Auditing the Owner/Manager Dominated Entity

Approaches to audits of smaller businesses are examined, with an emphasis on owner-manager (O/M) involvement. Questionnaires were mailed to the partners and sole practitioners comprising the AICPA membership list. A total of 724 usable replies were received. The responses indicate that smaller audit firms tend to assign more importance to reliance on the O/M and internal control than do the larger firms. The latter apparently believe that properly designed substantive testing can supplant reliance on O/M-dominated internal controls. Accordingly, smaller firm respondents are assessing control risk at a lower level than those affiliated with larger firms. A model is proposed for assessing the risk of reliance on the O/M. The model provides a basis for a field research study to examine the audits of smaller companies and the need to incorporate a formal assessment of O/M risk.