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Preview: International Journal of Auditing

International Journal of Auditing



Wiley Online Library : International Journal of Auditing



Published: 2017-07-01T00:00:00-05:00

 



Factors that enhance the quality of the relationships between internal auditors and auditees: Evidence from Italian companies

2017-09-19T01:06:26.988192-05:00

This study examines the relationships between internal auditors and auditees in an attempt to identify the factors that influence the abilities of internal auditors (IAs) to build high-quality relationships with auditees. The analysis is based on the responses of 78 Italian Chief Audit Executives who took part in a survey in 2014. The results indicate two factors that are positively and significantly associated with high-quality IA–auditee relationships: (1) the integration of senior management's inputs in the setting up of audit plans; and (2) the use of the internal auditing function (IAF) as a management training ground. The results also show a positive but marginally significant relationship between the regular revision of audit methodologies and high-quality IA–auditee relationships. Surprisingly, the results indicate a negative and significant association between the diversification of an IAF's activities and an IAF's ability to create positive collaboration with auditees.



Client's business risk, public-interest entities, and audit fees: The case of German credit institutions

2017-08-31T05:40:24.379159-05:00

This study examines a sample of 573 German credit institution-year observations covering 2009–2011, a period when not all credit institutions were designated as public-interest entities (PIEs) in Germany. The results show that a credit institution's business risk is associated with audit fees. In addition, the statistically significant findings reveal that PIE credit institutions pay approximately 27.29% higher audit fees, on average. There is also some evidence of an association between the interaction of a credit institution's business risk and PIE status and audit fees even if, on average, the business risk of credit institutions seems not to vary systematically between PIEs and non-PIEs. Ultimately, since a dummy variable for PIE versus non-PIE might not only, or even primarily, capture effects attributable to PIE status, the results should be interpreted with caution.



Audit committee cash compensation and propensity of firms to beat earnings by a large margin: Conditional effects of CEO power and agency risks

2017-08-29T03:11:02.195984-05:00

This study examines the association between cash-based compensation of directors on the audit committee and the propensity with which firms beat forecasted earnings by a large margin. We also examine how this association is affected by CEO power and three agency risk factors present in the firm, namely size, leverage, and performance. We find that greater cash in the compensation structure is negatively associated with the likelihood of actual earnings beating forecasted earnings by a large margin. In addition, we find that this negative association is modestly weaker in firms managed by a powerful CEO and stronger in firms that are exposed to more agency risks. Findings generally suggest compensation plans comprised predominantly of cash may promote objective financial reporting oversight performed by the audit committee and more specifically when CEOs are less powerful and need for monitoring is heightened. Our results have implications for investors, directors, regulators, governance activists, and future researchers.



New clients, audit quality, and audit partner industry expertise: Evidence from Taiwan

2017-06-30T06:35:24.791418-05:00

New client acceptance decisions are critical for auditors. Audit quality can be negatively affected by limited knowledge of the new client's operations and finances. This may be mitigated for auditors with industry specialization. We examine whether new clientele negatively affect audit quality at the individual level and how the association with audit quality varies across auditors with different levels of industry specialization. Our study fills a gap in the literature by directly addressing the effects of new clients on audit quality for specialist and non-specialist auditors, as well as portfolio-concentration experts, and sheds light on the nature of risks associated with new client acceptance decisions. We find both industry specialists and portfolio-concentration experts can maintain their audit quality when accepting new clients, while there is a decline in quality for auditors who are neither industry specialists nor portfolio-concentration experts.



What drives and measures public sector internal audit effectiveness? Dependent and independent variables

2017-06-20T03:45:19.841847-05:00

The effectiveness of the internal audit function is important to improve performance in the public sector. This study provides insight into the drivers and measures of internal audit effectiveness. The heads of the internal audit function, senior management of public institutions and chairpersons of the audit committee, within a South African public sector context, responded to a survey based on an extensive review of the internal audit function. Exploratory factor analysis was applied to facilitate the reduction of 92 items into a meaningful number of independent (drivers) and dependent (measures) variables. The result of the study identifies a refined list of drivers and measures of internal audit effectiveness that adds to existing knowledge and presents a foundation for further research.






