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Auditors’ perceptions
of reasonable assurance in audit
work and the effectiveness
of the audit risk model
Philip Law
Department of Accounting, University of Macau, Taipa, Macau
Abstract
Purpose – Though assurance services framework has been defined in the Auditing Standards, the
understandability of the concept of reasonable assurance are varied by different auditors. The audit
risk model (ARM) that is being used on a worldwide basis to underpin the audit risk of companies, is
often being criticized. The purpose of this paper is to assess auditors’ perceptions of reasonable
assurance in audit work and the effectiveness of the ARM.
Design/methodology/approach – Three independent variables are examined: CPA certification,
ranks of auditors and gender for their influence on two dependent variables: the perceptions of
reasonable assurance in audit work and the effectiveness of the ARM. MANOVA analysis and follow
up Discriminant Analysis are employed.
Findings – Results reveal that there are significant differences between the perceptions held by
auditors of different ranks regarding reasonable assurance in audit work. Partners entertain higher
perceptions of reasonable assurance than staff auditors. The “gender” variable does not have an
influence on the two dependent variables. Auditors with CPA certifications have higher perceptions of
reasonable assurance. There are no differences in the perceptions ratings by different rank of auditors,
gender and CPA certifications on the effectiveness of the ARM. The three independent variables have
average high-mean ratings on the effectiveness of the ARM, confirming that the current ARM still can
provide an effective assurance.
Originality/value – This empirical study revokes the UK study and The Netherlands study.
Immediate attention need not be focused on restructuring the ARM. Future contemplation of other
important issue such as auditor independence may be considered.
Keywords Auditors, Financial risk, Modelling, Audit reports, Hong Kong
Paper type Research paper
Asian Review of Accounting
Vol. 16 No. 2, 2008
pp. 160-178
q Emerald Group Publishing Limited
1321-7348
DOI 10.1108/13217340810889951
Introduction
This paper aims to provide an empirical study on the effects of CPA certification,
auditors’ rank and gender on the perceptions of reasonable assurance and effectiveness
of the audit risk model (ARM) in the Hong Kong context. No prior study has been made
in the Hong Kong auditing profession and the result of this research could bring
contributions to the literature especially in the Asian-Pacific region. In this study,
there are three independent variables namely, CPA certification, auditors’ rank and
gender; and there are two dependent variables namely, perceptions of reasonable
assurance and the effectiveness of the ARM. The ARM is widely used by the audit
practitioners in the audit process in order to assess the audit risk and hence the level of
reasonable assurances that auditors can place on the internal controls and operations
on their clients (Arens et al., 2006). Hence, the reasonable assurance variable and the
ARM variable may have some inter relationships with each other and MANOVA
analysis is employed in this study (Field, 2005). Since there is lack of prior research in
this area and this gives the justification and motivation to explore in depth in this issue
in the Hong Kong audit environment.
Reasonable assurance
Against the background of the recent corporate collapse and associated demise of the
Big 5 auditor, Arthur Andersen, this issue motivates the researching of examining
Hong Kong “Big 4” auditors’ perceptions of reasonable assurance in the audit work
after the Enron debacle. Assurance is a measure of the level of certainty that the
auditor has obtained at the completion of the audit. Reasonable assurance is not
defined in the literature, but is presumably less than certainty or absolute assurance
(Arens et al., 2006). In the scope paragraph of an audit report, the word reasonable, but
not absolute, assurance indicates that the auditor is not an insurer or guarantor of the
correctness of the financial statements.
The concept of reasonable assurance is formally introduced in the third of the
generally accepted auditing standards (GAAS) pertaining to the performance of audit
field work (Roberts and Dwyer, 1998). This standard states that the auditor shall
obtain sufficient, competent evidential matter to afford a reasonable basis for
expressing an opinion. In US Auditing Standards (AS) No. 2 defines reasonable
assurance means that there is a remote likelihood that material misstatements will not
be prevented or detected on a timely basis. In Australia, Auditing and Assurance
Standard AUS 106.10 defines assurance as “the satisfaction as to the reliability of
information provided” (AUASB, 2001). It points out that the level of satisfaction is
determined by the nature, extent and results of audit procedures and the objectivity of
the evidence obtained. Likewise, US AS No. 110 states that the auditor has a
responsibility to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements, whether caused by
error (AS No. 312) or fraud (AS No. 316). US AS No. 110 says explicitly that because of
the nature of the audit evidence and the characteristics of fraud, the auditor is able to
obtain reasonable, but not absolute, assurance that material misstatements are
detected.
Undeniably, Arens et al. (2006) argue that if the auditor is responsible for asserting
all the information in the financial statements are correct, the evidence requirement and
the resulting cost of the audit would increase to such an extent that audits would not be
economically practical. Moreover, Epstein and Geiger (1994) concur that if investors
expect a standard of absolute assurance, audit liability inevitably would increase.
Gauber et al. comment that in US AS No. 326 Evidential Matter, it is unlikely that an
auditor will be convinced beyond all doubt about all aspects of the statements
being audited, due to economic constraint and an audit opinion must be formed
within a reasonable time and at reasonable cost. The Australian Auditing and
Assurance Standard AUS 108 (AUASB, 2004) also recognize that it is not possible to
achieve absolute assurance because of the inherent limitations of an audit and control
systems.
