AUDITOR OBJECTIVITY: THE EFFECT OF PRIOR INVOLVEMENT IN AUDIT PROGRAMME DESIGN

This study tests whether the involvement of independent auditors in the design of an audit programme affects their subsequent audit work relating to that audit area. Two groups of subjects played roles in designing partial audit programmes for a particular account. They also evaluated partial audit programmes for another account designed by someone else. A third group merely evaluated partial audit programmes for both accounts. All subjects were informed that both audit programmes were implemented and of potential problems that could be attributed to either of the two accounts. Subjects were asked to allocate 15 hours to investigate either or both of the accounts in question. Our hypothesis was that auditors who had a role in designing a partial audit programme would allocate less audit effort to that account than auditors who had no role in the programme design. Comparisons of the hours allocated provided some support for this hypothesis.     

The influence of litigation risk and internal audit source on reliance decisions

External auditor reliance on the work of internal auditors in an integrated audit of the financial statements and internal control is an important audit planning procedure that can impact audit efficiency and effectiveness. The purpose of this study is to examine how perceived auditor litigation risk and internal audit source affect external auditors' reliance decisions in an integrated audit environment under varying levels of risk of material misstatement. In an experimental study using 89 practicing Big 4 auditors, this study finds that auditors who perceive low litigation risk from placing reliance on the work of internal auditors will rely more on outsourced internal auditors than in-house internal auditors. The results also show that auditors' reliance decisions are sensitive to the level of account risk consistent with the risk-based approach to the integrated audit encouraged by the PCAOB.     

An Experimental Study of Auditor Analytical Review Judgements

This paper provides evidence as to how five factors highlighted in the current UK auditing standard are taken into account by auditors in analytical review (AR) judgements. While the relative importance of particular cues was generally found to be consistent with the standard, certain factors were taken into account only to a marginal extent. Little evidence of configural cue usage was identified. The study also provides evidence of a tendency towards conservatism in the way auditors approach AR. The results suggest both that the potential to substitute AR for other substantive procedures may be realised only imperfectly and that the issue of configural reasoning should be addressed in the auditing standard.     

An Experimental Study of Auditor Analytical Review Judgements

This paper provides evidence as to how five factors highlighted in the current UK auditing standard are taken into account by auditors in analytical review (AR) judgements. While the relative importance of particular cues was generally found to be consistent with the standard, certain factors were taken into account only to a marginal extent. Little evidence of configural cue usage was identified. The study also provides evidence of a tendency towards conservatism in the way auditors approach AR. The results suggest both that the potential to substitute AR for other substantive procedures may be realised only imperfectly and that the issue of configural reasoning should be addressed in the auditing standard.     

New Auditors’ Decisions for Released Firms from the Mandatory Auditor Designation Rule: Evidence From South Korea

This study examines the effect of the mandatory designation rule on audit fees charged and audit hours rendered by auditors for firms released from the mandatory auditor designation rule in the Korean audit market. Under the mandatory auditor designation rule, which took effect in 1991, problematic firms are assigned new auditors by the Financial Supervisory Service. Previous studies suggest that this regulation positively affects the quality of audits by promoting auditor independence. Thus, this study hypothesises that firms that have been subjected to mandatory auditor designation improve the quality of their financial reporting, and that auditors hired after the mandatory designation period account for reduced audit risks when determining audit fees and audit hours. This study shows that audit fees and audit hours of firms released from the mandatory auditor designation rule are lower than those of other initial audit engagements. Taken together, this study's findings reinforce the notion that auditors’ perceptions of changes in audit risk yield corresponding changes in the audit fees they charge and audit hours they render.     

