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Preview: International Journal of Auditing

International Journal of Auditing

Wiley Online Library : International Journal of Auditing

Published: 2018-03-01T00:00:00-05:00


Evidence on the relation between managerial ability and financial reporting timeliness


While prior research has investigated the relation between firm-level attributes and financial reporting timeliness, there is little evidence on whether managerial ability is associated with financial reporting timeliness. We examine the relation between managerial ability and financial reporting timeliness. Managers with higher ability possess greater human capital and are better able to maintain the systems and controls underlying the company's financial information. We therefore predict that managers with higher ability produce more timely financial disclosures. We find that, incremental to firm-level attributes, higher managerial ability is associated with a shorter earnings announcement lag, a shorter audit report lag, and a lower probability of a late US Securities and Exchange Commission filing. Collectively, our results suggest that managerial ability has a positive influence on the timeliness of financial reporting.

Exploring the identity of audit committee members of New Zealand listed companies


We focus on the attributes of audit committee members at an individual level through investigating their role-based identity; this approach represents a departure from the traditional approach of measuring their independence and financial expertise. The data revealed that there is a wide range of backgrounds and attributes identified by New Zealand audit committee members as being helpful in performing their responsibilities. Members’ motivation and justification for serving on the audit committees played a significant role in verifying their identity salience in terms of being an audit committee member. Regulators and other corporate governance stakeholders may benefit from a further understanding of the reciprocal relationship between an audit committee mechanism and its members’ identity salience.

Mandatory audit firm rotation and prohibition of audit firm-provided tax services: Evidence from investment consultants’ perceptions


The European Union has discussed and recently implemented both audit-firm instead of audit-partner rotation and a restriction against audit-firm-provided tax services in order to improve auditor independence and audit quality. This study provides experimental evidence of the effects of the rotation system, the impact of audit-firm-provided tax services, and, for the first time, the interplay between both regulatory measures. Based on the assessments of 140 professional investment consultants from credit institutions, the results show that an audit-partner rotation regime which allows audit-firm-provided tax services generates the lowest assessments of auditor independence and audit quality. While investment consultants view both audit-firm rotation and a prohibition against audit-firm-provided tax services as beneficial, the joint implementation of a prohibition against audit-firm-provided tax services and audit-firm rotation leads to no additional benefits in either the appearance of independence or the perceived audit quality. Besides the theoretical contribution, we discuss the practical implications of our findings, in particular that more regulation does not automatically lead to higher audit quality.

An experimental investigation of the interaction effect of management training ground and reporting lines on internal auditors’ objectivity


Seventy-nine experienced internal auditors participated in an experiment investigating two factors that may affect internal auditors’ objectivity: (1) whether the internal audit function is used as a management training ground, and (2) whether the internal auditors’ reporting line is to management or the audit committee. Participants completed a case wherein management and the audit committee hold conflicting preferences regarding a major corporate investment opportunity. Participants evaluated relevant business risks and made an overall recommendation concerning the investment. The results include three important findings. First, we observe an interaction effect between management training ground and reporting line. When the internal audit function is not used as a management training ground, internal auditors’ risks assessments do not significantly differ by reporting line. However, when the internal audit function is used as a management training ground, internal auditors’ risk assessments align with management's preferences when auditors report to senior management versus the audit committee. Second, when the internal audit function is a management training ground, internal auditors provide more favorable investment recommendations (i.e., consistent with management's preferences). Third, internal auditors unexpectedly provided more favorable recommendations to the audit committee than to management.

Audit firm tenure, auditor familiarity, and trust: Effect on auditee whistleblowing reporting intentions


Mandatory audit firm rotation has been researched for decades with resulting opposition as well as support. Research has mainly treated mandatory auditor rotation at the firm macro level. We submit the client relationship length is comprised of firm tenure and audit team continuity, or auditor familiarity. Increased tenure, at the interorganizational or firm level and interpersonal or individual level, has been shown to increase trust; and further, trust is positively related to employee voice, such as speaking up about fraud (whistleblowing). We conduct an experiment examining whether increased audit firm tenure and auditor familiarity leads to increased trust, which enhances the willingness to whistleblow. We find evidence that suggests auditor familiarity enhances trust, which, in turn, positively influences an employee's intentions to whistleblow. This has important implications for the profession and for future research exploring mandatory audit firm rotation; in particular, the need to include auditor familiarity as a construct.

Issue Information


No abstract is available for this article.

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.

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.

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.

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.

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.

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.

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.

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.