How a Shared Auditor Affects Firm-Pair Comparability: Implications of Both Firm and Individual Audit Styles

SUMMARY In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of signing auditors are revealed in audit reports and accounting standards are principle based. After controlling for audit firm style, we find that firm pairs with shared signing auditors have incrementally greater comparability. Our results indicate that individual auditors exhibit their own personal style in implementing accounting standards and exercising professional judgment in the audit process. Overall, our study underscores the association between individual auditors and comparability, with practical implications for market participants and policymakers.

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When Do Auditor Defense Tactics Increase Rather Than Decrease Perceived Auditor Negligence?

Current Issues in Auditing ◽

10.2308/ciia-50280 ◽

2012 ◽

Vol 6 (2) ◽

pp. P7-P12

Author(s):

Jonathan Grenier ◽

Bradley Pomeroy ◽

Andrew Reffett

Keyword(s):

Situational Factors ◽

Mock Jurors ◽

Audit Firm ◽

Audit Failure ◽

Perceived Credibility ◽

National Office ◽

Audit Firms ◽

Practical Implications ◽

National Local

SUMMARY In cases of alleged audit failure, audit firms and/or their defense teams can make statements intended to decrease jurors' assessments of auditor negligence. For example, Cornell et al. (2009) find that expressing sympathy for the victims of undetected fraud successfully decreases mock jurors' assessments of auditor negligence. Extending this research, Grenier et al. (2012) report the results of an experiment indicating that the effectiveness of defense tactics depends on their perceived credibility, and that credibility depends on at least two prevalent situational factors: the importance of the client to the audit firm and the source of the defense tactic (i.e., the national office or the local office that conducted the audit). Specifically, mock jurors perceive auditor defense tactics to be credible (not credible) when client importance is low (high), and when implemented by the firm's national (local) office. Hence, when client importance is low, defense tactics successfully decrease negligence assessments if implemented by the firm's national office, but “backfire” and increase negligence assessments when client importance is high, regardless of the defense tactic's source (national versus local office). Audit firms should therefore use caution when deciding whether to use defense tactics, particularly in negligence suits involving clients that could be perceived as highly important to the audit firm. This article summarizes Grenier et al. (2012) by discussing its motivation, method, results, and practical implications.

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Does Engagement Partners’ Effort Affect Audit Quality? With a Focus on the Effects of Internal Control System

Risks ◽

10.3390/risks9120225 ◽

2021 ◽

Vol 9 (12) ◽

pp. 225

Author(s):

Suyon Kim

Keyword(s):

Internal Control ◽

Audit Quality ◽

Vital Role ◽

Fiscal Year ◽

Audit Process ◽

Client Characteristics ◽

Audit Firms ◽

Audit Reports ◽

It Departments ◽

Audit Team

An audit team includes engagement partners, CPAs, and staff. Among them, partners play a vital role in performing tasks that require expertise and experience, such as analyzing and understanding the industry, and supervising the overall audit process. In detail, the partners establish an audit plan, determine the overall audit time, provide the audit input ratio of the engagement team, and review the audit reports. This study examines for association between the partner’s audit hour ratio and audit quality depending on the client firms’ characteristics. Although the role of partners is important, the information about partner audit hours is limited. However, the Korean government requires audit firms to disclose the partner hour information in the audit report starting in the 2014 fiscal year. By the disclosure, it is possible to examine the association between partner audit hours and audit quality. In this study, the information on partner audit hour is hand-collected from the firms’ business reports. Using 6340 observations from 2014 to 2017, the partner audit hour ratio is associated with audit quality, under the characteristics of client firms. Firms’ risks are adopted for client characteristics, and we focused on the operation of internal control. The internal control operation level is measured by the following: (1) the ratio of internal control personnel and (2) experience of the internal control personnel in the accounting and IT departments. The result suggests that for the firms where internal control is not effectively operated, partners make more effort to enhance audit quality.

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Factors Influencing Professional Judgment of Auditors in Malaysia

International Business Research ◽

10.5539/ibr.v11n11p119 ◽

2018 ◽

Vol 11 (11) ◽

pp. 119

Author(s):

Hazianti Abdul Halim ◽

Hartini Jaafar ◽

Sharul Effendy Janudin

Keyword(s):

Firm Size ◽

Significant Relationship ◽

Early Stage ◽

Past Research ◽

Professional Judgment ◽

Junior Staff ◽

Factors Influencing ◽

Audit Firms ◽

Gender Knowledge ◽

Practical Implications

The purpose of this study was to examine the factors influencing professional judgment of Malaysian auditors. A questionnaire was used to measure the level of professional judgment and factors influencing the judgment such as gender, knowledge, position level, experience and also firm size. The multiple regression results showed that the position level and experience to be statistically significant in determining the level of professional judgment of auditors. Gender, knowledge and firm size have no significant relationship with professional judgment. As for gender, past research has shown mixed results and this study proves that there is no gender differences among Malaysian auditors in terms of their professional judgment. Even though past research has shown that knowledge has a positive relationship with professional judgment, this study finds no significant relationship between the two variables. With regard to firm size, this study finds similar results of prior study that there is no significant relationship between firm size and judgment. In terms of the practical implications, this study provides insights into significant factors that influence professional judgment of Malaysian auditors. Besides, the management of audit firms can place emphasis on establishing training to their employees especially for the junior staff. Exposing junior auditors at the early stage might improve their professional judgment when facing with complexities of assignments.