实际控制人类型、法律保护与会计师事务所变更——基于国企民营化的经验研究

本文以2001—2006年间通过控制权转移实现国有股份民营化的上市公司为研究对象,分析民营化对上市公司选择会计师事务所产生的影响。研究发现,民营化后上市公司对会计师事务所的选择发生了变更:民营化后上市公司的实际控制人为外资时,对事务所的选择由小所变更为大所,且主要选择国际"四大";在法律保护程度高的地区,民营化后实际控制人为集体时,对事务所的选择由大所变更为小所;在法律保护程度低的地区,民营化后实际控制人为个人和家族时,对事务所的选择是在小所之间进行变更;民营化前实际控制人是中央政府的上市公司在民营化后明显选择了小事务所。我国的法律环境未能有效约束会计师事务所的变更。     

The attitude of Libyan auditors to inherent control risk assessment

Previous empirical evidence contradicts the practices of audit risk assessment recommended by the professional auditing standards. Key differences represent the presumption that auditors can readily distinguish between different categories of risk, how they assess such risks in practice, their application to the different account levels and their capacity to differentiate between what may constitute potentially high or low risks. The paper addresses these differences in the context of the Libyan auditors’ perceptions and practices. The nature and development of the audit profession in Libya makes this a good comparator for the US and UK contexts of audit behaviour. Equally importantly, the religious, political and socio-cultural context combined with Libya's role as an emergent economy is representative of many other economies in the world, thus providing a good comparator for assessing the validity and applicability of the established auditing management principles and procedures. One hundred and sixty four practicing auditors in Libya were investigated, initially by questionnaire and subsequently interview of a smaller sample of 20 auditors. The evidence reinforces prior empirical evidence that inherent and control risks are assessed interdependently, auditors are aware of the risk differentials depending on the level of account and are cognizant of factors normally associated with potentially high and low risk levels.     

The Importance Of Inherent Risk Factors: Auditors‘ Perceptions

This research project investigated auditors' perceptions of the importance of inherent risk factors in assessing inherent risk for accounts receivable and inventory. Sixty-eight auditors completed a questionnaire listing 42 inherent risk factors and six control risk factors. The auditors were required to: identify whether each factor was an inherent risk factor; indicate whether the factor affected their assessment of inherent risk at the financial statement or account balance (class of transactions) level; indicate whether the factor was associated with high or low inherent risk; and assess how important the inherent risk factor was in their assessment of inherent risk. In general, the auditors perceived variables pertaining to the characteristics of management and the history of errors to be the major determinants of inherent risk.     

The influence of judges' attitudes on liability assessments related to failed audits exhibiting significant audit team over-time or significant use of off-shore auditors

This study provides evidence on how audit firms' decisions to use offshore (outsourced) auditors or to assign on-site (local) auditors extensive overtime affect judges' evaluation of auditor legal liability I conduct a behavioral experiment in which actual judges responded to a hypothetical audit lawsuit. The results suggest auditors may be penalized during the litigation process depending on the extent of overtime or off-shoring and judges' attitude toward the public accounting profession. Judges with a positive attitude toward public accounting assessed more liability for an audit firm that used offshore (outsourced) auditors than for the use of extensive overtime for on-site auditors or a control condition. However, judges with a negative attitude toward the auditing profession assessed higher liability for auditors except when on-site auditors bore significant overtime in the final weeks of the audit.     

Is the quality of female auditors really better? Evidence based on the Chinese A-share market

Unlike previous studies in which a single index was used to measure audit quality, this study establishes a new comprehensive index to measure audit quality via Discretionary Accrual, as estimated by Jones’ basic model (1991) and Audit Opinions. The former is used to measure the quality of financial statements, and the latter is used to measure the auditors’ independence in the mainstream international literature. We examine whether and how an auditor’s gender affects the quality of his or her audits under the framework of empathy theory and gender role socialization theory. Using a large sample of 9861 auditor-firm-year observations from Chinese A-share–listed companies from 2011 to 2015, we find that the audit quality of signed auditors shows significant gender differences: these significant gender differences differ from the findings of previous studies that female auditors could provide a higher-quality audit than male auditors; that is, in our study the audit quality of the male auditors exceeds that of the female auditors. After distinguishing the positive and negative directions of the Discretionary Accrual, we find no significant gender differences in audit quality between male and female auditors when the earnings had been adjusted upward by the client; that is, female and male auditors had the same audit risk perception. However, when the client adjusted earnings downward, which indicates a lower audit risk for the auditor, the audit quality of female auditors was significantly lower than that of the male auditors. After controlling for the age and position of the auditors, we also find that the gender differences in the auditors’ audit quality decreased significantly or even disappeared when the auditor’s age exceeded 45?years and/or their position was manager or above. These results are consistent with the empathy theory and gender role socialization theory.     

