Risk identification and assessment in a risk based audit environment: the effects of budget constraints and decision aid use

Risk based audit (RBA) approaches represent a major trend in current audit methodology. The approach is based on risk analysis used to identify business strategy risk. The RBA has created a new set of research issues that need investigation. In particular, this approach has important implications for risk identification and risk assessment. The success of the RBA approach is contingent on understanding what factors improve or interfere with the accuracy of these risk judgments. I examine how budget constraints and decision aid use affect risk identification and risk assessment. Unlike previous budget pressure studies, I cast budget constraints as a positive influence on auditors. I expect more stringent budget constraints to be motivating to the auditor as they provide a goal for the auditor to achieve. I also expect budget constraints to induce feelings of pressure leading to the use of time-pressure adaptation strategies. When auditors have use of a decision aid, they take advantage of these motivational goals and/or use beneficial adaptive strategies. Overall, I find that auditor participants tend to be more accurate when identifying financial statement risks compared to business risks. Budget constraints have no effect on risk identification for financial or business risks; they also have no effect on financial risk assessments. On the other hand, business risk assessments are improved by implementing more stringent budget constraints, but only when a decision aid is also provided. Budget constraints can affect performance through a goal theory route or a time-pressure adaptation route. I investigate the paths through which budget constraints improve business risk assessments under decision aid use. I find that budget constraints directly affect performance, supporting a goal theory route. However, I do not find that budget constraints are mediated by perceived budget pressure as expected. Auditors appear to use a positive adaptive strategy to respond to perceived budget pressure, however perceived budget pressure is not induced by providing a more stringent budget.