Do industry specialists and business risk auditors enhance audit reporting accuracy?.

A number of prior studies have examined audit reporting quality using size (Big 8/6/5/4) as a proxy for quality (i.e. Lennox, 1999b; Francis and Krishnan, 1999; Weber and Willenborg, 2003). In this paper we move beyond the traditional definition of a high quality auditor, and investigate whether enhanced industry knowledge or an increased focus on business risk auditing methodologies improve audit reporting accuracy. In addition, we examine whether industry specialists and business risk auditors have a comparative advantage in judging the adequacy of mitigating management actions implemented by financially distressed companies. Using a sample of US companies from manufacturing industries (SIC 20-39) that went bankrupt between 1998-2001, we do not find evidence supporting that specialist auditors are more likely to issue a going concern opinion for companies that subsequently go bankrupt. However, our evidence does indicate that specialists are not fooled by operating initiatives (whereas non-specialists are). Interestingly and counter to our expectations, we find that audit firms using a business risk methodology are less likely to issue a going–concern opinion for a firm that subsequently goes bankrupt. Further, our evidence also suggests that business risk auditors may be 'fooled' by short term operating efforts to reduce financial distress. Finally, we also find very strong evidence that auditors, irrespective of their type, are 'fooled' into not issuing a going concern opinion for clients that subsequently go bankrupt when the client is planning on raising cash in the short term.Behavior; Control; Cost; Exchange; Information; Negotiations; Performance; Power; Research; Theory; Law; Effects; Trade; Flows; Country; Intensity; Imports; Import; United States; Trade liberalization; Industry; Industries; Business; Risk; Reporting; Studies; Quality; Size; Knowledge; Auditing; Comparative advantage; Management; Companies; Manufacturing; Firms; Planning;

Unintended consequences of changes in the regulatory landscape on the statutory audit processNie

We examine the effect of changes in the regulatory environment on the conduct of financial statement audits in a European setting. These changes include the adoption of risk-based auditing, new Audit Risk Standards and increased scrutiny of audit quality by a new, co-ordinated oversight body in each Member State. We investigate this by analysing the audit hours and fees and their determinants for clients of Big N audit firms in Finland in 1996 and 2010. Our results show that audit fees and audit effort by senior auditors were generally higher for high risk clients in 2010 than in 1996. Second, we find that the relationship in 1996 between the client being owner-managed and lower audit hours for both senior and junior auditors is absent in 2010. This supports our argument that the increased auditor scepticism has increased audit effort for owner-managed firms. Third, we find that the average number of junior staff hours increased between 1996 and 2010, but the variance across engagements declined. In contrast, senior auditor hours (and total audit hours) decreased, but the variance across engagements increased. This supports the view that risk-based auditing has increased the efficiency of audits. However, it suggests that the general increase in regulation and the tightening of audit standards, reinforced by the new quality inspections, have led to less emphasis on processes requiring professional judgment and more emphasis on compliance with rules. These unintended consequences should be of interest to the auditing profession and policy makers

Scheduling internal audit activities:A stochastic combinatorial optimization problem

The problem of finding the optimal timing of audit activities within an organisation has been addressed by many researchers. We propose a stochastic programming formulation with Mixed Integer Linear Programming (MILP) and Constraint Programming (CP) certainty-equivalent models. In experiments neither approach dominates the other. However, the CP approach is orders of magnitude faster for large audit times, and almost as fast as the MILP approach for small audit times. This work generalises a previous approach by relaxing the assumption of instantaneous audits, and by prohibiting concurrent auditin

Do industry specialists and business risk auditors enhance audit reporting accuracy?

A number of prior studies have examined audit reporting quality using size (Big 8/6/5/4) as a proxy for quality (i.e. Lennox, 1999b; Francis and Krishnan, 1999; Weber and Willenborg, 2003). In this paper we move beyond the traditional definition of a high quality auditor, and investigate whether enhanced industry knowledge or an increased focus on business risk auditing methodologies improve audit reporting accuracy. In addition, we examine whether industry specialists and business risk auditors have a comparative advantage in judging the adequacy of mitigating management actions implemented by financially distressed companies. Using a sample of US companies from manufacturing industries (SIC 20-39) that went bankrupt between 1998-2001, we do not find evidence supporting that specialist auditors are more likely to issue a going concern opinion for companies that subsequently go bankrupt. However, our evidence does indicate that specialists are not fooled by operating initiatives (whereas non-specialists are). Interestingly and counter to our expectations, we find that audit firms using a business risk methodology are less likely to issue a going–concern opinion for a firm that subsequently goes bankrupt. Further, our evidence also suggests that business risk auditors may be 'fooled' by short term operating efforts to reduce financial distress. Finally, we also find very strong evidence that auditors, irrespective of their type, are 'fooled' into not issuing a going concern opinion for clients that subsequently go bankrupt when the client is planning on raising cash in the short term.status: publishe

Responsiveness of auditors to the audit risk standards: Unique evidence from Big 4 audit firms

We examine the effect of changes in audit risk standards on the conduct of financial statement audits in a European setting. We investigate this by analysing the audit hours and audit fees for clients of Big 4 audit firms in Finland in 1996 and 2010. Our results show that audit firms became more sensitive to clients’ business risk due to the introduction of the new audit risk standards, with more audit hours allocated to owner-managed companies in 2010 than in 1996, and fewer audit hours allocated to low-risk clients in 2010 than in 1996. Also, the labour mix in the audit team changed for owner-managed companies, with a greater work load carried by junior auditors in 2010 than in 1996. Regarding the price of audit, we find an increase in audit fees for clients with high business risk, while audit fees remained at roughly the same level for low-risk clients. These findings should be of interest to the auditing profession and those involved in the development of auditing regulations