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Preview: International Journal of Auditing

International Journal of Auditing

Wiley Online Library : International Journal of Auditing

Published: 2017-11-01T00:00:00-05:00


The impact of emotional intelligence on auditor judgment


This study seeks to identify emotional intelligence (EI) as a key factor in dealing with emotions and pressures in an audit context. In this paper, we focus on how EI may influence the relation between job pressures (i.e., time budget pressure and client pressure) and auditors' judgment. Specifically, we investigate the moderating effect of EI on auditors' third-person assessments of an auditor's actions when subject to internal and external pressures. The results suggest that the moderating influence of EI can effectively reduce auditors' tendency to engage in dysfunctional behavior and improve audit quality. Further, moderation analysis suggests that EI is a significant mechanism that moderates the effects of different types of pressure on auditors' judgments.

Big 4 audit fee premiums for national- and city-specific industry leadership in the UK: Additional evidence


This study investigates the relationship between Big 4 auditor industry specialization and audit pricing in the UK in a period of many changes having taken place in the market for audit services. Using a large dataset between 2004 and 2011, our empirical results show a significantly higher fee premium for the Big 4 firms who are national industry leaders compared to city-specific industry leaders, and that the fee premium for industry leadership is only earned by the city-specific industry leaders if and when they are also the national leaders. Neither the national nor city level industry leadership alone is priced anymore in the UK audit market. These findings hold for the pre- and the post-global-financial-crisis period only and for a number of additional analyses. The evidence suggests that the Big 4 industry leadership in the UK has moved away from the previously documented premium for the Big 4 city-specific industry leadership alone, and is now driven solely by the joint Big 4 industry expertise at the national and city-specific levels concurrently. The study's results indicate that there is a progression from city-specific industry expertise to national-specific industry expertise, and they imply that there has been an improvement in the sharing and transferability of industry knowledge and expertise among the city offices of the Big 4 firms in the UK in the period of investigation.

Audit partner industry specialization and audit quality: Evidence from Spain


We investigate the impact of the industry specialization of individual auditors on audit quality. We aim to contribute to a quickly growing line of research examining the importance of audit partners as determinants of audit quality. To provide robust results, we use several proxies of both industry specialization and audit quality. We conduct the empirical analysis with a sample of Spanish listed companies for the research period between 2005 and 2013. Our main result is the lack of a significant impact of the industry specialization of audit partners on audit quality. This result seems sound, as it holds for the several measures of industry specialization and audit quality used in the empirical study. Our main result, which contradicts most of the scarce available evidence, would stress the importance of the institutional context in the study of the industry specialization–audit quality relationship and advocates the need for further research.

Managing group audit risk in a multicomponent audit setting


This paper considers the challenges in planning the scope of auditing procedures in a group audit setting for an entity with geographically dispersed components which vary in risk characteristics. Auditing all the components for a complex group entity is often infeasible, hence the auditor faces risk from components not audited, as well as the normal sampling risk resulting from applying audit procedures to certain components. Auditing standards do not explain how to consider the risk factors and consider what portion of a multiple component entity should be selected for audit to be able to issue an unqualified audit opinion on the group. In this paper we describe a step-by-step method for determining a minimum number of component audits needed to support an aggregate low level of audit risk of material misstatement. The paper responds to calls from academics, practitioners, and standards-setters for theoretically valid and practically feasible solutions to the group audit problem, using a method that combines professional judgment and experience with basic statistical principles in an ensemble approach.

Exploring the determinants of internal audit: Evidence from ownership structure


The internal audit literature suggests that firms can gain significant added value from internal audit in terms of improving governance processes, reducing audit fees, and detecting fraud. Nonetheless, not all firms use internal audit. A growing literature examining the determinants of internal audit has identified a number of different determinants, such as firm size, strong commitment to risk management, existence of an audit committee, and an independent board chair. This paper contributes to the existing literature by examining the effects of ownership structure on the voluntary use of internal audit. The logistic regression model of this study is based on data from 107 firms listed on NASDAQ OMX Helsinki. It shows that ownership structure is a significant determinant of internal audit. Specifically, the paper shows that foreign ownership, dispersed ownership, and state ownership increase the likelihood of a firm using internal audit.

Audit committee chair and financial reporting timeliness: A focus on financial, experiential and monitoring expertise


In this study, we examine the association of audit committee chair financial, experiential and monitoring expertise with the audit report lag period. We find that the experiential and monitoring expertise of audit committee chairs have a significant negative association with the delay in the audit report lag period, possibly resulting in more effective audit committee chairs, at least in the face of financial reporting timeliness. We also find that the audit committee composite compliance variable has a significant negative association with the audit report lag period, which suggests that a firm's compliance with audit committee regulations is also beneficial for financial reporting timeliness. These are important findings from the practice, academic and public policy perspectives.

Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation


This study examines whether auditors who learn that fraud risks differ between accounts could become less skeptical toward evidence that could signal financial misstatement in low-fraud-risk accounts. Our theoretical framework suggests that contrast effects could reduce skepticism about suspicious changes in low-fraud-risk accounts when auditors perform analytical procedures during the planning phase of assurance engagements. We conducted a laboratory experiment where experienced auditors analyzed year over year changes in accounts to assess misstatement risk for revenue and costs. We manipulated fraud risk for revenue and the presence of an inconsistent fluctuation in costs. Participants who learned that fraud risks had been assessed as high for revenue but low for costs rated misstatement risk at lower levels for cost accounts, compared with auditors who learned that fraud risk was assessed as low for both accounts.

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


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.

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


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.

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


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.

Joint audit, political connections and cost of debt capital


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.

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


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.

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


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.

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


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.

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


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.