Understandably, auditors would be unlikely to uncover all material misstatements
in every audit. In view of the expectation gap that has plagued the public accounting
profession almost from inception (Epstein and Geiger, 1994), the profession has tried to
minimize the expectation gap by setting AS which distinguishes clearly the
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responsibilities of company management and of the auditor. For example, US AS
No. 110 sets out clearly that management is responsible for the preparation and
fairness of presentation of the financial statements and specifically for:
.
adopting sound accounting polices; and
.
establishing and maintaining effective internal control over financial reporting
(AS No. 319).
Encouragingly, Schelluch and Gay (2006) found that users are aware that an audit
cannot provide absolute assurance that there are no material misstatements and
believe that management is responsible for the underlying assumptions of the financial
statements. While a variety of means are suggested for bridging the expectation gap,
including increased public awareness and education, the most immediate is through
adherence to current audit standards (Epstein and Geiger, 1994). After the Enron
debacle, auditors even tend to take a more conservative approach when assurance
work is performed to clients (Lindberg and Beck, 2004).
Reasonable assurance in an audit report
Hence, the concept of reasonable assurance was developed in AS and in audit report.
The concept of reasonable assurance is essential in the auditor’s assessment about the
effectiveness of internal control over financial reporting (Dauber et al., 2006). Roberts
and Dwyer (1998) commented that term “reasonable assurance” is the key determinant
of the audit effort. Nevertheless, it will directly affect what types of audit report to be
issued to the clients, from a standard unqualified audit report to an adverse opinion
audit report (Arens et al., 2006). It was agreed that reasonable assurance was
not always well specified and consistently applied in audit practice. Since the purpose
of an audit is to provide reasonable assurance that the financial statements are free of
material misstatements (Arens et al., 2006), the profession is obliged to educate the
public regarding the profession’s use of the concept of reasonable assurance.
While reasonable assurance provides a high level of assurance, it falls short of
absolute assurance. In a standard unqualified audit report, the scope paragraph
states that the audit is designed to obtain reasonable assurance about whether the
financial statements are free of material misstatements. The use of the term
reasonable assurance is intended to indicate that an audit cannot be expected to
completely eliminate the possibility that material misstatements will exist in the
financial statements (Dauber et al., 2006; Arens et al., 2006). The phase obtain
reasonable assurance in the audit report, is intended to inform users that the
auditors do not guarantee or ensure the fair presentation of the financial
statements. Arens et al. (2006) suggest that the phase communicates that there is
some risk that the financial statements are not fairly stated even when the opinion
is unqualified. In other word, an audit provides a high level of assurance, but it is
not an absolute assurance or guarantee. Arens et al. (2006) provides three possible
reasons for that.
First, during an audit, auditors are normally searching for material misstatements
in their audit tests, not minor misstatements that do not affect users’ decisions. Minor
misstatement may sometimes not be adjusted in an audit, depending on the materiality
level of the misstatements. Second, AS No. 508 already sets out that an audit, includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Most audit evidence results from testing a sample of population
such as accounts receivable or inventory. Inevitably, sampling includes some risk of
not discovering a material misstatement. Moreover, the type of sample, extent of
testing and timing of those tests all will affect the outcome. Indeed, auditor judgments
are required for the evaluation of the tests results. No matter equipped with good faith
and integrity, auditors can make mistakes and errors in judgment. Third, an audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. The
accounting presentations contain complex estimates, which inherently involve
uncertainty and could be affected by future events such as contingencies, post
balances event, related party transactions. As a result, auditors have to rely on
evidence that is persuasive rather than convincing (AS No. 326).
The third standard of field work in GAAS states that sufficient competent
evidential matter is to be obtained through inspection, observation, inquires, and
confirmations to afford a reasonable basis for an opinion regarding the financial
statements under audit. Hence, the validity of audit evidence is based on the auditor’s
judgment, rather than a set of rules. Therefore, in an audit report, it concludes that
auditors believe the audits provide a reasonable basis for their opinion. Finally, based
on the normal audit procedures used by auditors, fraudulent prepared financial
statements are often extremely difficult for the auditor to detect, especially when there
is collusion among management (Arens et al., 2006). The normal audit procedures used
by the Big 4 accounting firms are designed to evaluate and examine the operating
activities of the firms. Intentional misstatements or fraud cannot be easily detected by
the normal audit procedures since those dishonest people aware of auditors’ audit
procedures and could make special treatment in the books and records. In view of the
audit work is performed by auditors and thereafter they are the professional staffs
responsible for the issuance of the audit report, hence it follows logically that auditors
will be the target sample in this Hong Kong study.
Audit risk model
The auditor attempts to provide a reasonable assurance in the discharge of their duties.
Auditors would normally resort to the ARM to assess the audit risk level in companies.
ARM is usually stated as:
Audit risk ¼ Detection risk * Inherent risk * Control risk
Detection risk is a measure of the risk that audit evidence for a segment will fail to
detect misstatements exceeding a tolerable amount, should such misstatement exist
(Arens et al., 2006). Inherent risk is a measure of the auditors’ assessment of the
likelihood that there are material misstatements (errors of fraud) in a segment before
considering the effectiveness of internal control. While Arens et al. (2006) defines
control risk is a measure of the auditors’ assessment of the likelihood that
misstatements exceeding a tolerable amount in a segment will not be prevented or
detected by the client’s internal control. Inherent and control risks which lie within the
company while detection risk lies with the auditors. The extent of substantive testing
carried out by the auditor is a function of the assessment of the level of inherent and
control risk within the company.
