY AND CONCLUSIONSThis paper reports the results of an experimental study investigating the effect of location of theprovider (onshore versus offshore) and sourcing (insource versus outsource) of audit procedures onthe liability of the auditor when an audit failure subsequently occurs. Theory suggests thatoutsourcing and offshoring of those outsourced audit procedures has the potential to erode theperceived professionalism of auditors’ work as embodied through decreases in perceptions of workquality, increases in perceptions of associated risk, and ultimately more severe damages assessedagainst auditors during litigation. This study uses data from 148 jury-eligible participants fromdiverse demographic backgrounds in order to get a better view of the impact of outsourcing andoffshoring on these potential jurors’ perceptions.Analysisofrecommendeddamageawardsfromtheparticipantslargelysupportsthehypotheses and the associated theoretical perceptions. Analysis of compensatory damages yields

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