The occurrence and awareness of a misstatement effect in auditors' internal control severity judgments

2017-04-19T23:40:50.013399-05:00

We define a misstatement effect as a tendency for auditors to take the non-detection of a misstatement as evidence of the absence of a material weakness and test the hypothesis that it occurs unconsciously in their internal control severity judgments. In a between-participants design, which is analogous to the practice setting, we find that auditors evaluate an internal control deficiency less severely when it has not led to a misstatement. However, in a within-participants design, where the misstatement manipulation (detected or not detected) is more salient, we find that auditors evaluate the deficiencies as equally severe, suggesting that the misstatement effect in the between-participants design is not intended. The findings suggest the need to consider the use of decision aids that align auditors' heuristics and knowledge. For instance, auditors may be required to document possible misstatements that could occur when evaluating control deficiencies that have not led to misstatements.



The impact of corporate social responsibility assurance on investor decisions: Chinese evidence

2017-04-11T03:20:27.564704-05:00

In this experimental study, we examine whether corporate social responsibility (CSR) reports affect the investment decisions of non-professional investors in China depending on whether they are assured, the nature of CSR disclosures (positive versus negative disclosures), and the type of assurance provider (professional accountants versus industry experts). The results indicate that CSR assurance increases investor willingness to invest and that the credibility of CSR information partially mediates the relationship between assurance and investment decisions. We also note that the effect of CSR assurance on investment decisions is greater when CSR disclosures are positive than when they are negative. However, the type of assurance provider does not significantly influence the effect of CSR assurance on investor decision making. China's institutional setting features novice investors, government-affiliated industry expert assurers, and government-driven CSR assurance. As a pioneering study on the effects of CSR assurance in China, our work is a valuable supplement to previous studies, which have largely focused on developed economies with considerably different institutional settings.



Joint audit, political connections and cost of debt capital

2017-04-10T04:05:59.731448-05:00

We investigate the association between joint audit and cost of debt for a sample of non-financial, publicly listed firms from the Gulf Cooperation Council (GCC) countries. Although the conventional wisdom suggests that “two heads are better than one”, empirical evidence on the beneficial impact of joint audit has not been convincingly documented. We attempt to shed further insights into this debate, using data from the GCC countries. We document a significantly negative effect of joint audit on cost of debt in the GCC countries. This effect is more pronounced in cases where at least one of the joint audit firms is a Big 4 auditor. We then investigate whether political connections with royal families moderate the association between joint audit and cost of debt. Our results suggest that the beneficial effects of joint audits, in terms of a lower cost of debt, are greater in firms with such political connections.



Male and Female Auditors: An Ethical Divide?

2016-12-25T20:45:24.735181-05:00

This article aims to explore the behavioural differences between male and female auditors with respect to professional ethics rules. We used factorial correspondence analysis to study disciplinary rulings issued against French statutory auditors between June 1989 and December 2008. Our results highlight significant gender-related behavioural differences between auditors regarding professional ethics. Male statutory auditors are more likely to exhibit behaviour that harms the image of the profession, while their female counterparts principally commit disciplinary offences relating to audit quality and to obstruction of professional peer-review controls. This study therefore shows that gender offers a relevant perspective for investigating differences in statutory auditor professional ethical behaviour. It is also a useful source of information for the profession in terms of increasing the effectiveness of its disciplinary processes.



Audit Quality for US-listed Chinese Companies

2016-12-27T22:25:23.267504-05:00

PCAOB Staff Audit Practice Alert No. 6 raised concerns regarding the quality of audit reports on financial statements filed by issuers with substantially all of their operations outside of the US. An area of specific concern is the audit of companies with operations predominantly based in mainland China. Using a sample of Chinese companies listed in the US, we examine whether measures of audit quality are affected by the location of the auditor. We find some evidence of higher levels of discretionary accruals when a US-listed Chinese firm is audited by a small US auditor.



