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SYNOPSIS:
To contribute to the PCAOB project on risk assessment in financial statement audits, we draw on the academic literature to offer insights and conclusions on the risk-assessment process. We use the PCAOB's (2005) recent briefing paper on risk assessment as the organizing framework for our literature review, and we examine academic auditing literature addressing topics including business risk, inherent risk, control risk, fraud risk, linking risk assessments to subsequent testing, and the audit risk model. Overall, we believe that the results of academic research are consistent with the PCAOB staff's apparent reconsideration of the auditor's risk-assessment process. We conclude with identification of future research topics and recognition of barriers to performing research that is relevant to standard setters.
INTRODUCTION
To facilitate the development of auditing standards and to inform regulators of insights from the academic auditing literature, the Auditing section of the American Accounting Association (AAA) has decided to develop a series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This is the first literature synthesis prepared under this program. This author team contains members of the Auditing section's Auditing Standards Committee. Another team includes Auditing Standards and Research Committee members, and the section's Executive Committee has recently selected seven additional research teams. The views expressed in this paper are those of the authors and do not reflect an official position of the AAA or the Auditing Standards Committee. In addition, while discussions with PCAOB staff helped us identify the issues that are most relevant to setting audit standards, the author team was not selected or managed by the PCAOB, and the resulting paper expresses our views, which may or may not correspond with views held by the PCAOB and its staff.
The PCAOB is engaged in a project on auditor risk assessment in financial statement audits. In this project, the PCAOB is considering the development of new auditing standards to provide additional guidance to auditors and/or to articulate new requirements in the auditor's risk-assessment process. On February 16, 2005, the PCAOB's Standing Advisory Group (SAG) discussed the risk-assessment project. In advance of the SAG meeting, PCAOB staff prepared a briefing paper to outline issues of interest in the project (PCAOB 2005). The briefing paper poses ten broad questions for...