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Predicting Impending Bankruptcy From Auditor Qualified Opinions And Audit Firm Changes

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v22i1.1444 ◽

2011 ◽

Vol 22 (1) ◽

Author(s):

David L. Senteney ◽

Yinning Chen ◽

Ashok Gupta

Keyword(s):

Empirical Evidence ◽

Relevant Literature ◽

Explanatory Power ◽

Financial Statement ◽

Compelling Evidence ◽

Font Size ◽

Strategic Response ◽

Audit Firm ◽

Audit Firms

Unlike prior research, we investigate the incremental explanatory power of both auditor qualified opinions and auditor changes beyond the information conveyed by traditional financial statement ratios in predicting bankruptcy. We find that qualified auditor opinion and auditor changes are both important in predicting impending bankruptcy and that auditor changes convey important information not reflected in auditor qualified opinions alone.  In fact, we find compelling evidence that auditor changes provide incremental explanatory power in predicting impending firm failure beyond what is conveyed by auditor qualified opinions and traditional financial statement ratios considered jointly.  Although the existing relevant literature provides no empirical evidence in this regard to our knowledge, this result is intuitive as one motivation for clients to change audit firms is to seek less conservative professional auditors as a strategic response to manifestation of the financial statement effects of bankruptcy.

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Auditors’ judgment subordination and the theory of planned behavior

Managerial Auditing Journal ◽

10.1108/maj-12-2018-2110 ◽

2020 ◽

Vol 35 (8) ◽

pp. 1189-1211

Author(s):

Dominic Cyr ◽

Sylvie Héroux ◽

Richard Fontaine

Keyword(s):

Theory Of Planned Behavior ◽

Planned Behavior ◽

Design Methodology ◽

Cash Flows ◽

Content Type ◽

Audit Firm ◽

Factors Associated ◽

Big 4 ◽

Audit Firms ◽

Practical Implications

Purpose The purpose of this paper is to examine circumstances under which auditors subordinate their judgment. More specifically, the authors investigate factors associated with auditors’ propensity to accept client-preferred accounting methods that conform to accounting standards but do not faithfully represent the entity’s financial position, financial performance and cash flows. Design/methodology/approach Based on the theory of planned behavior (TPB), the authors developed a survey that was sent to auditors at a non-Big 4 audit firm. Findings Main results suggest that auditors tend to agree with a client’s preferred accounting method when they anticipate little fallout from this decision, they believe they can easily justify the method, and they perceive that colleagues, shareholders and creditors would also agree with the decision. Practical implications Results benefit auditing standard setters and regulators and are relevant for accounting institutes and audit firms because practitioners can learn about circumstances under which auditors subordinate their judgment. Originality/value This study contributes to the audit literature by using the TPB to identify factors associated with auditors’ judgment subordination. In addition, it applies the TPB in a context where a client-preferred accounting method is considered acceptable but is not the most appropriate in light of the audited entity’s specific circumstances.

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The Effect of Audit Duality on Audit Quality

Journal of International Accounting Research ◽

10.2308/jiar-19-523 ◽

2020 ◽

Vol 19 (2) ◽

pp. 65-89

Author(s):

Lawrence Chui ◽

Oksana Kim ◽

Byron J. Pike

Keyword(s):

Financial Reporting ◽

Audit Quality ◽

Accounting Standards ◽

Financial Statement ◽

Regulatory Environment ◽

Public Companies ◽

Potential Reduction ◽

Audit Firm ◽

Financial Reporting Standards ◽

Jel Classifications

ABSTRACT The Russian regulatory environment offers a unique audit duality situation in which public companies receive two separate financial statement audits by the same audit firm: one based on Russian Accounting Standards (RAS) and the other on International Financial Reporting Standards (IFRS). We assess whether audit duality influences audit quality, measured by modifications to the standard audit report. Using a sample of public Russian companies from 2004 to 2016, we find that audit duality significantly reduces auditors' propensity to modify the audit opinions for both the RAS and IFRS audits as compared to companies that engage a different firm for each audit. This potential reduction in audit quality is mitigated when the company is in a loss position. The presence of Big N dual auditors does not diminish the observed findings and, in fact, appears to translate into lower-quality RAS-based audits of financially distressed companies. JEL Classifications: M42; M48.