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Reasonable assurance and ARM: a review of the literature
Ponemon’s (1992) study of ethical reasoning and selection socialization in US
accounting studied CPAs from the Big 8 and national audit firms. It found a lower level
of ethical reasoning and assurance in the work for staff holding higher level positions
in the accounting firm (such as manager and partner positions) than in the work of
lower level audit staff. Similarly, Shaub (1994) also indicated that the moral reasoning
of the auditors decreased from the senior through the partner levels in the Big 6
accounting firms in the audit assurance work. Although Shaub’s sample comprised 207
auditors, the generalization of the conclusions was limited, as the sample of auditors
was drawn from a single accounting firm. Shaub (1994) suggested that future research
should be made to explore the issues. Nevertheless, both the research by Ponemon
(1992) and that by Shaub (1994) are, without the benefit of the Enron experience, and
their results may contain different implications in the current environment. Moreover,
Johnstone (2000) found little evidence that audit partners use proactive risk adaptation
strategies to mediate the effects of clients’ business risk in the assurance work.
Additional research is suggested by the researchers to understand how auditors make
the client acceptance decision. Gendron et al. (2006) found that Big 4 accountants who
are working in industry report lower commitment to auditor independence than others
in public accounting firms, hence affecting their ethical reasoning and audit assurances
in the work.
However, different perspectives were found from other researchers. Lawrence and
Shaub (1997) examined auditors the ethical values in the USA. It was agreed that
auditors’ ethical orientation and reasoning influence their professional and ethical
decisions, thus impacting users of the financial statements. Lawrence and Shaub (1997)
expected that the longer auditors are involved in the profession, the more they would
be concerned with professional ethical issues. It was found that the partners in the
Big 6 firms have the highest scores in respect of professional ethical issues and
maintain high-ethical standards in the assurance work. Similarly, Beaulieu (2001)
studied the effects of Canadian audit partners’ judgments of new clients’ integrity in
risk judgments, audit evidence and fees in the assurance work. Auditors compensated
the high-risk clients and low-integrity judgments by collecting greater audit evidence
and seeking higher fees. This showed the auditors would increase audit work when
they judged the client integrity to be below what they viewed to be normal. Thus, the
auditors perceived to be concerned with the client integrity and maintain high level of
assurance services, as there may be risk of fraud. It was further found that auditors
would continually adjust evidence collection once the audits commenced in response to
evaluations of client integrity, with a view to maintaining a high level of reasonable
assurance in the audit and ensuring that the financial statements are free from material
misstatements (Arens et al., 2006).
Risk management in the US client acceptance decisions was the focus of the
examination by Johnstone and Bedard (2003); they found firms adapted to risk
management in the audit by assigning specialist audit personnel and using more
intensive testing. Hence, according to this study, an audit firm would be motivated to
maintain a high level of reasonable assurance. AS 2 of the AICPA specifies that since
the public continues to expect a low rate of audit failures, auditors must plan and
perform their audit procedures in a manner that will minimize the risk of an undetected
material misstatement. Goldwasser (2005) thus contended that auditors would like to
eliminate all material misstatements from their report to avoid civil litigation,
disciplinary proceedings by the SEC and the AICPA. That concurs with the views from
Johnstone and Bedard (2003) that the costs of an audit failure and misrepresentation
are high, time consuming and could greatly damage an auditor’s professional career.
It is argued that auditors are motivated to maintain a high level of assurance in the
audit. Desira and Baldacchino (2005) revealed that Maltese auditors agreed that the
audited financial statements represented a true and fair view of the financial positions
of the companies and the notion of having a reasonable assurance in the audit work by
the reporting auditors is generally warranted.
Audit risk model
Over the past 20 years, various researchers examined issues related to the adequacy or
appropriateness of the ARM and the conclusions are mixed (Allen et al., 2006). Some
research supports the model. For example, Dusenbury et al. (2000) conclude that the
ARM does not understate the risk of material misstatement. Houston (1999) find that
the model works well in describing auditor behavior in the presence of unintentional
financial statement errors. Libby et al. (1985) find that the model is consistent with
auditors’ decisions. However, other studies have claimed the ARM has limitations,
such as inherent risk and control risk get blurred or mixed (Haskins and Dirsmith,
1995; Messier and Austen, 2000); the ARM does not consider the quality of audit
evidence (Dusenbury and Reimers, 1996); the ARM is inconsistent with actual auditors’
judgments (Daniel, 1988; Strawser, 1990). Additional research are conducted by
researchers but the result are inconclusive (Pany and Whittington, 2001; Blokdijk,
2004). Some audit firms have refocused the way they assess risk and some have
questioned whether the established risk model still holds (Fearnley et al., 2005).
Blokdijk (2004) and Fearnley et al. (2005) both suggest revising the existing ARM,
based on the deficiencies in the current model. However, the studies conducted by
Blokdijk (2004) and Fearnley et al. (2005) are carried out in Europe and their results
may not hold true in the Asian-Pacific settings. Moreover, in the US study, Dusenbury
et al. (2000) conclude that their results support the ARM and the model does not
understate the risk of material misstatement. Their results provide a defense for
practitioners’ claims that they are appropriately using the ARM. Furthermore, Pany
and Whittington (2001) questioned that whether a revised ARM that was proposed by
some researchers, could more directly address the nature and timing of audit tests, in
addition to the extent of such tests, is uncertain. Hence, in view of this gap in the
literature, the ARM is being empirically tested in the Hong Kong auditing environment
and further research on the ARM is worthwhile and suggested (Dusenbury et al., 2000;
Pany and Whittington, 2001).
Likewise, the accounting profession has long contended that an audit conducted in
accordance with GAAS provides “reasonable assurance” that the financial statements
are free of material misstatements. More importantly, this issue has not been studied in
the Hong Kong auditing environment. With those underpinnings, the examination of
the reasonable assurance issue in this Hong Kong study is justifiable and promising.
