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Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation
Abstract
Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firm's risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process.
To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement. In terms of risk adaptation, partners screened clients based on the clients' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactive risk-adaptation strategies (e.g., adjusting the audit fee, making plans about necessary audit evidence, etc.) to make less “acceptable” clients more acceptable. It appears that avoiding risk, rather than proactively adapting to risk, is descriptive of how audit partners currently make the client-acceptance decision.
... Client acceptance guidelines are already available but are still considered natural and widely known. The results of previous studies reveal that the client's business risk impacts the client's acceptance decision (Johnstone, 2000). The client's business risk assessment can be carried out by KAP properly if it has a competent industry specialist auditor. ...
... Therefore, the higher risk to that auditor's face (public reputation) when accepting a client makes the audit fee charged higher to the client. Research conducted by both Johnstone & Bedard (2003) and Johnstone (2000) assumes that there are sufficient competent human resources within the KAP. ...
... At the same time, management appraisal methods are widely used (Luo & Salterio, 2021). When the auditor fails to conduct an audit risk assessment, it will impact the business risk of the KAP (Johnstone, 2000;Johnstone & Bedard, 2003). The business risk of KAP Besar turns out to be using audit software as a measurement tool instead of financial ratios (Prameswari & Yustrianthe, 2015). ...
... Several reasons indicate that high IC intensive firms, (organizational capital, labeled OC, is a part of IC) are positively associated with the occurrence of a modified audit opinion decision (Habib, 2013). First, IC increases business risk (de Matos Pedro et al., 2018;Dženopoljac et al., 2016;Nimtrakoon, 2015;Sardo and Serrasqueiro, 2018;Z eghal and Maaloul, 2010) which critically not only affects any audit effort and planning but also increases the risk that an unqualified audit opinion will be issued (Bentley et al., 2013;Johnstone, 2000;Shen et al., 2023). Second, a high IC intensive firm may require auditors to develop superior knowledge when auditing IC intensive firms, thus indicating that these auditors have invested resources to develop a relevant reputation which may increase the perceived potential reputational risk (Mayhew and Wilkins, 2003;Reichelt and Wang, 2010). ...
... plant, property and equipment). Thus, high IC intensive firms are associated with an increased business risk, which critically not only affects any audit effort and planning but also increases the risk that an unqualified audit opinion will be issued (Bentley et al., 2013;Johnstone, 2000). ...
... There are several reasons that explain the observed positive relationship of IC with the occurrence of a modified audit opinion decision. First, high IC intensive firms are associated with an increased business risk, which not only critically affects any audit effort and planning but also the risk that an unqualified audit opinion will be issued (Johnstone, 2000; Notes: The table shows findings for the binary regression. We use the maximum likelihood estimation (MLE) that aims to find the values of coefficients that maximize the likelihood of the observed data. ...
Purpose
This study aims to explore the effects of intellectual capital (IC) on the occurrence of a modified audit opinion decision. The authors expect that high IC intensive firms are positively associated with the occurrence of a modified audit opinion since they are associated with an increased business risk and are more likely to exhibit issues concerning their financial health and stability.
Design/methodology/approach
Using a data sample of 423 listed firms from Greece, Italy, Spain and Portugal over a 10-year period, the authors estimated a logistic regression model to examine the effects of IC on the probability that a modified audit opinion is issued. The authors used organizational capital as a measure of a firm’s intensity on IC.
Findings
Empirical findings indicate a significant and positive relationship between the IC and the likelihood of a firm receiving a modified audit opinion decision.
Originality/value
This study expands prior literature by exploring the predictive ability of IC on the likelihood of a firm receiving a modified audit opinion decision.
... First, investor attention demands more firm-specific information for valuation (Peng and Xiong 2006;Yang, Wu, and Yu 2021). External auditors provide reasonable assurance about the quality of firm-specific financial information and determine audit fees given the risk of material misstatements and audit risk (Simunic 1980;Johnstone 2000;Bell, Landsman, and Shackelford 2001;Mitra et al. 2007;Simunic and Stein 1990). 6 Thus, our study sheds light on the role of retail investor behaviors related to audit risk and audit pricing. ...
... Audit fees are determined based on client business risk, audit risk, and auditor business risk (Jensen and Meckling 1976;Johnstone 2000;Simunic and Stein 1990;DeFond and Zhang 2014). Client business risk in an audit engagement is the risk that the client's economic condition deteriorates in the future (Huss and Jacobs 1991;Johnstone 2000). ...
... Audit fees are determined based on client business risk, audit risk, and auditor business risk (Jensen and Meckling 1976;Johnstone 2000;Simunic and Stein 1990;DeFond and Zhang 2014). Client business risk in an audit engagement is the risk that the client's economic condition deteriorates in the future (Huss and Jacobs 1991;Johnstone 2000). Audit risk is the risk of issuing an incorrect audit opinion or failing to detect material misstatements. ...
Using a recently developed proxy for retail investor attention to 10-K filings on EDGAR, we investigate the relationship between retail investor attention and audit fees. We find that retail investor attention is positively related to audit fees and negatively related to earnings quality. Our result is consistent with the notion that managers of firms with high retail investor attention are more likely to manipulate earnings. We also find that retail investor attention to 10-K filings is a relatively more important source of firm-specific information for small firms than for large firms. Collectively, we find that retail investor attention plays a significant role in audit pricing. Our results are robust even after controlling for omitted variable bias, endogeneity, and alternative retail investor attention measures.
JEL Classifications: M41; M42.
... Auditors are required to assess a client's business risk, or the chance that the client's financial situation will worsen in the future, as part of the auditing process and in compliance with auditing standards. Higher business risk raises the possibility that the client will engage in earnings management to conceal poor performance (i.e., increased inherent risk and audit risk), resulting in reputational/economic losses for the auditor (i.e., auditor's business risk) (e.g., Johnstone, 2000;Stanley, 2011). Therefore, an auditor should respond to this increased risk by increasing audit effort (i.e., decreasing detection risk) and/or charging a fee premium (e.g., Bell et al., 2008;Niemi et al., 2018). ...
... Business risk, in this context, is broadly defined as the risk that a client's future economic condition will deteriorate and business objectives will not be met (e.g., De Martinis & Houghton, 2019; Johnstone, 2000;PCAOB, 2020). Therefore, developing a deep and comprehensive understanding of a client's business environment, as well as associated risks, is critical to this approach. ...
... Given that inherent and control risks are client-specific, they are significantly influenced by a client's business risk. Specifically, client business risk significantly determines whether financial reports contain material misstatements due to an error or fraud (Johnstone, 2000;PCAOB, 2010). A client who is exposed to increased business risk is more likely to intentionally falsify financial statements to conceal poor performance, implying higher inherent risk and, as a result, higher audit risk (Stanley, 2011). ...
In this study, we investigate whether auditors consider their clients’ climate change-related external risks when making audit pricing decisions. Using county-level proxies based on the number of declared natural disasters and the level of societal climate change awareness, we discover that clients with greater exposure to climate change risks pay significantly higher audit fees. After performing several additional tests, we conclude that auditors consider climate change risks and their potential consequences as a systematic business risk that is factored into the audit fees. For instance, we demonstrate that clients’ climate risk exposure has become more strongly associated with audit pricing in recent years, as climate change has gained greater importance in public debate. Moreover, we discover that auditors place a greater emphasis on clients’ climate risks when they themselves are located in regions with higher climate change awareness, indicating that auditors’ climate change perception also matters. Given the growing interest in climate change-related risks in practice and research, as well as the significance expected to be placed on these risks in the future, our findings are timely and should appeal to a wide range of readers, including investors, regulators, and scholars.
... Prior research on audit pricing (Bell et al., 2001;DeFond & Zhang, 2014;Gul & Tsai, 1998;Houston et al., 1999;Johnstone, 2000;Simunic & Stein, 1996) suggests that audit fees reflect an auditor's effort and risk premium and thus should be positively associated with auditor engagement risk, which consists of three components: audit risk (the risk that a material misstatement in the audit is not detected by the auditor); business risk (the risk associated with the audit client's survival and profitability); and auditor's business risk (the auditor's exposure to loss arising from the audit of a firm) (Colbert et al., 1996;Johnstone, 2000). 4 Given the evidence of the negative impact of media coverage of CSI on firms, it is possible that auditors may assess such firms as posing a higher engagement risk, leading them to charge higher audit fees. ...
