Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

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  • Jennifer M Mueller-Phillips
    Are Capitalized Software Development Costs Informative About...
    research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment 
    Title:
    Are Capitalized Software Development Costs Informative About Audit Risk?
    Practical Implications:

    In general, the results of this study provide empirical evidence that capitalized software development costs are incrementally informative about the client’s business risk and the overall audit risk.

    • First, although intangible assets play an increasing role in firm valuation, very little is known about whether and how auditors regard these assets in assessing audit risk. Thus it fills a void in the literature on the auditor’s assessment of capitalized software development costs.
    • Second, this study examines a setting that mitigates the client’s business risk. It is important in that while economic models predict that audit fees reflect business risk, there is some evidence that audit practice does not support a relation between business risk and audit fees
    • Third, this study could be viewed as a ‘‘bridge’’ between the limited literature on investor valuation of capitalized software assets and auditing
    • Fourth, this study also shed light on how auditing under certain circumstances could potentially enhance the informativeness of recognized assets that are subject to a high degree of information asymmetry and managerial discretion

    For more information on this study, please contact Gopal V. Krishnan.

    Citation:

    Krishnan, G. V., and C. Wang. 2014. Are Capitalized Software Development Costs Informative About Audit Risk? Accounting Horizons 28(1): 39-57.

  • Jennifer M Mueller-Phillips
    Voluntary Audits versus Mandatory Audits
    research summary posted March 4, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.02 Client Risk Assessment 
    Title:
    Voluntary Audits versus Mandatory Audits
    Practical Implications:

    This analysis provides empirical support for the argument that the mandatory requirement suppresses information that is conveyed when companies are allowed to choose whether to be audited. Moreover, additional tests indicate that the opt-out companies were only passively complying with the audit requirement—evident in their attempts to reduce costs through auditor choice and fees—under the mandatory regime. In other words, it is difficult to force companies to privately contract for stringent audits if they would choose not to be audited voluntarily. However, the research on private companies cannot contribute valid insights on the relative merits of voluntary and mandatory audits for public companies.

    For more information on this study, please contact Clive Lennox.

    Citation:

    Lennox, C. S. and J. A. Pittman. 2011. Voluntary Audits versus Mandatory Audits. The Accounting Review 86 (5): 1655-1678. 

  • Jennifer M Mueller-Phillips
    The Effect of Corporate Governance on Auditor-Client...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.02 Client Risk Assessment, 13.0 Governance 
    Title:
    The Effect of Corporate Governance on Auditor-Client Realignments
    Practical Implications:

    The results of this study are important for audit firms and regulators because it documents a potentially negative outcome of the realignment activity observed in the years surrounding implementation of SOX. Specifically, this realignment activity could have implications for the quality of financial statements if the corporate governance characteristics included in our index –specifically, board and audit committee independence, diligence and expertise are positively associated with financial reporting quality and Big N audit firms provide higher audit quality.  We also note that prior studies that consider these governance characteristics suggest that, on average, clients that exhibit higher scores on these characteristics are less likely to pose significant governance risk for the audit firm.

     

    For more information on this study, please contact Thomas Omer.

    Citation:

    Cassell C. A., G.A. Giroux, L.A. Myers and T.C. Omer. 2012. The effect of corporate governance on auditor-client realignments. Auditing: A Journal of Practice & Theory 31 (2): 167-188

  • Jennifer M Mueller-Phillips
    CEO and CFO Equity Incentives and the Pricing of Audit...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 14.0 Corporate Matters, 14.01 Earnings Management, 14.07 Executive Compensation 
    Title:
    CEO and CFO Equity Incentives and the Pricing of Audit Services
    Practical Implications:

    Our study highlights the importance of taking into account executive incentive plans in improving the understanding of auditors’ risk assessment and pricing decisions, in support of the current professional audit standards. The findings that auditors respond to CEO and CFO equity incentives differently have significant implications for the corporate governance reforms and the design of optimal corporate executive compensation policies. Following the accounting scandals in the early 2000s, there has been increased regulatory and legislative scrutiny on corporate governance. Especially, regulators have recognized CFOs as the individuals bearing responsibilities for the integrity of financial information. Our paper lends support to the regulatory inclusion of CFOs as accountable individuals, and to concerns that firms should exercise caution in compensating CFOs using equity-based tools.

     

    For more information on this study, please contact Yonghong Jia.

    Citation:

    Billings, B. A., X. Gao, and Y. Jia. 2014. CEO and CFO Equity Incentives and the Pricing of Audit Services. AUDITING: A Journal of Practice & Theory 33 (2): 1-25

  • Jennifer M Mueller-Phillips
    The Effects of Clients’ Controversial Activities on Audit P...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 06.0 Risk and Risk Management, Including Fraud Risk, 06.04 Management Integrity, 06.06 Earnings Management 
    Title:
    The Effects of Clients’ Controversial Activities on Audit Pricing
    Practical Implications:

    We focus on the business risk associated with controversial corporate activities. By examining a wider range of controversial corporate activities, we are able to conduct a broader investigation into the association between auditor business risk and audit fees.  Our study finds that adverse social performance arising from controversial activities affects firms’ audit fees. Specifically, our results indicate that auditors charge fee premiums ranging from 5.4% to 13.2% for clients that are involved with controversial activities related to consumers, employees, the community, and the environment.  We also find that corporate controversial activities are associated with higher risks of financial misstatement and adverse financial performance.  These results provide triangulation on our inference that auditors’ raise their assessment of clients’ business risks when their clients are involved in controversial activities, and charge such clients higher audit fees.  