Since the literature provides no real directional guidance as to what to expect with
regard to the reasonable assurance variable from different ranking auditors, an
alternative hypothesis H1 is formed to examine the perceptions of reasonable
assurance and effectiveness of the ARM from auditors of different ranks:
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H1. There are differences in the perceptions held by auditors of different ranks
regarding reasonable assurance in audit work and the effectiveness of the
ARM.
Arguably, in an US study, Elias (2004) found that CPAs in high-level positions had
higher perceptions of ethical values in their assurance work compared to those in the
entry level positions. The younger CPAs viewed the ethical climate and assurance
work more negatively. Since the public accounting firms have codes of ethics and
ethics programs, the findings have important implications for the accounting
profession (Elias, 2004). The research was conducted before the news of Enron and the
results may not hold true in the post-Enron period. Further research is suggested to
validate the result in the post-Enron period. The audit work should provide
high-reasonable assurance (Desira and Baldacchino, 2005) and be perceived of
high-professional standards. Therefore, H2 is hypothesized as follows:
H2. Higher ranking auditors will have higher perceptions of reasonable assurance
in the audit work than lower ranking auditors.
The third hypothesis relates to the gender of the respondents. Researchers have mixed
view on this variable. Some have found that there is no difference in the perceptions of
ethical behavior and audit assurances of males and females auditors (Davis and Welton,
1991; Shafer et al., 2001); while others indicated the gender factor has an influence
(Barnett and Karson, 1989; Larkin, 2000; Elias, 2004). But, prior research has not
examined whether there are gender differences in auditors’ perceptions of reasonable
assurance in the Hong Kong environment. More importantly, there is increasing number
of females entering the public accounting profession (ACCA Hong Kong, 2005; HKICPA,
2005), the research of the gender factor has implications for the success of socialization
processes and the practice development of accounting firms (Iyer et al., 2005). Similarly,
in Hong Kong there are more female accounting graduates than male graduates working
for the public accounting firms in the Big 4 (ACCA Hong Kong, 2005; HKICPA, 2005), the
research of the gender effect could facilitate the employment and training of staff in
public accounting (Giacomino and Akers, 1998; Iyer et al., 2005). The research on the
issues of ARM is inconclusive (Allen et al., 2006) and there is no prior research conducted
in the Hong Kong auditing profession. Hence, in view of this gap in the literature, the
ARM is being empirically tested in the Hong Kong auditing environment and further
research on the ARM is suggested (Dusenbury et al., 2000; Pany and Whittington, 2001).
Therefore, in this study, the gender of auditors in the Big 4 firms is used as the second
independent variable in the MANOVA analysis.
Alternative H3 is formed to thus examine whether there is an influence of gender on
the perceptions of reasonable assurance and the effectiveness of the ARM:
H3. There are differences in the perceptions held by gender of auditors regarding
reasonable assurance in audit work and the effectiveness of the ARM.
US AS No. 110 covers the responsibilities and functions of the independent auditors.
Since auditor is responsible for expressing an opinion on the fairness of presentation of
the financial statements, the Standards further comment that an auditor should possess
the professional qualification such as CPA certification required of an independent
auditor. Indeed, there is limited literature examining the effect of CPA certifications
on the perceptions of reasonable assurance (Desira and Baldacchino, 2005). An US study
conducted by Elias (2004) found that auditors with CPA certification have high-ethical
values in the work and enhance the reasonable assurance level. However, Desira and
Baldacchino (2005) indicated that respondents with accounting qualifications were not
rated their perceptions of auditor responsibility and reasonable assurance in a
significant different way from participants with no accounting qualifications. A similar
US study by Shafer et al. (2001) found that the ANOVA models revealed that
the education level of auditors have no significant influence on ethical judgments or
behavioral intentions. Elliott (1995) commented that CPA’s capabilities, knowledge
and competencies are essential to the maintenance of the current audit function.
In an US survey for the Big 4 firms, Guinn et al. (2004) revealed that public
accounting firms would not promote an employee from staff to senior or supervisory
level without a CPA certification. Virtually, all of the audit partners surveyed were
CPAs licensure. In Hong Kong, audit partner must hold a CPA certification to be
partnership in the Big 4 firms. Since the results are mixed in prior literature and there is
even no research that has been conducted in the Hong Kong environment and for the
effectiveness of ARM, alternative H5 is formed to examine whether there is an
influence of CPA certification on the perceptions of reasonable assurance and the
effectiveness of the ARM:
H4. There are differences in the perceptions held by the CPA certification group
and the non-CPA certification group regarding reasonable assurance in audit
work and the effectiveness of the ARM.
Alternative H5 is formed to examine whether there is any interaction effect between
the rank of auditors, gender and CPA certifications on the perceptions of reasonable
assurance in the audit work and the effectiveness of the ARM:
H5. The influences of auditors’ ranks, gender, and CPA certification have an
interaction effects on auditors’ perceptions of reasonable assurance in the
audit work and the effectiveness of the ARM (Interaction effect).
Method
Data were gathered using a questionnaire and the pre-tests was found to be
satisfactory. The data for auditors’ rank, gender and CPA certification are captured by
the categorical scale in the demographical section and the perceptions of the reasonable
assurance and the effectiveness of the ARM are captured in the survey questions using
the Likert scale with 1 to 5. Score 1 represents least reasonable assurance while Score 5
represents most reasonable assurance. The concern of any ambiguity of the questions
was not an issue in this study for the above reasons. The reliability measure reported
by Cronbach’s a is 0.867 and is a satisfactory score. Hence, the content validity of the
questionnaire is regarded to be high (Cavana et al., 2001).
