CONTROL ENVIRONMENT CONDITION AND THE INTERACTION BETWEEN CONTROL RISK, ACCOUNT TYPE AND MANAGEMENTS ASSERTIONS

This study examines how changes in Control Environment (CE) condition affect auditors' assessments of control risk for different types of Fi nancial Institution accounts at the management assertion level. CE com ponents are divided into ''tone-at-the-top'' and ''non-tone-at-the-top '' groups and accounts are taken from each end of a subjective/objecti ve continuum. The results indicate that there are significant control risk, account type and assertion interactions across various levels of CE conditions. Auditors are educated and trained in the skills requir ed to audit financial statements, but they generally lack comparable f ormal training in the psychological evaluation of the less objective, non-financial attributes that comprise the CE (e.g., management's phil osophy, attitude, integrity). This paper demonstrates that the assesse d state of the control environment may have differential effects on co ntrol risk depending on the industry, account type and management asse rtion under investigation. These effects are particularly significant for those accounts involving management's subjective estimates. Identi fying high-risk conditions for each assertion and account is important because it can direct auditors to the areas needing the most audit at tention and provide more effective and efficient audits.