     

    For more information on this study, please contact Kevin Koh.

    Citation:

    Koh, K. and Y. H. Tong. 2013. The Effects of Clients’ Controversial Activities on Audit Pricing. Auditing: A Journal of Practice and Theory 32 (2): 67-96.

  • Jennifer M Mueller-Phillips
    Is the Audit Fee Disclosure a Leading Indicator of...
    research summary posted October 3, 2013 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity 
    Title:
    Is the Audit Fee Disclosure a Leading Indicator of Clients’ Business Risk?
    Practical Implications:

    The results of this study have very important implications regarding how stakeholders respond to the disclosed audit fee and business risk. Stakeholders could devote special attention the audit fee disclosure that is mandated by the SEC as it has the potential to reveal risk information. Additionally, the results of this study should warrant increased awareness on the part of the auditors when they price an audit because audit firms should consider what the public believes the audit fee implies about the client’s business risk.

    For more information on this study, please contact Jonathan D. Stanley.
     

    Citation:

    Stanley, J.D. 2011. Is the audit fee disclosure a leading indicator of clients’ business risk? Auditing: A Journal of Practice and Theory 30 (3): 157-179.

  • The Auditing Section
    Financial Restatements, Audit Fees, and the Moderating...
    research summary posted April 23, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Financial Restatements, Audit Fees, and the Moderating Effect of CFO Turnover
    Practical Implications:

    This study provides evidence that auditors consider a client restatement as an increase in the audit risk of a client for future periods.  This increase in audit risk is factored into the audit fee possibly through additional hours or higher hourly rates.  This study also provides evidence that when a company has a change in CFO, auditors view this positively. 

    Citation:

    Feldmann, D.A., W.J. Read, and M.J. Abdolmohammadi. 2009. Auditing: A Journal of Practice and Theory 28 (1): 205-223.

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  • The Auditing Section
    Risk Monitoring and Control in Audit Firms: A Research...
    research summary posted April 16, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.02 Client Risk Assessment, 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness, 11.11 Impact of Firm and External Inspection Programs 
    Title:
    Risk Monitoring and Control in Audit Firms: A Research Synthesis
    Practical Implications:

    While research on “quality-threatening behaviors” by auditors is difficult to perform due to confidentiality constraints, the available findings suggest that audit firms can make a difference in their incidence and severity through careful attention to policies and procedures for assessing, monitoring and controlling risk of violation of professional standards. While there is likely to be greater resistance to higher quality control standards among smaller firms, research shows that audit quality concerns are greater for smaller firms and that larger firms are currently passing smaller and riskier clients to them. The authors suggest that small accounting firms can adopt strategies, like creating alliances or becoming niche providers of certain audit services, to allow them to meet this challenge.

    Citation:

    Bedard, J.C., D.R. Deis, M.B. Curtis, and J.G. Jenkins. 2008. Risk monitoring and control in audit firms: A research synthesis. Auditing: A Journal of Practice & Theory 27 (1): 187-218.

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  • The Auditing Section
    The Impact of Management Integrity on Audit Planning and...
    research summary posted April 13, 2012 by The Auditing Section, tagged 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.04 Management Integrity, 14.01 Earnings Management 
    Title:
    The Impact of Management Integrity on Audit Planning and Evidence
    Practical Implications:

    The results of this study are important because, while severe cases of low integrity may be weeded out during client acceptance, auditor firms tend to retain clients with a wide spectrum of integrity levels that must be managed throughout the audit process. Thus evidence regarding how the integrity of management influences auditors (1) assessment of risk, (2) planning of audit procedures, and (3) identification of misstatements may be useful for developing training materials or best practices for approaching audits on the lower end of the integrity spectrum.

    Citation:

    Kizirian, T.G., B.W. Mayhew, and L.D. Sneathen, Jr. 2005. The impact of management integrity on audit planning and evidence. Auditing: A Journal of Practice & Theory 24 (2): 49-67.

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  • The Auditing Section
    CFO Intentions of Fraudulent Financial Reporting
    research summary posted April 13, 2012 by The Auditing Section, tagged 02.02 Client Risk Assessment, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity 
    Title:
    CFO Intentions of Fraudulent Financial Reporting
    Practical Implications:

    The results of this study call into question the legitimacy of compensation structure as a red flag for fraud risk and introduce company size as a new (and easily assessed) indicator of financial statement fraud. CFO attitude emerged as the most influential factor in the formation of intentions to misreport. This indicates that it is important that auditors attempt to assess client management’s attitude toward fraudulent financial reporting. Although directly assessing management’s attitude may not be possible, auditors can subjectively assess management attitude based on ongoing personal interactions with the client. More formal audit decision aids to assess management attitudes toward fraudulent financial reporting might also be valuable for successfully detecting fraud.

    Citation:

    Gillett, P.R. and N. Uddin. 2005. CFO Intentions of Fraudulent Financial Reporting. Auditing: A Journal of Practice and Theory 24 (1): 55-75.

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