MANOVA design is used in this study since there are two dependent variables are
being studied at the same time and may have interrelationships (Field, 2005). This
analysis is to examine whether there is any influence of the rank of auditors, gender
and CPA certifications on auditors’ perceptions of the reasonable assurance and the
ARM outlined in the above hypotheses (Coakes, 2005). Separate ANOVA is followed
when the result in the MANOVA is significant. Discriminant analysis would also need
to be conducted to get the complete picture to see any interaction effects of the
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dependent variables (Field, 2005; Green and Salkind, 2003). Post hoc tests would be
performed in the ANOVA if the ANOVA result is significant.
A total of 300 Big 4 auditors were randomly selected from the publicly accessible
Directory of CPA booklet (Tsui, 1996; Neidermeyer et al., 1998; Umar and Anandarajan,
2004a, b). Accordingly, they were selected from the “Big 4” accounting firms: KPMG,
PricewaterhouseCoopers, Ernst and Young, Deloitte. Prior evidence in Australia and
Netherlands suggests there would be a response rate of 76 and 80 percent, respectively,
(Roberts, 1999; Dijk, 2000) by contacting the respondents first before sending off the
questionnaires. Thus, similar techniques were used in this Hong Kong study in the
expectation of a satisfactory response rate (Sekaran, 2000; Dijk, 2000; Desira and
Baldacchino, 2005). Moreover, Hussey and Hussey (1997) suggest that the response rate
could also be increased by keeping the questionnaire as short as possible and using
closed questions of non sensitive nature. Hence, it was anticipated that, with all the
questions being closed, the response rate would be optimistic. Were the response rate
unsatisfactory, a follow up procedure was planned – a second request, approximately
three weeks after the initial mailing to the entire sample (Frank et al., 2001).
Results
There were 231 responses from the 300 questionnaires sent to the auditors, 201 from
the first mail out and 30 responses from the second, returning an overall response
rate of 77 percent. Normal distribution of the data and the Box’ test has been met for
the fulfillment of the assumptions of MANOVA, with the p-value is not significant.
The notion of variance is at the heart of MANOVA (Coakes, 2005) and the assumptions
of homogeneity of variance have been met in this study, with p value is not significant.
A test for non responses bias has been carried out for comparing first 30 responses
and second request 30 responses; however there were no significant differences in
perceptions about the reasonable assurance and the effectiveness of the ARM issues.
Descriptive statistics show all the 231 auditors’ responses are entered, with 107 females
and 124 males.
From the MANOVA test Table I shows the first independent variable, “subposit”
with an F-value of Wilks’ l ¼ 14.183, p , 0.05 – which is statistically significant.
The four ranks of the auditors have different mean ratings for the perceptions of
reasonable assurance and ARM. The auditors’ rank has an average mean ratings of
3.43 on the effectiveness of the ARM, confirming that the current ARM still can provide
an effective assurance on the assessing the audit risk of companies.
The separate ANOVA in Table II shows only the “subposit” variable has an
influence on the reasonable assurance dependent variable, with a significant
p-value ¼ 0.00, while on the ARM dependent variable is not significant. The a is set at
0.05/2 ¼ 0.025 since there are two separate ANOVA, to control the Type 1 error
(Field, 2005). Since the ANOVA for rank is significant, post hoc tests need to be
conducted to see where the differences lie. Post hoc testing for using Bonferroni,
Hochberg, Games-Howell in Table III, shows the different ranks of auditors’ means for
the perceptions of reasonable assurance are significantly different from each other,
p-value , 0.00625, with the exception of that for the staff and manager group, which
is not significant. The a level is set at 0.025/4 since there are four comparisons to
control Type 1 error (Field, 2005; Green and Salkind, 2003). The pair-wise comparisons
and their mean in Tables IV and V shows the partners is significant different from the
Effect
Subposit
Gender
Cpacert
Subposit * gender
Subposit * cpacert
Gender * cpacert
Subposit * gender * cpacert
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Pillai’s Trace
Wilks’ l
Value
F
Sig.
Partial h 2
0.306
0.698
0.005
0.995
0.046
0.954
0.058
0.943
0.010
0.990
0.005
0.995
0.008
0.992
13.088
14.183
0.496
0.496
5.182
5.182
2.163
2.162
0.529
0.527
0.496
0.496
0.414
0.413
0.000
0.000
0.610
0.610
0.006
0.006
0.045
0.046
0.714
0.716
0.609
0.609
0.799
0.799
0.153
0.165
0.005
0.005
0.046
0.046
0.029
0.029
0.005
0.005
0.005
0.005
0.004
0.004
Note: Design: Intercept þ subposit þ gender þ cpacert þ subposit * gender þ subposit * cpacert þ
gender * cpacert þ subposit * gender * cpacert
Source
Dependent variable
Subposit
Reasonable assurance
Audit risk model
Reasonable assurance
Audit risk model
Reasonable assurance
Audit risk model
Gender
Cpacert
Type III sum of squares
Mean2
F
Sig.
Partial h 2
70.496
3.917
0.765
0.026
8.008
0.259
23.499
1.306
0.765
0.026
8.008
0.259
29.725
1.106
0.968
0.022
10.130
0.219
0.000
0.348
0.326
0.882
0.002
0.640
0.291
0.015
0.004
0.000
0.045
0.001
other types of auditors and has the highest rating mean for the perceptions of
reasonable assurance with mean value 4.938. Hence, H1 are partially supported for the
reasonable assurance dependent variable and rejected for differences in the perceptions
for the effectiveness of the ARM dependent variable. H2 are supported.
