FAR Practice Note - Internal control quality and audit quality: the role of financial analysts
This project studies the role of internal control quality during the audit process and proposes a new source which auditors can use to gain information on control risk.
The study aims at understanding the relevance of internal control quality for audit quality and identifying an information channel which may help auditors to assess internal control quality more accurately and efficiently. Since financial analysts are typically macroeconomic experts and have profound industry knowledge, they are arguably able to form a relatively precise assessment of fraud risk. In this context, the team views fraud risk and internal control quality as two sides of the same coin. Financial analysts have an incentive to acquire information on fraud risk (including governance and controls) as undetected fraud negatively affects the quality of financial statements, which are an essential information source of financial analysts’ earnings forecasts. Moreover, analysts explicitly and implicitly include their assessment of fraud risk during earnings conference calls as well as in their analyst reports, which provide an overview of the information that analysts collected of their covered firms and include buy or sell recommendations. Consequently, they argue that the information provided by financial analysts may be a valuable information source for auditors to more accurately and efficiently assess inherent and control risk.
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