LCE auditors management override-oversight dilemma: a descriptive analysis

What the paper says

Many small and medium-sized entities (SMEs) are governed by a dominant owner-manager, implying an increased level of the risk of management override of controls. At the same time, a closely involved owner-manager with day-to-day operations of the entity offers opportunities to the auditor to rely on supervisory controls. Given the absence of a rigorous analysis of this override-oversight dilemma, this article aims to provide a descriptive analysis of relevant parts of the auditing standards and available practical guidance. This offers substance to practicing auditors in the SME audit domain when relying on these controls. The insights of this paper may also be useful for the international standard setter (IAASB) when developing further guidance for less complex entities' audits. This article follows a structured approach of reviewing international standards on auditing, prior literature and practical guidance in the area of owner-manager's supervisory controls. Applying an (owner-manager's supervisory) control reliance approach requires having gained substantial knowledge and experience of the audited entity and more importantly extensive experience with the owner manager, resulting in a low integrity risk assessment. Application of this approach depends on various context-specific characteristics.