Balance between auditing and marketing: An explorative study

This study explores how auditors’ attitudes toward marketing and their views on the importance of marketing affect how they balance their time spent on auditing and marketing activities. The purpose is to understand how changes in the business environment for auditors affect the relationship between the auditing profession and marketing. The study is based on a survey of 672 auditors in Sweden. Findings suggest that auditors with a positive attitude toward marketing spend significantly more time on marketing activities compared to those with a less positive attitude. Furthermore, auditors who view marketing activities as important spend significantly more time on marketing activities. The study controlled for the number of years as an auditor, age of the auditor, and firm affiliation. The results indicate that the theoretical distance between the auditing profession and marketing does not exist in practice to the same degree as in the past. These findings have implications for international auditing theory and practice in illuminating the relationship of marketing and auditing in a wider business context.     

Future Events—A Conceptual Study of their Significance for Recognition and Measurement A Review Article

A number of research papers present evidence of fee premiums paid to specialist auditors. In this paper, we explore for listed and unlisted New Zealand firms not only the question of whether such premiums exist, but perhaps more importantly why they exist. We find evidence of fee premiums for auditor specialisation defined at the city level but not at the national level. We extend testing to examine the issue of self-selection of auditors by clients; we examine several different industry classification schemes and a number of different specialisation measures; and we consider the issue of portfolio specialists. We find from these additional tests that self-selection does not account for the existence of specialisation premiums; various alternative classification schemes all result in premiums at the city level; and portfolio specialists also earn fee premiums when portfolio specialisation is measured at the city level. We find that these specialist premiums apply most consistently to larger client firms and to low-risk firms. We consider various explanations and conclude that this result is consistent with non-specialist auditors providing discounts to attract desirable clients. Desirable clients – those that are large or low risk – are not able to negotiate fees as successfully with auditors who have differentiated themselves via industry specialisation.     

AUDIT PRICING, AUDITOR CHANGES, AND THE WINNER'S CURSE

This paper presents a two-period model of the audit market. In the first period, all auditors have symmetric information and adopt identical bidding strategies. In the process of performing the audit, the incumbent auditor learns the actual costs, thereby becoming informationally advantaged in the second period. In the model presented, unlike earlier ones found in the literature, audit costs include both a component common to all potential auditors and a private component that varies across auditors. The common component of auditor costs gives rise to a ‘winner's curse’ scenario. A winner's curse is said to exist because a non-incumbent bidder who does not take into account the superior information of the incumbent would be expected to generate a loss from winning the audit engagement. The adjustment of bids by sophisticated auditors to compensate for the winner's curse is shown to play a significant role in determining the degree of low-balling (first-period price cuts) and auditor turnover. In the model, low-balling is not associated with loss of audit quality. Additionally, it is shown that it is in the interest of the client to structure audit selection in a manner that gives rise to low-balling.     

The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments

Prior research suggests that internal auditors’ judgements are subject to management influence resulting in compromised risk assessments. This study investigates the effects of the tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments. Results of an experiment involving 64 internal auditors indicate that when the tone at the top is poor, rather than favouring management, internal auditors report a higher risk of intentional misstatements and that coordination with external auditors can further reduce expectations of the incidence of intentional misstatements.     

The turnover intentions of information systems auditors

The turnover rate of Information Systems auditors is an emerging problem for the profession. In his study of factors affecting resource allocations to Information Systems Audit departments, Lucy [Lucy, R.F. Factors affecting information systems audit resource allocation decisions. Thesis, The University of Texas, Arlington, 1998.] found that the average Information Systems (IS) auditor has four years of IS Audit experience. Dunmore [Dunmore D.B. Farewell to the information systems audit profession. Internal Auditor 1989; February:42–48.] argues that this high turnover of IS auditors will limit systems audit knowledge. Unlike prior research investigating turnover intentions of IS auditors, this study specifically includes factors that reflect the higher level needs of IS audit professionals. The need to satisfy personal and professional growth exerts a particularly strong influence on IS auditors' turnover intentions. Further, our study confirms that IS auditors' share similar characteristics to other IS professionals rather than with general accountants and auditors. Organizations wanting to retain their IS auditors should provide regular opportunities for their IS auditors to satisfy their personal growth needs.     