... Prior research on audit pricing (Bell et al., 2001;DeFond & Zhang, 2014;Gul & Tsai, 1998;Houston et al., 1999;Johnstone, 2000;Simunic & Stein, 1996) suggests that audit fees reflect an auditor's effort and risk premium and thus should be positively associated with auditor engagement risk, which consists of three components: audit risk (the risk that a material misstatement in the audit is not detected by the auditor); business risk (the risk associated with the audit client's survival and profitability); and auditor's business risk (the auditor's exposure to loss arising from the audit of a firm) (Colbert et al., 1996;Johnstone, 2000). 4 Given the evidence of the negative impact of media coverage of CSI on firms, it is possible that auditors may assess such firms as posing a higher engagement risk, leading them to charge higher audit fees. ...
... Lastly, CSI media coverage may increase the auditor's business risk (i.e., the auditor's exposure to loss arising from the audit of a firm) (Colbert et al., 1996;Johnstone, 2000). CSI media coverage increases the public and regulators' scrutiny of a firm, thereby heightening the auditor's risk of litigation and reputation risk. ...
This study uses a large sample of firms from 35 countries to examine how media coverage of corporate social irresponsibility (CSI) affects audit fees. We document a positive and significant relationship between media coverage of CSI and audit fees. Further evidence indicates that this positive relationship is less pronounced for firms with a higher level of commitment to corporate social responsibility (CSR) performance but is more pronounced for firms domiciled in countries with stronger investor protections, higher regulatory quality and higher CSR disclosure requirements. Taken together, these findings support the conjecture that CSI media coverage increases auditors' risk and thereby increases audit fees. Moreover, our findings suggest that the effect of media coverage of CSI on audit fees varies with country‐level institutional characteristics and the degree of firms' substantive commitment to CSR performance.
... Auditors' engagement risk consists of three components: client business risk, auditor business risk, and audit risk (Huss and Jacobs 1991;Johnstone 2000;Johnstone and Bedard 2003). Client business risk is the risk that the client's economic condition will deteriorate in either the short or long term (Huss and Jacobs 1991;Johnstone 2000). ...
... Auditors' engagement risk consists of three components: client business risk, auditor business risk, and audit risk (Huss and Jacobs 1991;Johnstone 2000;Johnstone and Bedard 2003). Client business risk is the risk that the client's economic condition will deteriorate in either the short or long term (Huss and Jacobs 1991;Johnstone 2000). Auditor business risk is the risk that the audit firm will suffer a loss resulting from the engagement due to litigation, loss of reputation, and/or problems with fee realization (Johnstone 2000;AICPA 1983, AU 312.02;Bell et al. 2001). ...
... Client business risk is the risk that the client's economic condition will deteriorate in either the short or long term (Huss and Jacobs 1991;Johnstone 2000). Auditor business risk is the risk that the audit firm will suffer a loss resulting from the engagement due to litigation, loss of reputation, and/or problems with fee realization (Johnstone 2000;AICPA 1983, AU 312.02;Bell et al. 2001). Audit risk "is the risk that the auditor may unknowingly fail to appropriately modify his opinion on financial statements that are materially misstated" (AICPA 1983, AU 312.02). ...
The literature finds that auditors charge higher fees for riskier clients. One reason for this is that auditors expend greater effort on riskier clients. However, it is unclear whether they also charge an additional client business risk premium. We investigate this issue employing a detailed, hand-collected dataset of hedging derivative usage by U.S. oil and gas exploration and production firms. Even though the auditing of derivative instruments requires greater effort, hedging significantly reduces client business risk. Consistent with the presence of a client business risk premium in audit fees that gets attenuated when clients reduce their risks, we find a negative association between audit fees and the extent of derivative hedging by clients. Further underscoring the role of risk reduction in this relationship, we find the above negative association to be weaker when the risk management efficacy of derivative instruments is comparatively lower. This negative association is also weaker when effort expended in auditing derivatives is likely to be especially high. We contribute to the literature by providing strong evidence for the presence of a client business risk premium in audit fees.
... The issues in respect of Shariah-compliant business entities or those in violations are relatively under-explored from the context of audit, or its impacts on auditors' risk perceptions and, subsequently, their pricing. While prior literature has established that auditors are considering arrays of business risk (Seetharaman et al., 2002;Johnstone, 2000;Johnstone and Bedard, 2003;Hay et al., 2006;Laux and Paul Newman, 2010;Koh and Tong, 2013), it is unclear whether they are insuring against engagement risk associated with Shariah noncompliant firms. The lack of study in such a specific relationship raises the question of whether auditors are prudent to the risk that may arise or attached to Shariah non-compliant firms, as a result of audit engagement and include these expected risks as a surcharge in their pricing. ...
... In specific, our findings contribute in broadening the mapping between the arrays of business risk and audit fees by exploring the lack of internalised values effect on auditors' business risk assessment. This subsequently complements prior works such as Pratt and Stice (1994), Johnstone (2000), Johnstone and Bedard (2003), Laux and Paul Newman (2010), Niemi (2002), Seetharaman et al. (2002), Laux and Paul Newman (2010) and Koh and Tong (2013). ...
... Evidence from prior research indicates that auditors are increasingly evaluating clients' business risks, as shown by Johnstone (2000), Johnstone and Bedard (2003), Hay et al. (2006), Laux and Paul Newman (2010), Koh and Tong (2013), DeFond and Zhang (2014) and Eierle et al. (2021). As corporate financial information environment becomes more litigious, stricter and heavily scrutinised by PCAOB in the USA, it influences the importance of business risk evaluation in auditing. ...
In this article, we examine whether firms’ involvement in socially provocative business activities that are inconsistent with Shariah principles affect auditor’s perceived risk
associated with the financial reporting information. Our study makes several key contributions: (1) this study is a pioneer in documenting the
relationship between Shariah non-compliant risk criteria and auditors’ pricing in a non-
Muslim majority research setting, (2) the findings suggest that on average, ethical contextualisation on perceived acceptable behaviours is relatively consistent across beliefs and the severe lack of it has implications on auditors’ business risk assessment and (3) our research helps enhance understanding on auditors’ business risk evaluation with respect to Shariah non-compliant business activities.
... Professional standards also require that auditors perform a risk assessment of internal control weaknesses and fraudulent statements (IESBA). Earlier documentation has presented various methods of assessing client risk (Johnstone, 2000), and management disclosures may be particularly helpful in this task. (IESBAI) points out that "overly optimistic press releases or annual report letters" are possible fraud risk factors. ...
... Professional standards also require auditors to perform a risk assessment for internal control weaknesses and fraudulent reporting (IESBA). Earlier documentation has outlined various methods of assessing client risk (Johnstone, 2000), and management disclosures may be particularly useful for this task. ...
In 2014, leading scholars in the field of big data auditing outlined a research agenda to explore these impacts, setting the foundation for further investigation. This paper explores the impact of big data on audit evidence, particularly in the context of Saudi Arabia’s transition to a more diversified economy under Vision 2030. This paper also seeks to synthesize current research and establish best practices for auditors in Saudi Arabia, emphasizing the importance of adapting audit processes to a growing economy that increasingly generates vast amounts of data. In recent decades, auditing practices have undergone substantial transformation by broadening the scope of audit goals and incorporating diverse, non-traditional sources of evidence, such as unstructured data from social media or IoT devices. These new data sources, while increasing audit accuracy and depth, pose challenges regarding data reliability and integrity. Over the past decade, many of these research questions have been addressed, particularly in relation to how big data enhances auditors' abilities to detect fraud, improve audit quality, and provide more accurate risk assessments. By implementing AI algorithms and advanced analytics, auditors can gain deeper insights while also addressing key concerns such as data veracity, compliance with International Financial Reporting Standards (IFRS), and the guidelines set by the Saudi Organization for Certified Public Accountants (SOCPA). As Saudi Arabia's economy diversifies and becomes more data-driven, understanding and integrating big data into audit practices will be essential for maintaining high audit standards and supporting economic growth.
... This risk-oriented audit approach is now codified in auditing standards, 2 requiring auditors to also assess firms' (i.e., their clients') business risk. In this context, business risk can be defined as any risk that may deteriorate firms' future economic condition and results in material misstatements of financial statements (PCAOB, 2022;De Martinis & Houghton, 2019;Johnstone, 2000). Firms' business risk is determined by several factors, such as industry affiliation, general economic conditions, regulatory environment, business model, digital transformation, business volatility, geographic location, or sustainable development (Bell et al., 2008;De Martinis & Houghton, 2019;Keller et al., 2024). ...
