Why Press Coverage of a Client Influences the Audit Opinion

In this study I use an experiment to examine why auditors are more likely to issue going–concern opinions when the client has been the subject of negative press coverage prior to the date of the audit opinion. I find no evidence that negative press coverage increases auditors' perceptions of legal liability, as was suggested in the prior literature. I do find, however, that negative press coverage increases auditors' perception of a client's bankruptcy probability and this, in turn, leads auditors to modify the audit opinion. Because the press coverage presented in this study provides no new information, the results suggest that auditors react too strongly to redundant information. This over–reaction can result in inefficient allocation of audit resources and can have deleterious affects on clients. Accordingly, policy makers, auditors and their clients might be interested in how auditors' reliance on redundant information can be reduced.     

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.     

The persuasiveness of audit evidence: The case of accounting policy decisions

This study examines how auditors respond to precedents in accounting situations where authoritative guidance does not exist. Three experiments were conducted with practicing audit managers and partners from a Canadian Big Six accounting firm. The results show that auditors rely to a greater extent on precedents that are similar (versus not similar) to the problem situation. When the client's position on the accounting matter was known to the auditor and all available precedents pointed to the same treatment of the accounting issue in question, auditors did not heed the client's position. Rather, they used the available precedents to judge the appropriate accounting. In contrast, when the client's position was known and the available precedents were mixed in their implications for the appropriate accounting treatment, auditors tended to follow the client's position. These results are considered in light of issues of auditor independence and the accounting regulatory environment.     

Accountability Demands and the Auditor's Evidence Search Strategy: The Influence of Reviewer Preferences and the Nature of the Response (Belief vs. Action)

This study examines differences in auditors' search behaviors associated with the preferences of audit management (reviewer preferences) and the nature of the required response (belief versus action) in the context of an accounts receivable collectibility review. I find that auditors facing reviewers who expressed concern about auditors spending time specifically looking for evidence inconsistent with explanations provided by the client (credence preference) examined fewer evidence items and followed a more client-prompted search (i.e., a search for evidence that follows directly from the client's explanation) than those facing reviewers who expressed concern about auditors' ready acceptance of client explanations without adequate justification (skepticism preference) and those facing reviewers who expressed no specific concern (unknown preference). Further, auditors in the action conditions examined fewer evidence items and spent less time per evidence item than those in the judgment conditions. Additional analyses also indicate that auditors who were held accountable to a reviewer with an unknown preference generally responded as if the reviewer maintained a skepticism preference.     

The effect of client management bargaining power, moral reasoning development, and belief in a just world on auditor independence

In two studies, practising auditors' responses to hypothetical audit conflict scenarios were used to test hypotheses that moral reasoning development and belief in a just world influence resistance to client management power. Based on a mixed factorial ANOVA design, results confirmed that auditor independence is interactively determined. Three styles of auditor decision-making emerged: “autonomous”, “accommodating” and “pragmatic”. Autonomous auditors were responsive to personal beliefs, such that those with strong just world beliefs were more likely to resist client management power. Pragmatic auditors were responsive to client management power, irrespective of beliefs. Accommodating auditors responded both to personal beliefs and client management power; they comprised the least resistant group, especially when they believed in an unjust world.     

审计判断信心研究:一项实验的证据

行为决策理论认为判断信心是影响判断质量的一个重要因素。本文以内部控制风险判断和持续经营能力判断为实验任务,采用实验方法检验了审计人员经验、努力程度等因素与审计判断信心的关系。研究发现,审计人员的经验、努力程度与审计判断信心存在显著的正向关系,任务困难程度的主观感知与审计判断信心存在显著的负向关系,而男性审计人员判断信心明显高于女性审计人员。     

An examination of order effects in auditors' inherent risk assessments

While recency effects have been reported in a variety of audit tasks, recent studies suggest that these effects may be mitigated under certain conditions. The importance of investigating order effects in auditors' judgments rests with its potential to impact on the efficiency and effectiveness of audits. Since current studies suggest that recency effects may not impact on all audit situations, it is necessary to identify conditions or variables in the task environment that either induce or mitigate recency.
This study examines the occurrence of order effects in auditors' inherent risk assessments, a task not previously examined. Using a case study administered to 70 auditors, this study found that auditors' judgments were not influenced by the order in which audit evidence was evaluated. Rather, the results suggest that judgments of inherent risk may be biased towards conservatism. This may not be surprising given the negative consequences associated with failing to adequately plan an audit. This may cause auditors to act cautiously and thus mitigate recency effects.     

