Business Models and Audit Risk Assessment : An Investigation of Alternative Information Presentation Techniques

An effective audit plan starts with understanding of the client's business risks. Though business risk assessment is a required component of audit risk assessment (ISA 315), there is little guidance regarding the best format for documenting business risks to support audit risk assessment; as a result, firms have used a variety of methods. While some literature emphasizes the advantages of using diagrams to display business models in preference to simple textual narrative representation, there is little empirical research on whether a diagrammatic representation can benefit auditors performing the risk assessment phase of the audit,. In an experiment, we provide participants (accounting students) with business risk models based on a real public company and test whether different informationally equivalent representation formats (diagram, table, or unstructured text/bullet points) affect their ability to identify audit risks in various financial statement accounts. We find that the tabular format out-performs both the unstructured text / bullet point formats and, surprisingly, the diagram does not. We attribute this to better identification of relevant items that impact audit risks. Second, we observe that tables also caused participants to focus more on irrelevant items that would decrease efficiency. Third, the amount of time taken on the task does not differ by representation format. Therese findings can help provide guidance on whether techniques such as those explored in the study should be further incorporated into accounting education, and which techniques seem to be most beneficial for auditing use