Structure Versus Judgement in the Audit Process: A Test of Kinney's Classification

Sullivan suggests that the alternative audit approaches adopted by accounting firms be expressed in terms of “structure” and “judgement”, with a division provided by the degree to which auditor judgement is replaced by structured quantitative algorithms. Cushing and Loebbecke attempt to operationalise this division by examining the guidance provided to practising auditors by their firms. Kinne extends this study by classifying accounting firms as “structured”, “intermediate” or “unstructured” in terms of their audit methodologies. Provides a test of Kinney’s classification by examining the tolerance of accounting firms to accounting policy choices which have an income effect in their clients’ financial statements. Argues that those firms with a structured audit approach will manage audit risk through a greater reliance on mechanistic procedures, resulting in a greater tolerance of income manipulation. The results are confirmatory for the period under study, but evidence is provided to suggest that audit firms have subsequently become less diversified in their approach.