... Specifically, higher (biodiversity-induced) business risk increases the probability of material misstatements in firms' financial statements, because firms are more likely to engage in earnings management to conceal their poor financial performance (Johnstone, 2000;Stanley, 2011). Thus, an auditor can increase its audit effort (e.g., allocating more experienced staff or increasing auditing hours) to decrease the audit risk that such material misstatements are not detected (Bell et al., 2008). ...
... As part of the risk-based audit approach, it is an important task for auditors to evaluate clients' business risk, which is in turn a relevant determinant of overall audit risk (i.e. the risk of expressing an inappropriate audit opinion) and thus significantly determines audit costs (LópezPuertas-Lamy et al., 2017). Clients' business risk is defined as the risk that companies' economic condition will be impaired to the extent that business objectives in future will not be attained (De Martinis & Houghton, 2019;Johnstone, 2000). Thus, this assessment requires a deep and wide understanding of clients' business environments to evaluate risks relating to industry conditions, regulatory environment, business model, technological change, strategies and further factors which can impact business objectives (Bell et al., 2008;De Martinis & Houghton, 2019). ...
... An auditor is expected to respond to increased client business risk by either expending audit effort and/or charging a premium to cover the additional risks of auditor's expected future losses due to the more risky audit assignment (e.g. through litigation risks) (Bell et al., 2001;Pratt & Stice, 1994;Stanley, 2011). Hence, audits of clients with higher business risk could also affect auditors' own business risk, for instance when auditors generate a loss from the engagement (Johnstone, 2000) or the audited financial statement includes a material misstatement, which may lead to litigation risks through threatening suits that are induced through investors . This would result in defence/settlement costs and reputational losses in regard to maintained misconduct, regardless of any lawsuits' ultimate outcome (Palmrose, 1991;Stanley, 2011). ...
... .] need strengthening, given the emphasis on inherent risk assessments in determining the nature, extent and timing of audit tests". Johnstone (2000) found that auditors' assessment of audit risk (the risk of issuing a clean opinion on materially misstated financial statements) is positively associated with their assessment of auditor business risk, and that increased audit risk results in more audit work. This supports the link between auditor business risk and audit report lag proposed by Bamber et al. (1993), as more audit work should lengthen fieldwork lag. ...
... The results, as shown in Table 6, indicate that there is a significant and positive correlation between ARI and audit report lag in model 3 (β =0.411, p <5 per cent), (β =0.080, p <10 per cent) for panel A and panel B respectively. The findings is consistent with previous studies (Johnstone, 2000;Gul, 2006) who have demonstrated that there is a positive relationship between auditors' assessment of audit risk and long audit fieldwork lag. This finding denotes well that if the audit risk increases, audit delay will be long. ...
Research question: This study investigates and analyzes the influence of earnings management on audit report lag. It also intends to develop a thorough understanding regarding the mediating effect of audit risk on this relation.
Motivation: The outcomes of this paper will help to bridge the knowledge gap related to this issue in developing countries due to the importance of audit delay as it relates to corporate transparency.
Idea: The issue of reporting delay is important as it relates to corporate transparency.
Data: This study is based on a sample consisting of 28 Tunisian companies listed in the Tunis Stock Exchange (TSE) over the periods 2005 to 2010 (pre-2011 revolution) and 2011 to 2017 (post-2011 revolution).
Tools: Consisting of 364 observations for the whole period, Structural Equation Modeling (SEM) approach is applied and three models are developed to examine the direct and the indirect link between earnings management and audit report lag.
Findings: The results show that firms which manage their earnings upward are more likely to accelerate the release of their financial statements. In addition, in the Tunisian context, audit risk mediates the relationship between earnings management and audit report lag.
Contribution: This study extends the existing literature by examining the mediation effect of audit risk on the relationship between earnings management and audit report lag.
... A client's business risk, induced by technological competition, can be transferred into auditor business risk (e.g., Johnstone, 2000;O'Keefe et al., 1994). In response to the higher auditor business risk, auditors may lower "the threshold for issuing a going concern opinion" (DeFond et al., 2016, p.70). ...
... An auditor might perceive its client's technological competition as a threat to the survival of its client, which leads to increased client and auditor business risk. Prior auditing literature suggests that higher client business risk is associated with higher auditor business risk (e.g., Johnstone, 2000;O'Keefe et al., 1994). Auditors tend to charge higher audit fees (e.g., Bell et al., 2001;Morgan & Stocken, 1998), resign from the audit engagements (e.g., J. Krishnan & Krishnan, 1997;Shu, 2000) or issue going-concern opinions for clients with higher business risk to reduce potential litigation costs. ...
We examine whether auditors consider financially distressed clients’ technological peer pressure (TPP) in their going concern assessments. While auditing standards highlight the importance of understanding the competitive environment in risk assessments and going concern assessments, it is not clear whether and to what extent auditors assess different dimensions of industry competition in evaluating firms’ ability to continue as a going concern. We show that a client firm’s TPP in the prior year increases the likelihood that it is issued a going-concern opinion in the current year. Further, this dimension of industry competition is more relevant in auditor evaluations than product market threats and supply chain competition. Further, we find that the positive association is more pronounced when a client firm’s auditor audits more industry peers and when a client’s peer firms have greater innovative originality. Finally, we find evidence that greater TPP results in more conservative going concern reporting.
... Additionally, since the costs related to consumer loss and reputation damage are often difficult to quantify (Romanosky 2016), data breach notification laws can increase not only the client's business risk but also the auditor's assessment of the risk of material misstatement. This, in turn, raises audit risk (Johnstone 2000). ...
Using the staggered adoption of data breach disclosure (DBD) laws, this paper studies the impact of mandatory disclosure of adverse corporate events on audit fees. DBD laws increase the frequency of disclosed cyber incidents, which adversely impacts firms’ financial condition and operations; this could result in a higher risk of misstatement and reputation loss for auditors. Consistent with this hypothesis, we find that auditors charge higher fees after the adoption of DBD laws. We also find that the increase in audit fees is more pronounced in firms with higher cyber risk and greater auditor reputational concerns. Furthermore, governance mechanisms and resources that are available to auditors can mitigate the rise in audit fees. Robustness tests suggest that the effect is not driven by realized cyber incidents and other contemporaneous events. Overall, our study provides evidence that the mandated disclosure regulation significantly affects audit pricing.
... Daher müssen Wirtschaftsprüfer das Geschäftsrisiko des Mandanten bei der Bewertung des inhärenten Risikos berücksichtigen und den Umfang der Prüfungshandlungen entsprechend anpassen, um das Entdeckungsrisiko zu reduzieren und das gesamte Prüfungsrisiko auf einem angemessenen Niveau zu halten(Rittenberg et al. 2011).Das Geschäfts-und Prüfungsrisiko des Mandanten beeinflusst auch das Geschäftsrisiko des Prüfers. Ein fehlerhaftes Urteil kann nicht nur erhebliche Reputationsschäden für die einzelnen Prüfer und die Prüfungsgesellschaft nach sich ziehen, sondern auch zu Schadensersatzklagen führen(Johnstone 2000). Es ist nicht ungewöhnlich, dass Kapitalgeber bei einer signifikanten Verschlechterung der wirtschaftlichen Lage von Unternehmen rechtliche Schritte gegen den Abschlussprüfer prüfen, um eigene Verluste zu kompensieren. ...
... 13 In addition to increased audit risk and client business risk, increased audit effort associated with RPTs contributes to higher audit fees. Prior research shows that auditors account for audit and business risk (in the form of damaged reputation, litigation risk, etc.) when setting audit fees (Houston, Peters, and Pratt 1999;Johnstone 2000;Lyon and Maher 2005). ...
We examine the effect of related party transactions (RPTs) on audit fees in Indian public companies. RPTs can be used to manipulate financial statements or to transfer wealth between firms and their related parties, and the presence of RPTs increases audit risk. RPTs are relatively more important in India than in advanced economies, so we examine the association between RPTs and audit fees in the Indian setting. We find that audit fees increase by 3.58 percent moving from the first to third quartile of related party sales (RPSs). The association between RPSs and audit fees becomes prominent after the enactment of The Companies Act of 2013. Discussions with audit partners suggest that The Companies Act of 2013 led to increases in audit effort. Our results provide information regarding the corporate governance environment in India and highlight the importance of separately analyzing different types of RPTs.
Data Availability: Data will be made available upon request after completion of related projects.
JEL Classifications: G34; M41; M42.