For the second independent variable, “gender,” the MANOVA shows that gender
has a F-value of 0.496 with p-value is not significant, p . 0.05. Thus, H3 is rejected.
But, the gender of auditors has an average mean ratings of 3.434 on the effectiveness of
the ARM in Table VI, confirming that the current ARM still can provide an effective
assurance on the assessing the audit risk of companies, though there are no significant
differences for the gender in the mean ratings for the effectiveness of the ARM.
There is also no interaction between CPA certifications, gender and rank of auditors
on the perceptions of reasonable assurance and ARM, with p-value equal 0.79, which is
not significant. Accordingly, H5 is rejected as well.
For the third independent variable, CPA certification, the MANOVA shows that
CPA certification has a F-value of 5.182, with p-value is significant, p , 0.05. Since
MANOVA result is significant, follow up ANOVA needs to be conducted. The separate
ANOVA in Table II shows only the “CPA certification” variable has an influence on
Auditors’
perceptions
169
Table I.
Multivariate tests
Table II.
Tests of between
subjects’ effects
ARA
16,2
Dependent
variable
Reasonable Bonferroni
assurance
( I ) Sub-position
( J ) Sub-position
Mean
difference
(I 2 J)
Staff and senior
Manager
2 0.1121
0.13549
1.000
Senior manager
Partner
Staff and senior
Senior manager
Partner
Staff and senior
Manager
Partner
Staff and senior
Manager
Senior manager
Manager
Senior manager
Partner
Staff and senior
Senior manager
Partner
Staff and senior
Manager
Partner
Staff and senior
Manager
Senior Manager
Manager
Senior manager
Partner
Staff and senior
Senior Manager
Partner
Staff and senior
Manager
Partner
Staff and senior
Manager
Senior manager
2 0.6586 *
2 2.7667 *
0.1121
2 0.5465 *
2 2.6546 *
0.6586 *
0.5465 *
2 2.1081 *
2.7667 *
2.6546 *
2.1081 *
2 0.1121
2 0.6586 *
2 2.7667 *
0.1121
2 0.5465 *
2 2.6546 *
0.6586 *
0.5465 *
2 2.1081 *
2.7667 *
2.6546 *
2.1081 *
2 0.1121
2 0.6586 *
2 2.7667 *
0.1121
2 0.5465 *
2 2.6546 *
0.6586 *
0.5465 *
2 2.1081 *
2.7667 *
2.6546 *
2.1081 *
0.16673
0.25297
0.13549
0.17635
0.25941
0.16673
0.17635
0.27701
0.25297
0.25941
0.27701
0.13549
0.16673
0.25297
0.13549
0.17635
0.25941
0.16673
0.17635
0.27701
0.25297
0.25941
0.27701
0.13708
0.18614
0.11951
0.13708
0.18730
0.12130
0.18614
0.18730
0.17484
0.11951
0.12130
0.17484
0.001
0.000
1.000
0.013
0.000
0.001
0.013
0.000
0.000
0.000
0.000
0.956
0.001
0.000
0.956
0.013
0.000
0.001
0.013
0.000
0.000
0.000
0.000
0.846
0.004
0.000
0.846
0.024
0.000
0.004
0.024
0.000
0.000
0.000
0.000
170
Manager
Senior manager
Partner
Hochberg
Staff and senior
Manager
Senior manager
Partner
Games-Howell Staff and senior
Manager
Senior manager
Partner
Table III.
Post hoc tests
Std.
error
Sig.
Notes: Based on observed means. The mean difference is significant at the *0.00625 level
the reasonable assurance dependent variable, with a significant p-value ¼ 0.00, while
on the ARM dependent variable is not significant. The estimated marginal means and
pair-wise comparisons also confirm the above result and are shown in Tables VII
and VIII, respectively. Pair-wise comparisons shows the CPA certification is
significant for the reasonable assurance dependent variable at the 0.05 level, with CPA
certification has a higher mean score of 3.176 for the perceptions of reasonable
assurance than those without the CPA certifications, which is 2.02. The result on the
ARM dependent variable is not significant. Besides, the CPA group and non CPA
Dependent variable
Sub-position
Mean
95 percent confidence
interval
Reasonable assurance
Staff and senior
Manager
Senior manager
Partner
Staff and senior
Manager
Senior manager
Partner
2.270
2.131
2.525
4.938a
3.230
3.356
3.713
3.438a
2.086
1.841
2.134
4.464
3.006
3.000
3.236
2.859
Audit risk model
2.453
2.422
2.915
5.411
3.455
3.711
4.190
4.016
Note: aBased on modified population marginal mean
Dependent variable
171
Table IV.
Means
( I ) Sub-position ( J ) Sub-position Mean difference (I 2 J ) Std. error Sig.(a)
Reasonable assurance Staff and senior Manager
Senior manager
Partner
Manager
Staff and senior
Senior manager
Partner
Senior manager Staff and senior
Manager
Partner
Partner
Staff and senior
Manager
Senior manager
0.138
20.255
22.668
20.138
20.393
22.806
0.255
0.393
22.413
2.668
2.806
2.413
0.175
0.219
0.258
0.175
0.247
0.282
0.219
0.247
0.311
0.258
0.282
0.311
1.000
1.000
0.000
1.000
0.677
0.000
1.000
0.677
0.000
0.000
0.000
0.000
Dependent variable
Male or female
Mean
Audit risk model
Female
Male
3.438a
3.430a
Note: aBased on modified population marginal mean
Dependent variable
Cpacert
Mean
Reasonable assurance
Non-CPA
CPA
Non-CPA
CPA
2.029a
3.176
3.383a
3.472
Audit risk model
Auditors’
perceptions
Note: aBased on modified population marginal mean
Table V.