Institutional Monitoring, Political Connections and Audit Fees: Evidence from Malaysian Firms

2017-01-22T19:20:26.634318-05:00

This study employs data on Malaysian firms from 2003 to 2011 to show that ownership by institutional investors is positively associated with audit fees, and this positive association is stronger for firms that are politically connected to the Malaysian government. The results of this study are aligned with the theories that institutional investors can play an effective monitoring role by demanding higher audit quality, particularly if their investee firms are politically connected. Additional tests reveal that the main results are largely driven by foreign institutional investors, while it is insignificant for local institutional investors. Therefore, our evidence suggests that institutional investors, particularly foreign institutions, demand increased audit effort (proxied by audit fees) as a method to monitor politically connected firms.



Audit Quality, Earnings Management, and Cost of Equity Capital: Evidence from India

2017-01-29T22:16:26.245839-05:00

This study examines the effect of audit quality on earnings management and cost of equity capital of listed companies in India. Our results show that companies employing a high-quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand-alone companies but that they benefit less from employing a high-quality auditor. Our results are based on a large sample of 7,303 firm-year observations on listed companies in India and are robust to alternative measures for our main variables – audit quality, earnings management, and cost of capital – and to tests for endogeneity and the impact of the global financial crisis (GFC). Given the distinctive and unique institutional features of the Indian market such as the dominant role of family business groups in the national economy, large market share of domestic audit firms, less litigious environment, and less effective professional accounting bodies in checking audit failure, our findings make a significant contribution to the literature on the role of audit quality as a corporate governance monitoring mechanism as reflected in the impact on earnings management and cost of equity capital.



Harvesting Public Audit Knowledge: Implications for Theory and Practice

2017-02-08T05:30:28.577549-05:00

For over three decades international public policy has dictated that not-for-profit organisations achieve economy, efficiency and effectiveness or ‘value for money’ (VfM). Across the globe VfM performance audits are deployed in order to promote compliance with this objective. Despite consistent political discourse, the current literature lacks conceptual integration of the factors that affect performance information and use, which frustrates efforts to better understand the factors that inhibit the emergence of VfM. Using the lens of information processing theory (IPT) this paper systematically analyses VfM audit reports produced by the Comptroller and Auditor General, Ireland. The contribution categorises strategic, operational and tactical barriers that affect the motivation, opportunity and ability to process information related to value for money. A key implication is that effectiveness needs to be reframed in terms of service-dominant (S-D) logic and is thus defined as value co-created by politicians, policy makers and public servants.



Can I Interrupt You? Understanding and Minimizing the Negative Effects of Brief Interruptions on Audit Judgment Quality

2017-01-29T22:30:30.526825-05:00

Interruptions are an inescapable characteristic of auditors' socially driven work environment, and the continuing growth of digital technologies implies that interruptions will increase. We investigate the effect of brief, but expected, interruptions on audit judgment quality, and whether giving auditors notice of the timing of the impending interruption minimizes negative effects arising from interruptions. Employing an experimental on-line setting, we find that auditors' performance deteriorates when they are briefly interrupted during the completion of an audit task. Our results highlight that this is partly explained by poorer recall of information encountered prior to the interruption. We find that notifying auditors in advance when the expected interruption will occur reduces the extent to which memory and judgment quality is negatively affected. Our results have important implications for audit firms in their attempts to deal with environments increasingly characterized by interruptions.



Do Family Firms Purchase More Nonaudit Services than Non-Family Firms?

2017-01-16T23:50:26.703366-05:00

This study investigates the association between family ownership and the relative level of nonaudit service (NAS) fees paid to the incumbent auditors by public companies. Using data from S&P 1500 firms during the post-SOX period 2002–2010, the study shows that the NAS fee ratio (the NAS fees relative to the total of audit and NAS fees) is higher for family firms than non-family firms. The results suggest that family owners' close monitoring of their firms reduces the information asymmetry and agency problems between shareholders and managers, and as a result family firms tend to purchase more NAS from their auditors to appreciate the potential benefits of the auditors' knowledge spillovers. Additional analysis demonstrates that the positive association between family ownership and the NAS fee ratio is particularly pronounced for family firms without dual-class shares and for those with non-family-member CEOs.