... They are not as reflective or sensitive to the external factor of the short-selling mechanism adoption as companies with less effective corporate governance structures. In addition, auditors will adjust their auditing behavior based on the results of client risk assessment [10]. While the short-selling mechanism enhances the external regulation of the subject company [11], the possibility of revealing negative information about weakly governed firms increases so that the auditors incline to improve their audit quality to protect their rights and interests. ...
This paper utilizes a least squares method to discover the influence of the short-selling mechanism implementation on audit quality, based on a sample of A-share listed companies from 2010 to 2022. It finds that the implementation of the short-selling mechanism encourages auditors to enhance audit quality. Further analysis reveals that the short-selling mechanism has a stronger impact on improving the audit quality of privately held businesses and those with a lower level of corporate governance. The paper’s conclusions offer empirical support for China’s full implementation of the shorting mechanism and the improvement of audit quality. The research findings also enrich the research on this topic in the field of auditing.
... To reduce the risk of audit failure, Auditing Standard 2110 (Public Company Accounting Oversight Board (PCAOB) 2010) requires auditors to assess engagement risk by understanding clients' business and industry (Erickson, Mayhew, and Felix 2000), including the industry environment, business operations and processes, management and governance, strategies, and performance (Elder, Beasley, Hogan, and Arens 2019). Empirical studies have shown that auditors' engagement risk is positively associated with clients' business risk (Simunic 1980;Wallace 1985;Palmrose 1991;Pratt and Stice 1994;Johnstone 2000;Stanley 2011), measured by future growth, return volatility (Stice 1991), and business strategies of being "prospectors" (Bentley, Omer, and Sharp 2013). Auditors may compensate for engagement risk by increasing their effort and/or charging a fee premium (Simunic and Stein 1996); ...
This study investigates whether audit clients’ blockchain activities (including crypto-related activities) affect audit risk by examining the association between blockchain disclosures in 10-K filings and audit fees. Focusing on U.S. firms between 2013 and 2020, we empirically show that audit fees are higher for companies disclosing blockchain activities in 10-K filings. We further find that this positive association is more pronounced for companies disclosing current blockchain implementation than for companies with plans for blockchain activities. The results indicate that clients’ blockchain activities influence audit risk as assessed by external auditors. As blockchain technology and its applications are emerging, our findings have implications that should be considered by auditors, regulators, and top management.
... al., 2012;Francis et. al., 2010;Francis, 2011 (Griffith, et al., 2017;Setiawan, 2017;Knechel et al., 2013;Jackson et al., 2017;Setianwan & Iswari, 2016 (Simnett, 1996;Simnett & Trotman, 1989;Shanteau, 1987;Green, 2008 (Nelson & Tan,2005;Chi et al, 2012;Gul et al., 2013;Baly et al., 2015;Svanberg et al.,2017;CICPA, 2015 Houston, 1999;Fukukawa et al., 2011;Beaulien, 2001;Gul et al.,2018;Johanstone, 2000;Bell et al,2002;Jones & Norman, 2006 (Stocks & Harrell, 1995;Meixner & Welker, 1988;Trotman, 1998;Cameran et al., 2017;Su & Wu, 2018;Dimmock et al.,2018;Gul et al.., 2013;Li et al., 2017 (Stoel et al.,2012;Uyar & Gungormus, 2011;Vasarhelyi et al., 2010;Lin, 2008;Howieson, 2003;Dixon et al.,2004;Curtis et al., 2009 (Stocks & Harrell, 1995;Meixner & Welker,1988;Trotman, 1998;Hammersly, 2011;Gul et al., 2013;CICPA,2015;Pyzoha et al..,2016) بما عالقتها و المهنية المالءة عناصر (Solomon, 1992;Cronin & weingarl, 2007;Oslan et al,2007;Knech et al.,2013;Jackson et al.,2017;Schmutte & Dumanu, 2009;Sanusi & Iskandar, 2007;Gul et al.,2013;Nelson & Tan, 2005;KPMG, 2014;Zhang et al., 2006;Maghee et al.,1978 ...
... Consistent with this view, Ashbaugh-Skaife et al. (2009) find that firms that disclose internal control deficiencies (resulting from a low-quality accounting information and disclosure system) show higher systematic risk, higher idiosyncratic risk, and higher cost of equity. Another branch of studies (e.g., Iskandar, 1996;Johnstone, 2000) suggests that auditors consider the audited company risk characteristics (e.g., financial condition, comparable industry performance and industry competition) within their materiality and risk assessment. Kotchetova et al. (2006) indicate that auditors, indeed, evaluate the audited company's underlying risks and the relationship between these risks and the risks of material misstatement. ...
In 2013, the Financial Reporting Council (FRC) in the UK mandated independent auditors to provide an expanded audit report to disclose the risks of material misstatement and application of materiality. This paper examines the information content and economic consequences of the expanded auditor's report and offers three main results. We first investigate the usefulness of auditor reporting regime change and find evidence that the new reporting regime relatively influences market indicators. Second, we document that firms receiving an expanded audit report with a higher level of disclosure on risks of material misstatement (materiality) exhibit significantly higher (lower) idiosyncratic risk, beta, and cost of equity. That is, the expanded auditor's disclosure meaningfully affects firms' risk fundamentals. Third, we find that information conveyed by the expanded auditor's report impacts bid-ask spread, trading volume, volatility of market returns, and analyst forecast dispersion. Collectively, our analyses suggest that auditors provide information that meaningfully reflects the risks that the audited companies face. Furthermore, this information is associated with significant economic consequences for capital market participants, implying that it is not generic. This firm-specific and useful disclosure supports the FRC (followed by International Auditing and Assurance Standard Board and Public Company Accounting Oversight Board) decision mandating the expanded audit report and provides evidence-based insights to major recent structural reforms aiming at proposing remedies to audit and capital market problems in the UK, and beyond.
... -Micro level: litigation risk affects client acceptance, audit pricing and audit planning (Asare et al.,1994;Pratt & Stice,1994;Simunic & Stein, 1996;Johnstone, 2000;Barron et al.,2001& Venkataraman et al.,2008 -Macro level: litigation risk associated with individual clients which leads the audit firm to consider this risk in managing their clients (Krishnan & Krishnan,1997& Johnstone& Bedard,2004 In this context, prior research has shown that decision aids assist auditors by presenting advantages as it provides unbiased, consistent, objective and accurate suggestions, so, more recent data reveals that decision aids may be employed as a defense tool when auditors is faced by litigation risk (Gomaa et al.,2008). ...
... For example, Frankel et al. (2002) provide evidence that audit fees are lower for firms with higher financial reporting quality, and Abbott et al. (2006) provide evidence that audit fees increase with a client's risk of upward earnings management, as estimated by positive discretionary accruals. Prior literature further suggests that when auditors face higher inherent and control risks, they tend to expand the audit's scope to obtain additional evidence (Johnstone, 2000;Bell et al., 2001;Judd et al., 2017). As a result, the auditors charge higher audit fees due to their increased workload, as well as higher risk premiums (Bell et al., 2008). ...
... The auditor seeks reselection to offer NAS, mainly tax services and, before SOX, all services when possible and solicit managers' reference to their colleagues about his services (Neu et al., 1991;Gibbins et al., 2001;and Investor Relations Business, 2002). In fact, auditors select their clients strategically (Johnstone, 2000;Johnstone & Bedard, 2003). Both parties develop a personal relationship such that each party considers the other a valuable service (Neu et al., 1991;Gibbins et al., 2001). ...
The audit function in a corporate model can be a defective tool in monitoring executive management. Arguably, the Sarbanes-Oxley act (SOX) inadvertently has placed auditors in unwanted positions while increasing their independence. Auditors' reliance on their clients for collecting information, financial dependence, and self-bias in processing information restrain them from neutrally and objectively judging corporate reporting. Mandated rules can never substitute integrity and the desired objectivity by shareholders. By reconceptualizing the result of the relationship as a general partnership where trust plays a critical role, this study considers the relationship between management and their auditors, offers an explanation about the audit firms' behavior, and offers reasons for the failure of some audit for committing unethical actions. The analysis leads to testable empirical and policy implications. Accounting theorists should be on board critiquing and retheorizing positively but not normatively: A corporation with the absence of an objective party that shareholders count to attest corporate reporting impartially.
... Auditors are more willing to rely on internal audit work in a continuous audit environment compared to a traditional one (Malaescu & Sutton, 2015). In the evaluation of audit risk, the components of corporate governance are encompassed in control risk, which seems to be determined by the management's attitude toward internal controls, corporate governance quality and the audit committee quality, expressed in terms of audit committee independence and audit committee financial experiences (Cohen, Krishnamoorthy, & Wright, 2010;Johnstone, 2000;Krishnan, 2005). ...
