Auditors tend to focus more on income-increasing items compared to income-decreasing items because they are trained to be conservative and also because the risk of litigation is…
Abstract
Purpose
Auditors tend to focus more on income-increasing items compared to income-decreasing items because they are trained to be conservative and also because the risk of litigation is significantly higher for failing to detect material income-increasing items compared to material income-decreasing items. Auditors’ consideration of transaction-level items is also affected by their evaluation of company-level information. Therefore, this study aims to examine how the interaction between company-level information and sign of the material items affects auditors’ evaluation of income-increasing and income-decreasing items.
Design/methodology/approach
A three-treatment between-subjects experiment was conducted to investigate the research questions.
Findings
The results indicate that in the absence of company-level information, auditors intuitively associate a higher risk and audit effort to income-increasing items. When the company-level information indicates that management is under pressure to inflate earnings, auditors’ conservatism associated with income-increasing items gets amplified. This leads to an increase in the difference in assessed risk and audit effort between income-increasing and income-decreasing items. However, when the company-level information indicates that management is not under pressure to inflate earnings, there are no significant differences in assessed risk and audit effort between income-increasing and income-decreasing items. These results indicate that auditor conservatism is affected by company-level information.
Originality/value
The findings indicate how an analysis of company-level information (as prescribed by auditing standards) and inherent auditor conservatism could potentially affect audit procedures and have important implications for the audit profession.
Details
Keywords
Naman Desai, Joshy Jacob and Savan Godiawala
The case examines the financial and operational causes of business failure associated with Setco Automotive Ltd. an auto-clutch manufacturing company located in India and then…
Abstract
The case examines the financial and operational causes of business failure associated with Setco Automotive Ltd. an auto-clutch manufacturing company located in India and then proceeds to identify the key turn around factors which eventually led to Setco becoming the largest producer of clutches for medium and heavy vehicles in India. The case allows the participants to understand and evaluate the financial impact of turn around factors on the company's profitability and survivability and in also determining the optimal capital structure for a struggling company.
Details
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Keywords
M. Teresa Ortega Egea, María Isabel Roldán Bravo, Antonia Ruiz Moreno, Carmen Haro Domínguez and Dainelis Cabeza Pullés
Although most research considers organizational learning as an antecedent of innovation, the relationship is complex and could be reciprocal. Therefore, more research is needed on…
Abstract
Purpose
Although most research considers organizational learning as an antecedent of innovation, the relationship is complex and could be reciprocal. Therefore, more research is needed on the profit gained from the learning and organization acquires from its innovation activities. Using the concept of fit, this paper aims to investigate whether organizational learning increases when an organization’s technical innovation level exceeds that of its competitors (positive misfit), theorizing the curvilinear effect of positive technical innovation misfit on organizational learning.
Design/methodology/approach
This paper uses regression analysis with survey data gathered from 202 European firms.
Findings
The findings support the argument that positive technical innovation misfit has an inverted-U shaped effect on organizational learning.
Practical implications
The findings obtained should orient firm managers to developing a work environment that enables optimal levels of technical innovation and learning – levels at which the technical innovation developed drives learning among the organization’s members but avoids becoming trapped in the organizational complexity involved in very high levels of positive technical innovation misfit.
Originality/value
This study resolves conflicting views of the relationship between organizational learning and technical innovation and adds to the existing literature that indicates that proactive innovative firms can fail when becoming learners.