Auditors' Predisposition to Provide Fair Judgments: Australian Evidence of Auditors' Level of Moral Reasoning

Auditors have a responsibility to provide fair and independent opinions about managemenfs preparation of company financial statements. This study examines auditors' predisposition to provide just and fair judgments, using Kohlberg's theory of developmental moral reasoning, one of the most widely accepted theories in justice psychology. The results indicate that a majority of auditors have the predisposition to act fairly, particularly when faced with an ethical crisis. A smaller number are likely to act in their own self-interest and do the right thing only to avoid punishment. These auditors have the ability to "do deals" and, when faced with an ethical crisis, may tend to focus on their own needs at the expense of others.     

A Survey of Time Budget Pressure and Reduced Audit Quality Among Australian Auditors

This paper reports the results of a survey of Australian auditors' perceptions of their time-budget pressure, as well as whether they had exhibited "reduced audit quality" (RAQ) behaviours. Further questions examined why RAQ practices were used and what areas of the audit were likely to be subject to these practices. There appears to be a high level of time-budget pressure on auditors, and many auditors have at some time performed RAQ practices, potentially having implications for the quality of the audit function. These results point to the importance of placing an appropriate value on the audit function to ensure that time budgets are adequate.     

审计风险、审计定价与相对谈判能力——以受监管部门处罚或调查的公司为例

本文以受到相关监管部门调查或处罚(这类公司简称为违规公司,下同)作为衡量审计风险的替代变量,讨论了审计风险对审计定价的影响。研究结果表明,违规公司披露接受调查或处罚信息当年的审计费用显著高于其他公司,而在相关信息披露前一年,这种差异却并不显著。进一步的研究结果表明,虽然审计师能够在前一年认识到违规公司的异常审计风险,但是在审计市场竞争压力下,能否提高审计定价却在很大程度上取决于审计师的相对谈判能力。本文的研究结果表明,在审计风险水平一定的情况下,审计师的相对谈判能力越强,审计定价就越高。     

Strategic Auditor Behavior and Going-Concern Decisions

This paper analyzes a game-theoretic model in which a client can potentially avoid a going-concern opinion and its self-fulfilling prophecy by switching auditors. Incumbent auditors are less willing to express a going-concern opinion the more credible the client's threat of dismissal and the stronger the self-fulfilling prophecy effect. Similarly, the client is more willing to switch auditors the more likely it is that auditors' reporting judgments will differ and the stronger the self-fulfilling prophecy effect. Further, with greater noise in the auditor's forecast of client viability, the auditor tends to express fewer going-concern opinions.     

Limiting Auditors' Liability: The Potential Consequences

The recent revival of interest in the issue of limiting auditors' liability raises questions about the potential effect of such a limitation on auditors' performance. This paper considers the consequences of limited liability from the perspectives of contracting theory and economic arguments. We examine the potential effect of a reduction in auditors' liability on the standard of care or quality of service they provide, emphasising the "calculus of negligence" concept used by Australian courts. We consider the potential impact of reduced liability on the auditor's decision to shirk responsibilities (the moral hazard problem) and on the value placed on audit services. The analysis shows that placing a statutory cap on auditors' liability has the potential to reduce the effectiveness of bonding mechanisms; provide an avenue for divergent behaviour; lower the level of care provided by auditors; and decrease the value of audit services.     

签字注册会计师强制轮换制度提高了审计质量吗?——基于中国上市公司的实证研究

本文分析了我国签字注册会计师强制轮换制度对审计质量的影响,并检验了影响制度效果的主要因素。研究发现,强制轮换制度总体上没有显著提高审计质量,其原因一是强制轮换制度执行中存在规避行为,导致审计师变更频繁和过渡审计师的出现,其对应审计质量较低;二是强制轮换制度实施后,新任审计师的平均专业胜任能力下降,导致审计质量下降。而具有原客户审计经验的审计师在被强制轮换后重新审计该客户的审计质量较高,这能在一定程度上抑制上市公司审计质量的整体下滑。本文的发现对进一步完善签字注册会计师强制轮换制度有较好的参考意义。     

The Effects of Business Risk on Audit Pricing

This paper examines the pricing of business risk by homogeneous auditors in a two period model. Incumbent auditors learn the client's business risk type during the course of the engagement. They subsequently compete in prices with prospective auditors. In such an environment, we show that equilibrium audit fees do not fully reflect the cost of business risk. Moreover, there exists differential auditor turnover between high and low risk firms; cross-subsidization of the audit fees of high risk firms by low risk firms; and low-balling by auditors.     