The study examines the relationship between corporate govern-ance mechanisms and audit risk in firms listed on the Tunisian Stock Exchange (TSE). The study covers the period 2006-2013. Panel regression analysis was used to estimate the relationship between corporate governance variables and audit risk. The results show that board size, board independence and institutional ownership were negatively related to audit risk. It is also discovered that audit risk index level increases as poor corporate governance. These findings may have important implications for analysts, investors, regulators and academics. First, the identifying factors that may influence the audit risk can help guide the reforms to improve the functioning of the financial market. Second, the study provides ample evidence of risk governance problems in the Tunisian market , highlighting the necessity of new corporate governance requirements. This study is unique in providing Tunisian evidence on the effect of corporate governance on audit risk. This paper is also relevant as it develops an index of audit risk and risk corporate governance.
... Audit risk refers to the risk of issuing inappropriate (unqualified) audit opinions on materially-misstated financial statements. This risk is closely related to the auditor's own business risk through monetary or reputational losses arising from the audit engagement (Jubb, Houghton, and Butterworth 1996;Johnstone 2000;Huang, Masli, Meschke, and Guthrie 2017). Moreover, the client's business risk can affect the auditor's business risk by increasing the possibility of litigation that is not directly related to actual audit failures. ...
Client- and auditor-related attributes are well-documented determinants of audit pricing, but the number of empirical archival studies investigating the effects of external factors on audit pricing has grown rapidly in recent years. We extend the traditional framework used to classify audit fee research by adding a novel structure that focuses on political, economic, social, technological, legal, and environmental/ecological factors (a PESTLE analysis). We provide a systematic review of the literature on external factors and audit pricing, and we suggest opportunities for future research. Our review reveals that audit researchers focus on legal factors in terms of regulatory changes, and we find increased attention to political, economic, and social factors. However, despite increased public scrutiny, technological and environmental/ecological factors remain under-researched. Overall, our review demonstrates the importance of considering external factors to gain a more complete understanding of the audit pricing framework, especially in terms of global and regional variations.
JEL Classifications: M40; M42.
While close distance to trading partners is often viewed as beneficial to business operations, our study reveals a potential downside. We show that a firm's geographical proximity to its major trading partners is positively correlated with audit fees, which can be explained by an opportunistic narrative: close interactions within the supply chain facilitate misconduct, increasing auditors' engagement risk and concerns. Further analyses suggest that mid‐ and lower‐level employees, rather than top management, are more likely to initiate such misconduct. Overall, our findings highlight the dark side of firm–stakeholder geographical proximity and broaden our understanding of its impact on corporate governance.
We examine whether and how redacted disclosure in material contracts is related to the cost of an audit. Prior studies document that redaction of mandatory disclosure affects firms’ operating performance, voluntary disclosure decisions, and various market outcomes due to increased information asymmetry. Auditors do not face this information constraint and can access redacted information with little effort, and thus should not be affected by the redacted disclosure. Our findings show that while redacted disclosure has limited impact on audit effort, auditors do charge higher fees for redacting firms as they perceive redacted disclosure as an indicator of potential business and litigation risk. We also find that the positive relation between redacted disclosure and audit fees is mitigated for firms with a more transparent information environment (i.e., larger firms, firms providing more voluntary disclosure, firms with large customers, and firms with higher institutional ownership). Overall, our results suggest that auditors become more cautious in response to clients’ nondisclosure choices from public filings.
تهدف الدراسة إلى استقصاء تأثير العوامل الجوهرية المكونة للاختلالات السلوكية للمدقق الواجب تقليلها على بناء إستراتيجية التدقيق لدى مكاتب التدقيق في الجزائر، بالإضافة الى التحقق من الأثر المباشر لبيئة التدقيق وغير المباشر عن طريق علاقة الاختلالات السلوكية باستراتيجية التدقيق. كما تهدف الدراسة الى اختبار أثر المتغير المعدل المتمثل في المتابعة من قبل الجهات الوصية على العلاقة بين الاختلالات السلوكية واستراتيجية التدقيق. ولتحقيق غرض الدراسة، تم تصميم أداة استبانه وتوزيعها على عينة من مجتمع الدراسة التي بلغت (204) مهني مدقق ناشط في ممارسة مهنة الخبرة المحاسبية ومحافظة الحسابات في الجزائر، حيث تم الحرص على أن وحدة المعاينة تكون مكونة من الاشخاص ذوي الصلة المهنية بإجراء عمليات التدقيق على مستوى المكاتب المتضمنة في عينة الدراسة وتحليل البيانات المستقاة من أداة الدراسة عن طرق استخدام نمذجة المعادلات البنائية بتقنية المربعات الصغرى الجزئية. خلصت الدراسة إلى أن تقليل الاختلالات السلوكية الجوهرية عند المدقق تؤثر بصورة جوهرية على بناء إستراتيجية التدقيق، لاسيما الاختلالات المرتبطة بالميزانية الزمنية والمرتبطة بالإطار القانوني، كما أن هناك أثر مباشر جوهري لبيئة التدقيق على كل من تقليل الاختلالات السلوكية للمدقق وبناء استراتيجية التدقيق المناسبة. ومن جهة أخرى فقد خلصت الدراسة الى تلعب هناك دور الوساطة للاختلالات السلوكية للمدقق في العلاقة بين بيئة التدقيق وإستراتيجية التدقيق. كما ان المتابعة من الجهات الوصية تعدل بشكل جوهري العلاقة بين الاختلالات السلوكية واستراتيجية التدقيق. توصي الدراسة بالتركيز على الجانب السلوكي للمهنيين المدققين وما يتضمنه من فرص لكسب المعارف لتطوير المهنة وزيادة كفاءه المهنيين في الميدان. كما توصي الدراسة بضرورة الأخذ بعين الإعتبار واقع بيئة التدقيق بكل جوانبها الاجتماعية والاقتصادية والمؤسساتية وحتى الجوانب الشخصية والنفسية للمدققين في الجزائر من أجل فهم كيفيات التعامل مع الضغوط المولدة للاختلالات السلوكية وتخفيفها من أجل أداء عمليات تدقيق وفق استراتيجات مناسبة في الظروف. كما تقترح الدراسة العمل على تطوير سياسات فعالة من قبل الجهات الوصية من أجل الخروج بإجراءات متابعة واشراف تتمتع بالشمول وبالقوة وبالفعالية والكفاءة من أجل ضبط الممارسات المهنية ودفع المهنيين الى تطوير استراتيجيات تدقيق مناسبة لمكاتب التدقيق في الجزائر.
Abstrait:
L'étude vise à étudier l'effet du comportement d'un auditeur dysfonctionnel sur l'élaboration d'une stratégie d'audit en Algérie. En outre, l'étude tente de vérifier l'effet direct de l'environnement d'audit ainsi que l'effet indirect en réduisant le comportement de l'auditeur dysfonctionnel en tant que médiateur vers la construction. La stratégie d’audit. L’étude examine également l’effet de la variable modératrice représentée par le processus de surveillance sur la relation entre la réduction du comportement dysfonctionnel de l’auditeur et la stratégie d’audit. Pour atteindre l'objectif de l'étude, un outil de questionnaire a été conçu et distribué à un échantillon de 204 auditeurs en Algérie. En exploitant la modélisation d'équations structurelles utilisant la technique des moindres carrés partiels dans le but d'analyser les données extraites de l'enquête par questionnaire, l'étude a conclu que la réduction du comportement des auditeurs dysfonctionnels affecte de manière significative le développement positif de la stratégie d'audit, en particulier les dysfonctionnements liés au budget temps et au cadre juridique, En outre, il existe un impact direct et significatif de l'environnement d'audit sur chacune des catégories de comportement et sur la stratégie d'audit de l'auditeur dysfonctionnel. D’autre part, l’étude conclut que le comportement des auditeurs dysfonctionnels joue un rôle médiateur dans la relation entre l’environnement d’audit et la stratégie d’audit en développement. En outre, la variable de surveillance modère considérablement la relation entre la réduction du comportement dysfonctionnement de l’auditeur et l’élaboration d’une stratégie d’audit.
