BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting Association Vol. 24, No. 1 DOI: 10.2308/bria-10074 2012 pp. 73–90 Internal Control Assessment and Interference Effects Janet B. Morrill Cameron K. J. Morrill University of Manitoba Lori S. Kopp University of Lethbridge ABSTRACT: Both U.S. Generally Accepted Auditing Standards and International Standards on Auditing require risk-based audits, where audit effort is concentrated on accounts and financial statement assertions where the risk of material misstatement is high. Assessing risk requires the auditor to evaluate the auditee’s internal control systems; however, current standards and practice vary regarding the point at which risks are to be identified. Using output interference theory, we hypothesize that risk assessment performed by the auditor before evaluating the client’s internal control systems will lead to a more complete identification of sources of internal control deficiencies as compared to assessing risk after evaluating internal control systems. In our experiment, auditors who identified risks first identified more, and more important, internal control deficiencies than did auditors identifying controls first, although the number of risks identified was not significantly different between the two groups. Overall, our results suggest that audit efficiency and effectiveness depend on the sequence in which internal control evaluation subtasks are performed. Keywords: auditor judgment; internal control evaluation; interference. Data Availability: Data are available from the authors upon request. INTRODUCTION T he successful design and evaluation of internal control systems is playing an increasingly important role in corporate governance and financial statement audits. Both U.S. Generally Accepted Auditing Standards and International Standards on Auditing require risk-based audits, where audit effort is concentrated on accounts and financial statement assertions where the Janet Morrill and Cameron Morrill are Chartered Accountants Research Fellows at the University of Manitoba. We express our gratitude to the Deloitte Touche Research Foundation and the University of Manitoba Centre for Accounting Research and Education, funded by the Institute of Chartered Accountants of Manitoba, for their financial support; the Certified General Accountants of Manitoba and British Columbia that provided participants for this study; and Jeff Thomas and Erin Sharpe for their assistance. We also appreciate helpful comments from Theresa Libby, two anonymous reviewers, Ed O’Donnell, participants at the University of Manitoba faculty workshop series, the Certified General Accountants/University of Manitoba Accounting Research Conference, and comments from participants and reviewers of annual meetings of the American Accounting Association (AAA), the Canadian Academic Accounting Association, the Administrative Sciences Association of Canada, and the AAA Auditing Section. Published Online: January 2012 73