The Association between Information Technology Investments and Audit Risk

Abstract

SUMMARY: The advances in information technology (IT) have changed the way companies conduct business in using electronic commerce strategies, preparing financial reports and having their financial statements audited. Therefore, client firms ’ IT investments could have effects on audit risk. On one hand, the IT complexity creates challenges for auditors in auditing the effectiveness of internal control and detecting accounting irregularities. On the other hand, IT decreases audit risk by improving operation and internal control effectiveness which may decrease inherent and internal control risk. Yet, the relationship between clients ’ IT asset portfolios and audit risk remains an empirical question. Using proprietary IT data of US firms from 2000 to 2009, we find that IT investments are positively related to audit fees and abnormal audit fees, and negatively related to the probability of issuance of a going-concern audit opinion. Furthermore, we find that audit tenure moderates the above relationship due to the learning effect