Abstract:
The study aims to investigate the effect of dysfunctional auditor’s behavior on developing audit strategy in Algeria, in addition, the study attempts to verify the direct effect of the audit environment as well as the indirect effect path through reducing dysfunctional auditor’s behavior as a mediator toward building the audit strategy. The study also examines the effect of the moderator variable represented by monitoring process on the relationship between reducing dysfunctional auditor’s behavior and the audit strategy. To achieve the purpose of the study, a questionnaire tool was designed and distributed to a sample of 204 auditors in Algeria. By exploiting structural equation modeling using the partial least squares technique for the purpose of analyzing extracted data from the questionnaire survey, the study concluded that reducing dysfunctionals auditor’s behavior significantly affect positively developing audit strategy, especially Dysfonctions related to the time budget and the legal framework, in Addition there is a direct and significant impact of the audit environment on each of dysfunctional auditor’s behaviour categories and audit strategy. On the other hand, the study concluds that dysfunctionals auditor’s behavior play a mediating role in the relationship between audit environment and the developing audit strategy. Also, monitoring variable significantly moderates the relationship between reducing dysfunctionals auditor’s behavior and developing audit strategy.
The research aims to explore the determinants of internal auditors' contribution to the work of the Federal Board of Supreme Audit (FBSA) in Republic Iraq. Adopted variables derive from the perspective of transaction cost economics (TCE). According to this perspective, It depends on determining to the extent to which the internal auditor contribution to the work of the Federal Board of Supreme Audit on group of environmental factors represented by of transaction characteristics: asset specificity, behavioral and environmental uncertainty, and frequency, as well as the element of trust between the internal and external auditor. The results of the study showed that the specialized knowledge of the internal auditor in his organization and the laws and regulations under which it operate was ranked first among the variables transaction cost, and came variable trust internal auditor in second place. Accordingly, the researcher recommends fostering specialized knowledge and trust in the internal auditor to increase participation and effectiveness in external audit.
Our study finds that relative to firms managed by local CEOs, firms managed by CEOs who have returned from overseas (returnee CEOs) exhibit significantly higher audit fees. We also find this positive association to be stronger for returnee CEOs who manage firms with greater agency problems, have overseas experience in countries with better developed institutions, or have greater business knowledge. Further analyses indicate that firms managed by returnee CEOs tend to exhibit better financial reporting quality, lower propensities for financial fraud, and fewer earnings restatements in subsequent years. In addition, firms managed by returnee CEOs are associated with greater internationalization and higher propensities for seasoned equity offerings (SEOs) than firms managed by local CEOs. Overall, our findings are most consistent with the conjecture that returnees tend to bring ethics and practices that ensure higher financial reporting quality back to their home countries. Our findings offer a plausible explanation that returnee talents could increase firm value.
We examine the relative importance of audit firm versus partner decision styles in key audit matter (KAM) reporting. Standard setters intended KAMs to increase the usefulness of the audit report by requiring the partner‐led engagement team to disclose engagement‐specific information about the most significant judgments they made during the audit. However, stakeholders expressed widespread concern that audit firms' longstanding efforts towards standardization would result in generic KAMs at the audit firm level and provide partners little opportunity or incentive for engagement‐specific reporting. We evaluate this high‐stakes tension between standard setters' goals for audit reporting and auditors' deep‐rooted practices by leveraging data from the United Kingdom, which has required partner identification since 2009 and expanded audit reports since 2013. We find that clients sharing the same partner receive KAMs that are 10% more textually similar than clients with different partners. In contrast, clients sharing the same audit firm receive KAMs that are just 2% more textually similar than clients with different audit firms. This implies that partner decision styles are more important in influencing KAM outcomes than audit firm styles. Collectively, our results suggest that partners make unique KAM reporting judgments, countering concerns that audit firms' efforts toward standardization will yield boilerplate KAMs. This evidence extends the literature on expanded audit reporting and partner decision styles and provides valuable insights into a contemporary issue in audit regulation with broader implications for understanding dynamics within the profession.
This article is protected by copyright. All rights reserved.
Purpose
The aim of the present study is to explore the impact of the COVID-19 pandemic on the first stage of external audit, namely, on the auditors’ client acceptance and continuance decisions (CACDs).
Design/methodology/approach
Survey data was collected on the basis of a structured questionnaire, which was answered by 21.02% of the Greek certified auditors/accountants. Parametric hypothesis testing and regression analysis were used in data analysis.
Findings
The results of the survey showed that the COVID-19 pandemic had a different impact on the client acceptance decision-making (CAD) process and the client continuance decision-making (CCD) process. The CAD process appears to have been affected in a mostly negative way, and to a greater extent than is the case with the CCD process. The impact of the COVID-19 pandemic on the CACD process appears to be mainly related to the difficulty arising in auditor–client communication. Additionally, as far as the CAD process is concerned, the COVID-19 pandemic appears to have had a negative impact on the audit fees, while, when it comes to the CCD process, the pandemic has had a positive impact with regard to clientele expansion. Finally, survey findings showed that the COVID-19 pandemic affected in a different way Big6 and non-Big6 auditors.
Originality/value
The present study aspires to fill significant gaps identified in relevant literature with regard to auditors’ work in correlation with the COVID-19 pandemic. More specifically, to the best of the author’s knowledge, it is the first study exploring the impact of the COVID-19 pandemic on the first stage of external audit. Moreover, the study is based on primary data collected in real time, under the actual conditions of emergency related to the health crisis. Last but not least, the findings of the present study could be of value to professionals and regulative authorities in case of similar future emergencies or potential crisis situations.
Purpose
The purpose of this study is to examine accountants’ application of principles-based accounting standards to a lawsuit contingency recognition scenario and the potential role that accounting work experience plays in mitigating accountants’ aggressive financial reporting.
Design/methodology/approach
This study presents a 2 × 2 between-subjects experiment with accounting experience (measured as high vs low) and contingency type (asset vs liability) as independent variables and accountants’ lawsuit contingency conservatism likelihood judgments and US amounts for assets (liabilities), as expected. Supplemental analyses show a significant moderated-mediated effect whereby the interactive effect of contingency type and accounting experience on individuals’ US asset and liability recognition recommendations.
Bu çalışmada, Türkiye ve İngiltere’de kayıtlı Gayrimenkul Yatırım Ortaklıklarının Bağımsız Denetim Raporlarında işletmelerin kilit denetim konularına dair açıklamaları incelenmiş, bu açıklamalardan örnekler verilerek iki ülke arasındaki Kilit Denetim Konuları ile ilgili karşılaştırma yapılmıştır. Bu çalışmanın amacı, uluslararası yayımlanmış ISA 701’e karşılık Türkiye’de yayımlanan BDS 701 standardı olan Kilit Denetim Konuları, daha önceki çalışmalardan farklı olarak Gayrimenkul Yatırım Ortaklıklarının Bağımsız Denetim Raporlarında incelenmiştir. Uzun yıllardır denetim standartları uygulayıcısı olan gelişmiş ülke olarak İngiltere ve gelişmekte olan ülke olarak Türkiye; araştırma konusu olarak alınarak bu iki ülkenin borsalarında işlem gören işletmelerin bağımsız denetim raporlarında kilit denetim konularının neleri içerdiğinin belirlenmesi ve bu belirlenen kilit denetim konularının iki ülke arasındaki benzer ve farklı yönleri ortaya konularak, finansal tablo kullanıcılarına spesifik bilgiler verilmesi amaçlanmıştır. Çalışmaya konu olan şirketler için spesifik öneme haiz kilit denetim konuları ele alınmıştır. Çalışmanın sonucunda, kilit denetim konularının belirlenmesinde işletmenin içinde bulunduğu sektöre göre en çok risk içeren alanlar belirlendiği ve gelişmiş ülkenin değişen şartlara reaksiyonun daha hızlı olduğu tespit edilmiştir.
We find that the readability of financial footnotes and risk management committees contributes to audit fees. We use observations from 758 companies listed in Indonesia for 2014–2018, and moderated regression analysis is used for statistical analysis. The results show that the readability of financial footnotes will affect audit fees paid, and RMC strengthens the relationship between the readability of financial footnotes and audit fees. In addition, we also used robustness assays to address endogeneity issues with consistent results as moderated regression analysis (hereafter MRA). These findings provide evidence for policymakers about the relationship between the readability of financial footnotes, RMC, and audit fees.
This paper examines whether auditors plan engagements to be the same‐as‐last‐year (SALY) and if they respond to changes in risk both before and during audit engagements by varying engagements from planned. These are important questions considering audit standards require the assessment of risk and general concerns about audit quality and fee pressure. We provide new insights using a proprietary database containing both quoted and reported audit hours and fees. We find that the basis quoted audit hours and billing rates (i.e., audit plans) are prepared on is not SALY. However, as there is little difference for audit hours, we conclude that they are based‐on‐last‐year (BOLY). Changes in audit characteristics are associated with the variance between quoted and reported audit hours and billing rates. In addition, auditors with higher reputational risk quote more audit hours and have a higher quoted average billing rate and further increase them from quoted.
