Does an auditor's skill matter?: responses to and preferences amongst auditing standards

Abstract

The last decades have seen a dramatic increase in litigation against auditors. This paper introduces a model, in which auditors differ in their levels of skill, where differences in levels of skill may or may not be observable and reflect differences in knowledge or audit technology. This model is designed to capture the interplay amongst auditing standards, auditors liability, and auditors levels of skill, which determines auditors responses to and attitudes towards auditing standards. The paper first derives an auditor's employment prospects and the quality of audit supplied if employed as a function of his level of skill in the absence of any imperfection, in the assessment of negligence or uncertainty in the quality of audit prescribed by the prevailing auditing standards. It then analyses the effect of either an imperfection in the assessment of negligence or uncertainty in the quality of audit prescribed by the prevailing auditing standards on the equilibrium schedule of audit quality. It then derives auditors preferences amongst auditing standards. Finally, auditors incentives to invest in skill are considered