Audit risk judgment and performance of Thai auditors: an empirical investigation of their antecedents and consequences.

Author:Lim-u-sanno, Kulwadee

    Audit quality is of significant value to investors in capital markets because investors often use audited financial statements by auditors as the basis for investment decisions. Because auditors are as both insurance provider and information intermediary that provide independent verification of manager-prepared financial statements; audit quality contributes to the creditability of financial statements. Specifically, the current climate of intense competition and litigation in the auditing profession has resulted in auditors paying more attention to conducting efficient and effective audits (Knechel, 2007). Moreover, recent audit failures and corporate scandals in the U.S. such as the Enron debacle have resulted in widespread calls to refresh the audit process and provide highly audit quality (Lin and Fraser, 2003). Accordingly, judgment in auditing is identified major issues that need to be considered to improve the quality of auditor's decision and audit performance. External auditors perform judgment in the context of a financial statement audit to determine whether the financial statements of a company are free from material misstatements and fairly presented in accordance with the Generally Accepted Accounting Principles (GAAP) or other appropriate disclosed basis of accounting (Ritchie and Khorwatt, 2007). During the early stages of judgment in a financial statement audit, auditors must relate with the determining materiality and audit risk to obtain the subsequent design and conduct of an audit (Low, 2004). In the context of today's increasingly global economy, the business processes and audit environments are becoming much more complex and dynamic. As a result, the overall audit risks are also increased.

    The Statement on Auditing Standard 47 (SAS 47) "Audit Risk and Materiality in Conducting an Audit" defines audit risk as the risk that the auditor may unknowingly fail to appropriately modify an opinion on financial statements that are materially misstated (Hwang, Shin, and Han, 2004). Thus, this audit risk reflects the probability that auditors may give a wrong or an inappropriate audit opinion on their client's financial statements (Hui and Fatt, 2007). The audit risk has three major components: inherent risk, control risk, and detection risk. In this study, audit risk judgment refers to the good characteristics of audit risk assessment to decide in the level of audit risks. These characteristics include reliance on information cues, problem indicators awareness, engagement with professional standards, and unbiasedness. The current auditing standards indicate that audit effectiveness and efficiency are acquired from the proper assessment of audit risks (Carnaghan, 2006). In addition, the auditing literature clearly outlines the importance of assessing audit risk in determining the nature, extent, and timing of audit testing, in turn, influence on audit performance (Chang, Tsai, Shin, and Hwang, 2008). In this study, audit performance refers to audit effectiveness and audit efficiency. Audit effectiveness is defined as the auditor's ability to detect errors in the audit working paper and correct decisions concerning the presence of management fraud (Pincus, Bernardi, and Ludwig, 1999). Audit efficiency designates as the auditor's ability to minimize the resource expenditures and accomplish the audit task in less time (Blokdijk, 2004).

    In previous audit risk assessment literature, auditors evaluate the level of audit risk as high, medium or low to identify potential material misstatements and to plan the expected collection of sufficient and proper audit evidence to generate relevant, reliable, and timely audit report (Hwang, Shin, and Han, 2004). Therefore, audit risk judgment will be assumed influence the subsequent audit planning, professional decision making, audit report, and audit performance. Furthermore, the audit judgment and decision literature demonstrates that memory, knowledge, learning, cognition, and other mental processes of individuals play a significant part in the overall judgmental processes and affect their judgment and decision performance (Solomon and Trotman, 2003). Hence, auditor's professional learning may lead to good audit risk judgment. Additionally, audit risk judgment is affected by several external and internal environment factors which influence its operations and practices. Examples of external factors include economic and competitive conditions, development in technology, and change in accounting practices and regulations within the industry. Internal influences include the volume and complexity of the business transactions. This study investigates the effects of audit risk judgment on audit performance of Thai auditors. There has been no prior empirical research in the relation between audit risk judgment and audit performance. The results of this study can be used to improve the quality of auditor's risk judgment and provide implications for efficient and effective audit practices to Thai auditors. Also, these results may be of useful guidelines to Thai auditing standard setters and regulators for enhancing and updating professional standards.

    As described earlier, the main objectives of this study are as follows: (1) to empirically examine the relationship between audit risk judgment and audit performance (2) to study the mediating effects of competent audit planning, professional decision making, and efficient audit report in the audit risk judgment-audit performance relationships (3) to investigate the relationship between professional learning and audit risk judgment (4) to test the moderating effects of audit practice environments and business transaction characteristics in the professional learning-audit risk judgment relationships and (5) to scrutinize the relationship between efficient audit report and audit performance by using the strength of professional standards as a moderator. Thus, the key research question of this study is: how does audit risk judgment have an impact on audit performance? Moreover, the specific research questions are as follows: (1) how do competent audit planning, professional decision making, and efficient audit report mediate the relationship between audit risk judgment and audit performance? (2) how does professional learning have an influence on audit risk judgment? (3) how do audit practice environments and business transaction characteristics moderate the relationship between professional learning and audit risk judgment? And, (4) how does strength of professional standards moderate the efficient audit report-audit performance relationships?

    The remainder of this study is organized as follows. Firstly, the relevant literature and the theoretical framework are reviewed to describe the conceptual model and develop the related hypotheses for testing. Secondly, the research methods including sample and data collection procedure, the variable measurements of each construct, the instrumental verification, the statistics, and equations to test the hypotheses are provided. Thirdly, the empirical results and discussion are demonstrated. Finally, the theoretical, practical, and institutional implications, limitations and suggestions for future research, and conclusion are discussed.


    This study integrates many theoretical perspectives to supporting how audit risk judgment affects audit performance including the cognitive theory, the resource-based view of the firm (RBV), and contingency theory. Firstly, the cognitive theory explains that human behavior is a result of the interrelationship between social environmental factors such as friends, family, and co-workers, and personal factors involving cognitive, affective, and biological events (Bandura, 1997). In this study, the cognitive theory will be applied to describe the relationship between professional learning and audit risk judgment of auditors. The assumption is that individual auditors gain knowledge from interaction between environmental factors such as changing information with other auditors, collecting knowledge from clients and any kinds of media that affect audit risk judgment of auditors. Accordingly, auditors who are higher professional learning will obtain greater the good characteristics of audit risk judgment.

    Secondly, the resource-based view of the firm (RBV) explains how firms achieve a competitive advantage from resources and capabilities (Eisenhardt and Martin, 2000; Barney, 1991). This study attempts to link the resource-based view perspective with individuals to supporting the relationship between audit risk judgment and performance of auditors. In this study, the audit risk judgment is assumed as an auditor's individual capability that affects audit performance. Consequently, an auditor who has more professional learning will acquire good audit risk judgment and good performance in auditing.

    Finally, the contingency theory hypothesizes that organizational structure seems as competitive strategies to enhancing organizational performance which depends on a variety of endogenous and exogenous contextual factors (Anderson and Lanen, 1999). Exogenous factors are the environmental factors or external factors such as competition and environmental uncertainty (Khandwalla, 1972; Govindarajan, 1984), whereas endogenous factors are the organizational factors or internal factors such as technology and culture. In this study, the contingency theory is applied to explain the moderating effects of audit practice environments, business transaction characteristics, and strength of professional standards in the audit risk judgment-audit performance relationships. This study assumes that audit practice environments such as the increasing of competition and litigation, and business transaction characteristics such as the increasing of industry regulations and business transactions, the complexity of business environments, and...

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