This study uses semistructured interviews to gain insights from 19 practicing Canadian audit partners into the practical implications of the Engagement Partner Identity (EPI) mandate requiring firms to disclose the identity of the engagement partner(s) auditing Canadian publicly traded companies. Building on prior literature that suggests accountability can reach a ceiling, we explore whether audit partners perceive incremental increases in accountability pressures to be effective in increasing audit quality. Based on existing literature, we propose a nonlinear relation between accountability and performance (audit quality, in the current context), reflecting this ceiling effect. We find partners believe they are reaching, or are at, a ceiling level of accountability and that further initiatives to increase their accountability are ineffective in eliciting procedural changes in the audit or the audit’s outcome. Contrary to regulators’ motives for the disclosure, our interviewed partners do not believe the transparency of publicly disclosing their names will further increase their level of accountability or overall audit quality. We document that one possible reason for the disconnect is that partners are less concerned with managing external reputation than with managing internal reputation, which they believe has a more direct impact on their careers. We also discuss partners’ perceptions of the required disclosure’s impact on individual reputations, client risk choices, personal safety, and partner recruitment. We offer suggestions for future research building on the partners’ insights. This article is protected by copyright. All rights reserved.
This Study aims to examine how far the influence of business research client, audit risk, business research auditor, auditor's competency to client selection either partial or simultaneous. Hypothesis of this study are business research client, audit risk, business research auditor, auditor's competency influence to client selection either partial or simultaneous. The method of collecting data is done through a questionary that share to Auditor whom work in audit firm. This study uses associative causal with multiple linear regression and also for examine hypothesis uses F test (simultaneous test) and t test (partial test). Results of this study interprets to indicate that business rist client, audit risk, business rist auditor, auditor's competency has influence to clients selection simutaneously and from result of examine t test indicate that audit risk.
Purpose
Using unique trade credit insurance data from China, we examine whether trade insurance claims are associated with audit efforts and audit quality.
Design/methodology/approach
The paper is based on a sample of Chinese firms to study insurance claims of trade credit insurance that affects abnormal audit fees.
Findings
In this study, we find that firms with high insurance claims pay higher abnormal audit fees. Further, our findings indicate that firms with high insurance claims have a short audit report lag and tend to select local audit firms.
Originality/value
To the best of our knowledge, this is the first study to investigate the association between trade credit insurance claims and audit efforts. In addition, we contribute to the literature on the agency cost of abnormal audit fees.
In this article, we provide guidance for substantive researchers on the use of structural equation modeling in practice for theory testing and development. We present a comprehensive, two-step modeling approach that employs a series of nested models and sequential chi-square difference tests. We discuss the comparative advantages of this approach over a one-step approach. Considerations in specification, assessment of fit, and respecification of measurement models using confirmatory factor analysis are reviewed. As background to the two-step approach, the distinction between exploratory and confirmatory analysis, the distinction between complementary approaches for theory testing versus predictive application, and some developments in estimation methods also are discussed.
Describes a procedure that enables researchers to estimate nonlinear and interactive effects of latent variables in structural equation models. Given that the latent variables are normally distributed, the parameters of such models can be estimated. To do this, products of the measured variables are used as indicators of latent product variables. Estimation must be done using a procedure that allows nonlinear constraints on parameters. The procedure is demonstrated in 3 examples. The 1st 2 examples use artificial data with known parameter values. These parameters are successfully recovered by the procedure. The final complex example uses national election survey data. (14 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Factor analysis, path analysis, structural equation modeling, and related multivariate statistical methods are based on maximum likelihood or generalized least squares estimation developed for covariance structure models (CSMs). Large-sample theory provides a chi-square goodness-of-fit test for comparing a model (M) against a general alternative M based on correlated variables. It is suggested that this comparison is insufficient for M evaluation. A general null M based on modified independence among variables is proposed as an additional reference point for the statistical and scientific evaluation of CSMs. Use of the null M in the context of a procedure that sequentially evaluates the statistical necessity of various sets of parameters places statistical methods in covariance structure analysis into a more complete framework. The concepts of ideal Ms and pseudo chi-square tests are introduced, and their roles in hypothesis testing are developed. The importance of supplementing statistical evaluation with incremental fit indices associated with the comparison of hierarchical Ms is also emphasized. Normed and nonnormed fit indices are developed and illustrated. (43 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Auditing is often depicted in scientific and professional literature as being subject to conflicting forces, such as mechanization versus flexibility, and professionalism versus commercialism. This paper examines how auditors actually make the client‐acceptance decision in the midst of these forces. The investigation was conducted via a field study at three Big 6 firms located in Canada.
The results show that in all firms the client‐acceptance decision process in action is largely flexible, being characterized by a high degree of informal communication and the adaptation of the client‐acceptance written policies and decision aids to circumstances. Furthermore, while commercialism in one firm (A) has a significant influence on the decision process, in the two other firms (B and C) the decision process is mostly consistent with professionalism. This result conflicts with the concerns that North American regulators have recently expressed about auditors' professionalism.
In confirmatory factor analysis, hypothesized models reflect approximations to reality so that any model can be rejected if the sample size is large enough. The appropriate question is whether the fit is adequate to support the model, and a large number of fit indexes have been proposed for this purpose. In the present article, we examine the influence of sample size on different fit indexes for both real and simulated data. Contrary to claims by Bentler and Bonett (1980), their incremental fit index was substantially affected by sample size. Contrary to claims by Joreskog and Sorbom (1981), their goodness-of-fit indexes provided by LISREL were substantially affected by sample size. Contrary to claims by Bollen (1986), his new incremental fit index was substantially affected by sample size. Hoelter's (1983) critical N index was also substantially affected by sample size. Of the more than 30 indexes considered, the Tucker-Lewis (1973) index was the only widely used index that was relatively independent of sample size. However, four new indexes based on the same form as the Tucker-Lewis index were also relatively independent of sample size., (C) 1988 by the American Psychological Association <2>
Normed and nonnormed fit indexes are frequently used as adjuncts to chi-square statistics for evaluating the fit of a structural model. A drawback of existing indexes is that they estimate no known population parameters. A new coefficient is proposed to summarize the relative reduction in the noncentrality parameters of two nested models. Two estimators of the coefficient yield new normed (CFI) and nonnormed (FI) fit indexes. CFI avoids the underestimation of fit often noted in small samples for Bentler and Bonett's (1980) normed fit index (NFI). FI is a linear function of Bentler and Bonett's non-normed fit index (NNFI) that avoids the extreme underestimation and overestimation often found in NNFI. Asymptotically, CFI, FI, NFI, and a new index developed by Bollen are equivalent measures of comparative fit, whereas NNFI measures relative fit by comparing noncentrality per degree of freedom. All of the indexes are generalized to permit use of Wald and Lagrange multiplier statistics. An example illustrates the behavior of these indexes under conditions of correct specification and misspecification. The new fit indexes perform very well at all sample sizes.
In this article, we attempt to distinguish between the properties of moderator and mediator variables at a number of levels. First, we seek to make theorists and researchers aware of the importance of not using the terms moderator and mediator interchangeably by carefully elaborating, both conceptually and strategically, the many ways in which moderators and mediators differ. We then go beyond this largely pedagogical function and delineate the conceptual and strategic implications of making use of such distinctions with regard to a wide range of phenomena, including control and stress, attitudes, and personality traits. We also provide a specific compendium of analytic procedures appropriate for making the most effective use of the moderator and mediator distinction, both separately and in terms of a broader causal system that includes both moderators and mediators.