University Audit Departments in the United States

Internal auditors of public and private universities were asked about their selection processes, supervisors, and activities. At public institutions, the governing board selects the internal auditor, the president supervises the work and more audit findings are implemented. Private institutions have more audit committees that are involved with the internal auditors' activities and their auditors perform more program audits. Thus, although public universities are following professional guidelines more closely, suggesting more accountability, private universities have greater access to audit committees and perform more value-added audits.     

Auditors' Conflict Management Styles: An Exploratory Study

This study explores the conflict management styles used by auditors when resolving disputes with clients concerning financial statement issues. Rahim's (1983a, 1990) ROCI–II conflict management instrument was used to establish both the styles generally used and also those used in a scenario concerning possible inventory obsolescence. Size of the client and the strength of its corporate governance mechanisms were manipulated in the scenario. It was found that auditors indicate that they primarily use the integrating style to resolve disputes. The compromising and dominating styles are used to a lesser extent while the obliging and avoiding styles are rarely used. Partners are more likely than managers to use more assertive styles of conflict management. The size of the client and the strength of corporate governance mechanisms in place have a significant but relatively minor impact on the choice of styles. The study also identifies the parties whom the auditor would expect to help resolve the dispute. It was found that, when resolving a dispute with the client's chief financial officer, the audit committee is perceived to give the most assistance, followed by the chief executive of icer.     

The effect of inspections,rotations and client preferences on staffing decisions

With increased regulatory focus on audits and concerns about whether audit regulation is achieving its stated aims, it is timely to investigate how regulator inspection of audit files and partner rotations may be affecting staffing decisions. This is an important issue, which affects all audits, as the calibre of staff allocated across engagements impacts the quality of audit work delivered. This study reports the results of an experiment where auditor participants allocate staff across two audits, where regulation anticipated (none, inspection, rotation) and a client request for the best staff (absent, present) are manipulated between‐subjects. We find that auditors allocate lower calibre staff when neither an inspection nor rotation is anticipated than when either is anticipated. When an inspection is anticipated, auditors allocate staff with more knowledge and compliance skills. When a rotation is anticipated, auditors allocate staff with more people skills. A client request for the best staff only has an effect when a partner is due to be rotated, where auditors allocate staff with more people skills in response to the client request. Our findings provide greater understanding of staffing decisions, which may affect audit quality if concerns around audit inspections and partner rotations are perceived by auditors as more important than the underlying risk or complexity of an engagement when allocating staff.     

Does Ethical Culture in Audit Firms Support Auditor Objectivity?

The suggested cause of constrained auditor objectivity has been centred on auditors' financial incentives and long audit tenure. Recent research has challenged those assumptions and questioned the effectiveness of auditor rotation to counteract short-tenure threats to auditor objectivity. Audit firms and regulators need to adopt methods for enhancing auditor objectivity that are effective in various auditor–client relationships. This study examines whether audit firm ethical culture is positively related to auditor objectivity. Based on the responses of 281 practising auditors, the findings indicate that auditors are more likely to make objective judgments in ethical cultures characterized by the rewarding of ethical behaviour and punishment of unethical behaviour, prevalence of ethical norms, visible ethical leadership, and low emphasis on obedience to authority. In conclusion, evidence indicates that auditors in audit firms with a strong ethical culture are more likely to maintain auditor objectivity than are auditors in less supportive cultures. This suggests that audit firms should promote a strong ethical culture to reduce the risk of constrained auditor judgment.     

Specialty production, personal capitalism and auditors' reports: Mintons Ltd., c.1870-1900

This paper considers the role of auditors and auditors' reports in the context of British personal capitalism in the late nineteenth century. Focusing on a case study derived from the records of high-class pottery manufacturer Mintons Ltd, it is demonstrated how auditors attempted to extend the role of the audit, and how that attempt was received in a family firm exhibiting a strong company culture. The paper provides insights into costing issues in the context of specialty production, the role and competencies of professional external auditors, and the priorities of personal capitalism, examining important debates in British business history from a novel angle.