Pair-wise comparisons
Table VI.
Means for gender
Table VII.
Means
ARA
16,2
172
group have an average mean ratings of 3.427 on the effectiveness of the ARM in
Table VII, confirming that the current ARM still can provide an effective assurance on
the assessing the audit risk of companies, though there are no significant differences
by the CPA group and non CPA group in the mean ratings for the effectiveness of the
ARM. Hence, H4 are partially supported for the reasonable assurance dependent
variable and rejected for differences in the perceptions for the effectiveness of the ARM
dependent variable.
Discriminant analysis
Since the MANOVA shows significant effect on the “subposit” and “CPA
certifications” independent variables, follow up discriminant analysis is suggested to
reveal where the significant effect lies (Field, 2005; Green and Salkind, 2003).
Discriminant analysis shows the first function explains 95 percent of the variance and
it is only significant for the first variate, p , 0.05. The second variate is not significant
with p-value ¼ 0.059. The reasonable assurance variable contributes most to the first
variate with 0.994 in the standardized canonical discriminant function coefficients and
0.988 in the structure matrix. This confirms the follow up ANOVA result in above.
Therefore, it validates the above MANOVA and separate ANOVA results in Tables I
and II, respectively. H1 are partially supported for the reasonable assurance dependent
variable and rejected for differences in the perceptions for the effectiveness of the ARM
dependent variable.
Moreover, the functions at Group Centroids show that the Partner is the most
discriminant group among the four groups with a positive value of 2.681. This also
confirms our result that partner has the most significant different ratings than the
other groups and is confirmed in H2.
Regarding the third independent variable “CPA certification,” that is significant in
the MANOVA, discriminant analysis is suggested to reveal where the differences lie
(Field, 2005, Green and Salkind, 2003). Discriminant analysis shows the first function
explains 100 percent of the variance and it is only significant for the first variate,
p , 0.05. The reasonable assurance variable contributes most to the first variate with
0.987 in the standardized canonical discriminant function coefficients and 0.986 in the
structure matrix. This also confirms the follow up ANOVA result in above. Moreover,
the functions at group Centroids shows that the CPAs and the non-CPAs groups are
discriminating with each other, with the CPA has positive 0.285 while the non CPA
with negative 2 0.454. This double confirms that the CPA has a significant higher
rating than the non CPA as shown in Table VII above. Hence, it validates the result in
MANOVA and separate ANOVA. Therefore, H4 are partially supported for the
Dependent variable
( I ) cpacert
( J ) cpacert
Reasonable assurance
Non-CPA
CPA
Non-CPA
CPA
CPA
Non-CPA
CPA
Non-CPA
Audit risk model
Table VIII.
Pair-wise comparison
Note: aBased on estimated marginal means
Mean difference ( I 2 J )
Std. error
Siga
21.147
1.147
20.089
0.089
0.178
0.178
0.217
0.217
0.000
0.000
0.682
0.682
reasonable assurance dependent variable and rejected for differences in the perceptions
for the effectiveness of the ARM dependent variable.
Discussion and implications
The MANOVA and follow up discriminant analysis both show H1 and H2 concerning
the reasonable assurance dependent variable, are supported. The post hoc tests depict
clearly that the ratings for all the four groups are different, except the managers vs the
staff auditors. Partners have the highest ratings while the staff auditors have the
lowest ratings for reasonable assurance. This finding is consistent with the prior
research results in the USA and Canada (Lawrence and Shaub, 1997; Beaulieu, 2001;
Johnstone and Bedard, 2003; Asare et al., 2005; Gendron et al., 2006). Partners believe
the audit work is of high-reasonable assurance quality, as experienced or specialist
staff are assigned to risky clients and intensive testing approaches are used (Johnstone
and Bedard, 2003; Asare et al., 2005). Beaulieu (2001) also explained that Partners
compensated for the high-risk clients and low-integrity judgments by collecting
greater audit evidence and charging appropriate fees. This demonstrates auditors
would increase audit work and their fees when they judge a client’s integrity is
atypical. Auditors are expected to be scrupulous in matching the audit work with their
evaluations of client integrity. Possibly that is not surprising, high levels of assurance
services are maintained to avoid the risks of fraud or irregularities arising from clients.
Beaulieu (2001) and Arens et al. (2006) indicate that auditors would continually adjust
evidence collection once the audits have been started in response to client integrity.
Maintaining a high level of reasonable assurance and financial statements without
material misstatements are the ultimate objectives (Arens et al., 2006). Consequently, it
is expected that Partners are motivated to maintain high-reasonable assurance in the
audit work for the reasons of avoiding time consuming litigation, court proceedings
and the consequential loss of reputation (Reynolds and Francis, 2001; DeFond et al.,
2002; Lindberg and Beck, 2004; Reynolds et al., 2004; Goldwasser, 2005).
The ratings from the staff auditors and managers’ group are unexpectedly much
lower than the other groups. Apparently, they are the frontier staffs in a fieldwork
audit and their assurance services are essentially of paramount importance to the
clients. Elias (2004) advocated that the junior staffs may observe the upper level
management engaged in unethical activities, and hence that may affect their ratings.