External auditors’ reliance on internal audit: the impact of sourcing arrangements and consulting activities

This study examines the impact of internal audit outsourcing and involvement in consulting on external auditors’ reliance on the work of internal audit. We test whether these factors influence reliance on internal audit work already undertaken and the use of internal auditors as assistants, distinguishing between control evaluation and substantive testing. Involvement in consulting impacts reliance on work undertaken and the use of internal auditors as assistants for control evaluation. External auditors make greater use of internal auditors as assistants for substantive testing when internal audit is provided in‐house. Overall, external auditors use internal audit more for control evaluation tasks.     

The Effect of Litigation Risk Increase on Big N Auditor Exits and Audit Quality in the Korean Savings Banking Industry

This study investigates whether an increase in litigation risk results in Big N auditors leaving the industry and examines the impact of this increase on audit quality. Using a sample of Korean savings banks from 2009 to 2015, the study finds that the proportion of Big N auditors sharply decreases after a savings bank crisis, suggesting that Big N auditors are likely to reject riskier clients, while audit quality is unchanged. The results provide new evidence that an increase in litigation risk does not necessarily increase audit quality. The findings have academic and practical implications, as they suggest that policies for improving audit quality should consider auditors’ strategies in response to litigation risk.     

Japanese stock market reaction to announcements of news affecting auditors’ reputation: The case of the Olympus fraud

The revelation of accounting fraud by the Olympus Corporation gave rise to shareholder allegations of audit failure against Olympus’ auditors—Ernst & Young ShinNihon LLC and KPMG AZSA LLC—in 2011. In this study, we investigate whether the auditors’ affiliation with Olympus contributes to divergent perceptions of audit quality in the event of news announcements affecting the reputation of Olympus’ auditors. First, we use a nonparametric generalized rank event study methodology on 918 sample firms from the First Section of the Tokyo Stock Exchange (TSE) to observe Japanese investors’ perceptions of auditor reputation as proxied by abnormal returns. Second, we perform a multivariate linear regression on firms’ abnormal returns after controlling for firm-specific variables. We find that Japanese investors do not respond to negative or neutral reputational information arising from news announcements concerning Olympus’ auditors for firms affiliated and not affiliated with those auditors. In the absence of legal penalties imposed on Olympus’ auditors, we argue that Japanese investors consider the Olympus fraud case as an expected occurrence of audit failure due to a lack of evidence suggesting systematic audit failure on the part of Olympus’ auditors and an expectation of lower audit quality in the Japanese capital market. As a result, Japanese investors do not consider news announcements affecting the Olympus auditors’ reputation as sufficient evidence to change their prior expectation regarding the reputations of the audit firms affiliated with the Olympus fraud case.     

Configural Information Processing in Auditing: Further Evidence

An important issue in audit judgment research has been how auditors combine information in order to make judgments and, in particular, whether auditors ‘judgments involve configural cue usage. Some recent research (Brown and Solomon, 1990; 1991) has found that under certain conditions, many auditors were able to configurally process information. This paper extends this research by examining some conditions that may facilitate the development of auditors’ ability to configurally process available information. The study found that: (a) the proportion of auditors processing the information configurally was greater than chance; (b) for those that processed the information configurally, the form of the interaction was as predicted, that is, ordinal with a compensatory form; (c) increasing depth of processing by requiring subjects to provide explanations for their judgments did not have a significant effect on the number of auditors processing configurally; (d) the level of consensus was higher for auditors who processed configurally than for those who did not; and (e) the analysis of the explanations provided by configurai cue processors indicated that they saw the relevant cues as being substitutable.     

The ‘Cost’ of Climate Change: How Carbon Emissions Allowances are Accounted for Amongst European Union Companies

Following the withdrawal of IFRIC 3: Emissions Rights in 2005, European Union (EU) companies participating in an Emissions Trading Scheme (ETS) do not have definitive guidelines as to how to account for carbon emissions allowances. Using a content analysis methodology, this study examines the disclosed accounting policies of companies participating in the EU ETS, and reveals how, in the absence of clear guidance, they account for their carbon emissions allowances. As the accounting method adopted will impact upon a company's financial statements, these findings are of interest to accounting standards setters, investors, financial reporting preparers, auditors, and researchers.