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Client business models, process business risks and the risk of material misstatement of revenue

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  • Wright, William F.

Abstract

This research tests for understanding of the theory of business risk auditing. Focusing on process-level instead of entity-level business risk assessment, the study tests predictions for risk assessments given two business strategies and the fundamental operating processes of a manufacturing firm. Risk assessments for a client using a product differentiation strategy are compared with assessments made for a client using an operational excellence strategy. The focus is on hypotheses for judgments of process-specific business risk and the risk of material misstatement (RMM) of revenue. Business risk is the risk that a process will not produce the level of effectiveness necessary to achieve one or more entity-level strategic objectives (Bell, Peecher, & Solomon, 2002). Graduate accounting students with auditing experience demonstrated significant understanding of the predicted relationships. With a few exceptions, they (1) produced process-specific business risk judgments that are positively associated with RMM judgments for the critical processes of the product differentiation strategy, and not for the non-critical processes; (2) generated process-specific judgments of business risk that mediated the association of Production process performance and the RMM of revenue; and, (3) when the three product generation processes were performing less well, correctly assessed the highest RMM of revenue. Using this comprehensive set of conditions, contrary to many expressed concerns in the literature, the participants indicate business risk and RMM judgments that reflect significant understanding of the subtleties of business risk assessment.

Suggested Citation

  • Wright, William F., 2016. "Client business models, process business risks and the risk of material misstatement of revenue," Accounting, Organizations and Society, Elsevier, vol. 48(C), pages 43-55.
    • Handle: RePEc:eee:aosoci:v:48:y:2016:i:c:p:43-55
    DOI: 10.1016/j.aos.2015.11.005
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    2. Carolyn Mactavish & Susan McCracken & Regan N. Schmidt, 2018. "External Auditors' Judgment and Decision Making: An Audit Process Task Analysis," Accounting Perspectives, John Wiley & Sons, vol. 17(3), pages 387-426, September.

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