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Super Electronics, Inc.: Financial Reporting of Sales Incentives and Vendor Allowances Using FASB Codification

Issues in Accounting Education ◽

10.2308/iace-50005 ◽

2012 ◽

Vol 27 (2) ◽

pp. 461-474 ◽

Cited By ~ 5

Author(s):

Mahendra R. Gujarathi

Keyword(s):

Financial Reporting ◽

Real World ◽

Accounting Standards ◽

Financial Statement ◽

Professional Judgment ◽

Generally Accepted Accounting Principles ◽

Accounting Principles ◽

Real World Setting ◽

Sales Incentives

ABSTRACT Super Electronics, Inc., a specialty retailer, has recently initiated several sales incentives and has entered into a long-term purchase arrangement with a major vendor that entitles it to sliding discounts based on its level of purchases. Using FASB Accounting Standards Codification, you are to determine whether the Company's existing policies comply with Generally Accepted Accounting Principles (GAAP). You are also required to evaluate the soundness of the proposals that SE's management has made during the process of annual audit and explore plausible motivations behind them. The case provides an opportunity to examine several technical and conceptual accounting issues in a real-world setting, strengthen accounting research capabilities, understand implications of the choice of an accounting policy for performance measurement and financial statement analysis, and develop advanced critical thinking and professional judgment skills.

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The mediating role of human capital on the relationship between audit firm size and independent auditor’s opinion: evidence from Iranian audit firms

International Journal of Accounting and Economics Studies ◽

10.14419/ijaes.v4i2.6287 ◽

2016 ◽

Vol 4 (2) ◽

pp. 102

Author(s):

Seyedhossein Naslmosavi ◽

Agha Jahanzeb

Keyword(s):

Human Capital ◽

Firm Size ◽

Positive Association ◽

Audit Firm ◽

Mediating Role ◽

Audit Firms ◽

Audit Reports ◽

The Relationship

This empirical research is aimed to explore the effect of Human Capital (HC) as a mediator in the association of the size of an audit firm and independent auditor’s opinion (IAO). The respondents of this research were senior practicing auditors of audit firms with verse experience. The research has applied ANCOVA and path analysis method in SEM by utilizing LISREL to examine research questions. The results of this study revealed that HC was significantly associated to independent auditor’s opinion and it can significantly create a relationship between audit firm size and IAO and their qualities. Indeed, the link of audit firm size on IAO without HC was found to be insignificant. Furthermore, it contributed to understand that the HC of large audit firm is greater than other audit firms and the audit reports of these kinds of firms possess good quality because of positive association amid firm size and quality of auditors.

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Female Audit Partners and Extended Audit Reporting: UK Evidence

Journal of Business Ethics ◽

10.1007/s10551-020-04607-0 ◽

2020 ◽

Cited By ~ 2

Author(s):

Tarek Abdelfattah ◽

Mohamed Elmahgoub ◽

Ahmed A. Elamer

Keyword(s):

Gender Diversity ◽

Communication Style ◽

Writing Style ◽

Audit Firm ◽

Audit Firms ◽

Audit Reports ◽

Partner Gender ◽

Firm Attributes

Abstract This study investigates whether audit partner gender is associated with the extent of auditor disclosure and the communication style regarding risks of material misstatements that are classified as key audit matters (KAMs). Using a sample of UK firms during the 2013–2017 period, our results suggest that female audit partners are more likely than male audit partners to disclose more KAMs with more details after controlling for both client and audit firm attributes. Furthermore, female audit partners are found to use a less optimistic tone and provide less readable audit reports, compared to their male counterparts, suggesting that behavioural variances between female and male audit partners may have significant implications on their writing style. Therefore, this study offers new insights on the role of audit partner gender in extended audit reporting. Our findings have important implications for audit firms, investors, policymakers and governments in relation to the development, implementation and enforcement of gender diversity.

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Auditor Style Dan Komparabilitas Laporan Keuangan

JURNAL EKSPLORASI AKUNTANSI ◽

10.24036/jea.v1i1.66 ◽

2019 ◽

Vol 1 (1) ◽

pp. 109-122

Author(s):

Riski Wulandari ◽

Henri Agustin ◽

Mayar Afriyenti

Keyword(s):

Stock Exchange ◽

Financial Statements ◽

Financial Statement ◽

Accounting Standard ◽

Audit Firm ◽

Internal Working ◽

Big 4 ◽

Audit Firms ◽

Reported Earnings ◽

Working Rules

Auditor style defined as a unique set of internal working rules for the interpretation and enforcement of accounting standard within the auditor’s clienteles belongs to particular audit firm, especially Big 4 audit firms. As a consequence, financial statements of two companies audited by the same Big 4 auditor, subjected to the same audit style, tend to have comparable earnings which have a more similar accrual, than two companies audited by two different Big 4 auditors with different styles. This research attempts to examine the effect of this auditor style issue on manufacturing financial statement comparability listed in Indonesian Stock Exchange. For five years’ observations, through 2012-2016 this research demonstrated a result with auditor style affects the comparability of reported earnings within a Big 4 auditor’s clientele and found no effect of auditor style on financial statement comparability within a non-Big 4 auditor’s clientele

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