A Framework for Assessing the Value of Management Inquiry

Abstract

Using a Bayesian Cascaded Inference approach, this study provides a framework to allow an auditor to simultaneously consider important criteria identified in the literature in evaluating the credibility of evidence obtained from management inquiry. Specifically, the importance of management reliability attributes (competence and objectivity) and the role of misstatement risk are examined. Additionally, fraud risk scenarios are considered.Sensitivity analyses suggest three important propositions that have implications for practice and research. First, reliable management inquiries have the highest potential value when misstatement risks are greatest. Second, in a situation of suspected financial reporting fraud, inquiries from high level management are of little value due to concerns for objectivity. Third, in a suspected defalcation scenario the reliability of higher level management inquiries is contingent upon their competence in identifying suspected fraud, a type of competence that auditors have not traditionally assessed. Copyright