Based on that intricacy, however, in the current post-Enron period and for the
avoidance of litigation, Elias’s (2004) explanation may not be applicable after the Enron
debacle. It is acknowledged that the audit reports would be relied on by other
multinational companies or the Big 4 auditors in other countries for consolidation
purposes (Umar and Anandarajan, 2004a, b), Hong Kong Partners would undoubtedly
assure the whole reporting process and sustain Hong Kong as a major international
financial market and stock exchange in the world. Elias’s (2004) explanation may not
be appropriate for the Hong Kong environment.
Environmental factors (Tackett et al., 2004) might also be possibly account for staff
auditors perceiving a lower rating of reasonable assurance than the higher ranking
groups. Tackett et al. (2004) illustrate that junior auditors may have encountered
problems of mental fatigue due to prolonged working conditions during peak seasons
in fieldwork and office. Further research is conducive to the understanding and
validation of this psychological aspect of auditors.
Auditors’
perceptions
173
ARA
16,2
174
MANOVA results perspicuously indicate that neither H3 nor H5, is supported.
It shows that the “gender,” does not have an influence on the reasonable assurance and
the ARM dependent variable. That phenomenon might be explicable by Hong Kong
“Big 4” auditors receiving equivalent professional technical training in the public
accounting firms and practical fieldwork exposure, thus their audit acumen gained
through work experience should be identical, and hence their perceptions of reasonable
assurance. Accordingly, there is no reason why the gender factor could make a
difference in their perceptions.
Interestingly, the CPA certification in H4 is supported. The result suggests that the
CPA certification provide auditors with knowledge capabilities (Elliott, 1995) and
confidence in the assurance work (Chung and Monroe, 2000). Accordingly, their
perceptions on the reasonable assurance level are higher at all levels. This finding
reveals that nowadays professional technical training and in house
examination-oriented seminars, provided by the public accounting firms for the
auditors, especially the junior level, are a necessary condition for achieving a
high-quality audit. Noticeably encouraging, there is no interaction effect for all the
three independent variables with each other on the two dependent variables in H5.
Were the result shown significant, it could be tantamount to an incredibly complicated
state for understanding the issue of reasonable assurance and the ARM, which has
been pervading the professions for years.
There are not much different perceptions ratings by different rank of auditors,
gender and CPA certifications on the perceptions on the effectiveness of the ARM. The
auditors’ rank, gender and CPA certification have an average high-mean ratings on the
effectiveness of the ARM, confirming that the current ARM still can provide an
effective assurance on the assessing the audit risk of companies. This empirical study
revokes the UK study (Fearnley et al., 2005) and The Netherlands study (Blokdijk,
2004) that the current ARM needs to be revised. This Hong Kong study also confirms
the comments from Pany and Whittington (2001) that a revised ARM could more
directly address the nature and timing of audit tests, is uncertain. This Hong Kong
study supports the US research done by Dusenbury et al. (2000), for confirming the
effectiveness of the current ARM. The result not only adds contribution to the
Asian-Pacific literature but also provides invaluable insight to the Hong Kong
accounting profession and regulatory body that immediate attention need not be
focusing on restructuring the audit model.
Finally, the results revealed in this study should be considered in light of certain
limitations. The sample includes only the Big 4 auditors while the non Big 4 auditors’
perceptions are not measured. Future research could explore the views of both the Big
4 and non-Big 4 auditors in order to gain a more comprehensive picture of the audit
profession.
Conclusion
There are differences between the perceptions held by auditors of different ranks
regarding reasonable assurance in audit work. Higher ranking auditors such as
Partners entertain higher perceptions of reasonable assurance than lower ranking
auditors such as Staff Auditors. It can be anticipated that Partners after the Enron
debacle are vigilant, to avoid litigations and indictments, reputation loss by the firm
and the significant repercussions of audit failure to the society. No matter how episodic
an audit failure or corporate collapse, the fallout of collapse is widespread and costly
to society. The “gender” variable does not have an influence on the perceptions
of reasonable assurance and the effectiveness of the ARM. Auditors with CPA
certifications have higher perceptions of reasonable assurance in the audit work. There
are no differences in the perceptions ratings by different rank of auditors, gender and
CPA certifications on the effectiveness of the ARM. The auditors’ rank, gender and
CPA certification have an average high-mean ratings on the effectiveness of the ARM,
confirming that the current ARM still can provide an effective assurance on the
assessing the audit risk of companies. Finally, there is no overall interactions effect
among the rank of auditors, gender and CPA certifications on the perceptions of
reasonable assurance and the effectiveness of the ARM.
Unquestionably, the restoration of investor confidence will ultimately depend on
both the effectiveness of the AS and the professional commitment of auditors in the
audit assurances work so as to eliminate future recurrence of corporate collapses and
debacles. Strict adherence to the audit procedures and AS are of paramount importance
for auditors when discharging their daily duties. Indeed, audit firm rotation could
restore public confidence in the quality of audited financial statements (Gates et al.,
2007). Users’ expectation of the final product of an audit is the increased credibility
attached to the financial statements signed by the independent auditor. Since an audit
is carried out in sampling and tests basis, accordingly, in the audit report, auditors
believe that an audit provides a reasonable basis for an opinion about the financial
statements (AS, No. 508), but not on absolute assurance. This also provides invaluable
insight to the Hong Kong accounting and regulatory body that immediate attention
need not be focusing on restructuring the ARM.
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Corresponding author
Philip Law can be contacted at: plaw@umac.mu
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