Auditors' Consideration of Corporate Governance and Management Control Philosophy in Preplanning and Planning Judgments

By Cohen, Jeffrey R.; Hanno, Dennis M. | Auditing: A Journal of Practice & Theory, Fall 2000 | Go to article overview

Auditors' Consideration of Corporate Governance and Management Control Philosophy in Preplanning and Planning Judgments


Cohen, Jeffrey R., Hanno, Dennis M., Auditing: A Journal of Practice & Theory


SUMMARY

The professional literature (e.g., COSO 1992, POB 1993), recent auditing standards (e.g., SAS Nos. 78 and 82), and prior research (e.g., Beasley 1996; Beasley et al. 1999; Dechow et al. 1996) highlight the importance of corporate governance and management control philosophy in ensuring the integrity of the financial-reporting process. We examine the link between these two macro-level factors and both preplanning (e.g., client acceptance, business risk judgments) and planning judgments (e.g., extent and timing of testing).

Ninety-six auditors evaluated a hypothetical client with corporate governance and management control philosophy characteristics that were either strong or weak. More experienced auditors performed preplanning (client acceptance) judgments, while the remaining auditors performed planning judgments related to the extent and timing of substantive testing. As predicted, management control philosophy and the governance structure did affect the preplanning and planning judgments, with a stronger effect observed for management control philosophy. While the results for judgments related to the extent of testing were consistent with professional guidance, auditors lacked consensus in judging the effect on the timing of tests. The results provide insight into the effect of two important elements of the control environment on preplanning and planning judgments and could prove useful in the development of work papers and risk assessment models.

Key Words: Corporate governance, Management control philosophy, Client acceptance, Audit planning.

Data availability: Data used in this study are available upon request from the authors.

Financial-reporting problems of companies (e.g., BCCI, Phar-Mor, Bankers Trust, Barings Bank, Centennial Technologies, Rite-Aid) are often attributable to weak corporate governance and/or weaknesses in management control philosophy (Beasley 1996; Beasley et al. 1999). For example, Dechow et al. (1996) note that the likelihood of earnings manipulation is systematically related to poor governance structures and weaknesses in management oversight. The importance of these characteristics in ensuring the relevance and reliability of financial information has been addressed in several reports issued by various stakeholders in the financial reporting process. For example, the Public Oversight Board (POB 1994, 30) notes that independent auditors, the board of directors, and the audit committee should be natural allies in protecting shareholder interests. Further, Chair of the Securities and Exchange Commission (SEC) Levitt (1999) argues that there needs to be more attention paid to the link between corporate governance mechanisms and the financial-reporting system.

This study investigates the impact of the quality of corporate governance and management control philosophy on preplanning (judgments related to the client-acceptance process) and audit-planning judgments. Both corporate governance and management control philosophy relate to the sharing of power among stakeholders and the protection of shareholders' interests. However, the professional literature (e.g., POB 1993; Committee of Sponsoring Organizations of the Treadway Commission [COSO] 1992) identifies distinct activities that relate specifically to either corporate governance or management control philosophy. Corporate governance includes those oversight activities undertaken by the board of directors and audit committee to ensure the integrity of the financial-reporting process (POB 1993). Management control philosophy includes the activities and attitudes of management related to controls, and the actions taken to convey their importance throughout the organization (COSO 1992).

The increased recognition of the importance of these issues in the financial-reporting process has led to several recent changes in auditing standards (e.g., Statements on Auditing Standards No. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Auditors' Consideration of Corporate Governance and Management Control Philosophy in Preplanning and Planning Judgments
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.