In confirmatory factor analysis, hypothesized models reflect approximations to reality so that any model can be rejected if the sample size is large enough. The appropriate question is whether the fit is adequate to support the model, and a large number of fit indexes have been proposed for this purpose. In the present article, we examine the influence of sample size on different fit indexes for both real and simulated data. Contrary to claims by Bentler and Bonett (1980), their incremental fit index was substantially affected by sample size. Contrary to claims by Joreskog and Sorbom (1981), their goodness-of-ftt indexes provided by LISREL were substantially affected by sample size. Contrary to claims by Bollen (1986), his new incremental fit index was substantially affected by sample size. Hoelter's (1983) critical N index was also substantially affected by sample size. Of the more than 30 indexes considered, the Tucker-Lewis (1973) index was the only widely used index that was relatively independent of sample size. However, four new indexes based on the same form as the Tucker-Lewis index were also relatively independent of sample size. The purpose of the present investigation was to examine the influence of sample size on goodness-of-f it indicators used in confirmatory factor analysis (CFA). Although the present inves- tigation was limited to CFA, the problems, issues, and most of the results generalize to the analysis of covariance structures. The advantages of CFA are well-known, and numerous intro- ductions to the LISREL approach used in the present investiga- tion are available elsewhere (e.g., Bagozzi, 1980; Joreskog &
A screening decision is about whether a candidate fails to meet a decision maker's criteria and must be rejected, or whether it meets the criteria and can be accepted. Image theory contends that screening decisions are based on a simple, noncompensatory process that focuses solely upon the candidate's negative attributes. This contention has received empirical support in a job screening context in which students role-played a hypothetical person seeking a job. But how robust is image theory's prediction? The present work was done in the context of professional auditors screening prospective clients. The client screening context is a particularly interesting setting to test the implications of image theory. If auditors reject clients with negative attributes, as predicted by image theory, this will indicate that some clients are being denied access to a socially useful service. Further, auditors can accept prospective clients with negative attributes and simply adjust the audit plan and fees to compensate for the client's riskiness. Thus, it is not clear that the preliminary findings obtained in a job screening context will generalize to the audit context. On the other hand, results consistent with the image theory prediction would suggest a robust theory. Even in the client screening context, where auditors used their own criteria to screen prospective clients, we found overwhelming support for image theory's view of screening. The results indicate the potential payoffs of image theory as a robust framework to address audit and other substantive problems. Implications of a noncompensatory, negative oriented, client screening strategy are discussed.
Mixed messages regarding the need for firms to grow their audit client base, yet avoid overly risky opportunities, may result in a variety of different interpretations by partners involved in the client acceptance process. This field survey contributes to the scant literature regarding client acceptance judgments by examining differences between two partner groups in (1) the relative level of conservatism in their client acceptance judgments, (2) certain factors which are suspected to influence client acceptance judgments, and (3) the extent to which these same factors influence client acceptance judgments. Thus, we hope to provide preliminary answers to two questions: do risk review partners make more conservative client acceptance judgments than engagement partners, and if so, why do they make more conservative judgments? Results from 216 Big 6 audit partners suggest that risk review partners do indeed make more conservative client acceptance judgments than engagement partners. In explaining this judgmental difference, we note that risk review partners made more conservative assessments of client financial condition and had a higher level of general public accounting experience than their engagement partner peers. Both of these variables had strong effects on client acceptance judgments for both partner groups in a direction that suggests added conservatism for risk review partners. In addition, risk review partners? perceptions regarding the consequences of accepting overly risky clients were more severe than those of the engagement partner group, and this variable had a stronger effect on client acceptance judgments for the risk review partner group than for the engagement partner group. Assessments of management integrity were also found to significantly affect client acceptance judgments, but neither the assessments themselves nor the impact of the assessments on client acceptance judgments varied across the two partner groups.
Criteria for evaluating structural equation models with latent variables are defined, critiqued, and illustrated. An overall
program for model evaluation is proposed based upon an interpretation of converging and diverging evidence. Model assessment
is considered to be a complex process mixing statistical criteria with philosophical, historical, and theoretical elements.
Inevitably the process entails some attempt at a reconcilation between so-called objective and subjective norms.
Analysis of Ordinal Categorical Data Alan Agresti Statistical Science Now has its first coordinated manual of methods for analyzing ordered categorical data. This book discusses specialized models that, unlike standard methods underlying nominal categorical data, efficiently use the information on ordering. It begins with an introduction to basic descriptive and inferential methods for categorical data, and then gives thorough coverage of the most current developments, such as loglinear and logit models for ordinal data. Special emphasis is placed on interpretation and application of methods and contains an integrated comparison of the available strategies for analyzing ordinal data. This is a case study work with illuminating examples taken from across the wide spectrum of ordinal categorical applications. 1984 (0 471-89055-3) 287 pp. Regression Diagnostics Identifying Influential Data and Sources of Collinearity David A. Belsley, Edwin Kuh and Roy E. Welsch This book provides the practicing statistician and econometrician with new tools for assessing the quality and reliability of regression estimates. Diagnostic techniques are developed that aid in the systematic location of data points that are either unusual or inordinately influential; measure the presence and intensity of collinear relations among the regression data and help to identify the variables involved in each; and pinpoint the estimated coefficients that are potentially most adversely affected. The primary emphasis of these contributions is on diagnostics, but suggestions for remedial action are given and illustrated. 1980 (0 471-05856-4) 292 pp. Applied Regression Analysis Second Edition Norman Draper and Harry Smith Featuring a significant expansion of material reflecting recent advances, here is a complete and up-to-date introduction to the fundamentals of regression analysis, focusing on understanding the latest concepts and applications of these methods. The authors thoroughly explore the fitting and checking of both linear and nonlinear regression models, using small or large data sets and pocket or high-speed computing equipment. Features added to this Second Edition include the practical implications of linear regression; the Durbin-Watson test for serial correlation; families of transformations; inverse, ridge, latent root and robust regression; and nonlinear growth models. Includes many new exercises and worked examples.
Sumario: The auditing profession -- The auditing process -- Application of the auditing process to the sales and collection cycle -- Auditing complex EDP systems -- Application of the auditing process to other cycles -- completing the audit and offering other services
Maximum likelihood factor analysis provides an effective method for estimation of factor matrices and a useful test statistic
in the likelihood ratio for rejection of overly simple factor models. A reliability coefficient is proposed to indicate quality
of representation of interrelations among attributes in a battery by a maximum likelihood factor analysis. Usually, for a
large sample of individuals or objects, the likelihood ratio statistic could indicate that an otherwise acceptable factor
model does not exactly represent the interrelations among the attributes for a population. The reliability coefficient could
indicate a very close representation in this case and be a better indication as to whether to accept or reject the factor
solution.
Factor analysis, path analysis, structural equation modeling, and related multivariate statistical methods are based on maximum likelihood or generalized least squares estimation developed for covariance structure models. Large-sample theory provides a chi-square goodness-of-fit test for comparing a model against a general alternative model based on correlated variables. This model comparison is insufficient for model evaluation: In large samples virtually any model tends to be rejected as inadequate, and in small samples various competing models, if evaluated, might be equally acceptable. A general null model based on modified independence among variables is proposed to provide an additional reference point for the statistical and scientific evaluation of covariance structure models. Use of the null model in the context of a procedure that sequentially evaluates the statistical necessity of various sets of parameters places statistical methods in covariance structure analysis into a more complete framework. The concepts of ideal models and pseudo chi-square tests are introduced, and their roles in hypothesis testing are developed. The importance of supplementing statistical evaluation with incremental fit indices associated with the comparison of hierarchical models is also emphasized. Normed and nonnormed fit indices are developed and illustrated.
Libby & Luft [Accounting, Organizations and Society (1993) pp. 425-450] presented a model of the relations between experience, ability, knowledge, and performance in audit judgment. This paper extends the model by developing a framework for predicting the structure of these relations in different judgment in different judgment settings and provides an initial test of the predictions by analyzing data from Bonner & Lewis's [Journal of Accounting Research (Supplement 1990) pp. 1-20] four tasks using LISREL. Key predictions were that problem-solving ability would directly affect performance only in unstructured tasks and would indirectly affect performance through its effect on knowledge acquisition where the learning environment was impoverished. The predictions were supported in most cases. In addition, the paper provides and tests a basis for predicting the associations between performance on different audit tasks. Construct measurement problems that need to be addressed in future research are also indicated.
The role of client integrity in client-acceptance decisions. Working paper
- P R Beaulieu
Do large accounting firms screen out risky clients? Working paper
- J R Francis
- D T Simon
Empirical evidence of risk evaluation and risk adaptation in client acceptance decisions. Working paper
- K M Johnstone
- S F Biggs
- J C Bedard
The Handbook of Social Psychology
- D A Kenny
Client Acceptance and Continuation Decisions
- S Asare
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- W R Knechel
Framing Effects and Output Interference in A Concurring Partner Review Context
- K M Johnstone
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When auditors go on record. The Financial Times
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The relation between auditors' perceived business risk and audit fees. Working paper
- T B Bell
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- D A Shackelford
Business viability risk assessment modeled through a Bayesian network approach
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