Control Interrelationships vs Cue Interrelationships

In internal control judgment tasks internal controls serve as cues and the criterion is audit specific (e.g., control risk). Internal controls may be interrelated in many ways (e.g., compensating and amplifying controls), and how they interrelate has been an important task characteristic in audit research (e.g., Brown and Solomon 1990).

At the generic level, cue interrelationships regard how cues interact in their relation to a criterion (Bonner 1994). It may therefore be useful to clarify whether control interrelationships and cue interrelationships are essentially the same thing, or whether, in fact, they are two different constructs. If they are the same thing, and control interrelationships are merely an operationalization of cue interrelationships, then the distinction is less important. If, however, they are two different constructs, then care must be taken when operationalizing cue interrelationships in a control judgment setting, and when generalizing findings from such a setting.

The existence of control interrelationships is clearly recognized in audit regulation. For example, ISA 315.44 and ISA 315.54 (IFAC 2008) require judging controls in combination with other controls when it is appropriate. Audit regulation furthermore recognizes various forms of control interrelationships. For example, PCAOB AS5.76 states that “The auditor should evaluate the effect of compensating controls”. PCAOB AS5.12 states that control objectives can be achieved by alternative (i.e., substitutable) internal controls “(…) implement alternative controls to achieve its control objectives (…)”. Control interrelationships are therefore specific to an audit setting and tied to general concepts in auditing (Brown and Solomon 1990, 21). More generally, audit regulation gives support to the notion that control interrelationships can be defined through how controls interact in their relationship to risk: “The auditor should focus on whether the selected controls, individually or in combination, sufficiently address the assessed risk of misstatement of a given relevant assertion”, “(…) evaluating controls individually or in consideration with other controls” (ISA 315.44 and ISA 315.54, IFAC 2008). In auditing, risk is conceptualized through the audit risk model. It is therefore reasonable to assume that control interrelationship concepts are based on some form of risk scale – typically a percentage point or categorical risk scale (e.g., high, medium, low).³²

Cue interrelationships, however, are more generic in that they can be defined by how cues interact in their relation to a criterion (i.e., the state of an external reality) (see figure 4 below) (Libby 1981, p8, item B3). While control interrelationships are tied to a risk scale, the general construct of cue interrelationships may be tied to any kind of scale.

32 Audit regulation acknowledges that the auditor may use various judgment response scales in control judgments: “The risks of material misstatement may be expressed in quantitative terms, such as in percentages, or in non-quantitative terms”

(ISA 200.A17 ED, IFAC 2008).

Figure 4: Cue Interrelationships (Lens Model Environment)

Criterion Cue set

Cue A

It is therefore of value to know whether control interrelationships and cue interrelationships always represent the same construct. If not, then generalization of findings from internal control judgment studies may be questionable. Similarly, it would be problematic to assume that findings from generic judgment research would automatically be valid for an audit setting. The question is therefore posed: What is the relationship between control interrelationships and cue interrelationships?

Early control judgment research (i.e., prior to 1990) with findings relevant for cue processing did not discuss interrelationships on the environment side of the Lens Model (i.e., it was not an issue since cues were independent) (Brown and Solomon 1990). Brown and Solomon (1990) is therefore the only internal control judgment study that provides an idea about the relationship between control interrelationships and cue interrelationships.

Although they did not explicitly discuss the general relationship between control- and cue interrelationships it is clear that they implied a one-to-one relationship; compensating (amplifying) controls is the same thing as compensating (amplifying) cues. In their study the functional form of the judgment policy is predicted based on audit concepts of amplifying and compensating controls (e.g., compensating controls result in compensatory form judgment policies). The functional form of the judgment policy is then observed through the forms of interactions in judgment models, and these judgment models are defined in terms of effects of cues: “Ordinal relations require that higher (lower) values of an information cue imply higher (lower) judgment values, regardless of the values of other information cues”

(Brown and Solomon 1990, 22). It is therefore reasonable to state that prior research Cue B

Cue C

Cue interrelationships True

criterion level

assumed a one-to-one relationship between control interrelationships and cue interrelationships.

This raises two questions: First, do compensating (amplifying) controls always translate to compensating (amplifying) cues? (2) Is the relationship one-to-one for other potentially important control- and cue- interrelationships (e.g., substitutable controls/cues)?

This dissertation suggests that control interrelationships and cue interrelationships are two different constructs. A sufficient argument for this view is that a change in the judgment response scale may change cue interrelationships even if controls, and thus control interrelationships, remain the same. For example, if each of two controls is related to a different subset of material invoices, then they are independent. Both controls are, however, necessary for a positive binary judgment about overall sufficiency of controls. Although controls are independent in their effect on risk (i.e., invoices), the cues are completely-dependent in the binary judgment setting. Control interrelationships and cue interrelationships must therefore be two different constructs. Note that it is not suggested that controls and cues are two different constructs; controls are operationalizations of cues.

However, the interrelationships are two different constructs, and it is the interrelationships that are the independent variables in this dissertation. The mechanism through which the judgment response scale affects cue interrelationships is further developed under the discussion of the impact of the judgment response scale below.

This dissertation therefore proposes that control interrelationships do not always translate directly to cue interrelationships and that, in fact, they are two different concepts. The relationships will be further developed below when the concepts of control interrelationships, cue interrelationships, the judgment response scale and the criterion scale are discussed.

3.5.3 Incomplete Range of Control- and Cue Interrelationships