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  • Jennifer M Mueller-Phillips
    Audit Partner Perceptions of Post-Audit Review Mechanisms:...
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs 
    Title:
    Audit Partner Perceptions of Post-Audit Review Mechanisms: An Examination of Internal Quality Reviews and PCAOB Inspections
    Practical Implications:

    The results of this study make several contributions. It is beneficial to researchers interested in furthering our understanding of the effects and effectiveness of IQRs and PCAOB inspections, as well as to practitioners and regulators. While many opportunities for further research exist, results indicating a large portion of partners try to predict the engagements that will be selected for either PAR can serve as a foundation to investigate further the effects of PAR salience on audit planning and reporting decisions.

    For more information on this study, please contact Richard W. Houston
     

    Citation:

    Houston, R. W., and C. M. Stefaniak. 2013. Audit Partner Perceptions of Post-Audit Review Mechanisms: An Examination of Internal Quality Reviews and PCAOB Inspections. Accounting Horizons 27 (1).

    Keywords:
    audit quality; internal quality reviews; PCAOB inspections
    Purpose of the Study:

    Tis study attempts to examine audit partner perceptions of the two primary post-audit review (PAR) mechanisms intended to help maintain and improve the quality of public company audits (PCAOB inspections and firms’ internal quality reviews [IQRs]). Using a survey of audit partners, the authors investigate and compare partners’ perceptions of each review’s predictability, conduct, inspector qualifications and behavior, and effects. This study extends upon prior research by reporting perceptions of experienced partners from large firms, providing detailed evidence concerning IQRs, and examining partners’ perceptions of both PCAOB inspections and IQRs. Finally, the authors are also the first to study PAR perceptions to consider the effects of partner experience, complementing research suggesting that partner experience affects audit performance. 
     
     

    Design/Method/ Approach:

    To learn more about PCAOB inspections and IQRs, the authors investigate and compare partners’ perceptions of each PAR. The research questions concern perceptions of each PAR’s (1) predictability, (2) conduct, (3) inspector qualifications and behavior, and (4) effects, as well as whether results differ based on partner experience. To examine the research questions, the authors distributed a survey to large-firm audit partners. Survey participants were obtained via a mailing list obtained through the AICPA. The list included U.S. professionals who were (1) partners, shareholders, or owners; (2) audit focused; (3) employed by U.S. public accounting firms with over 100 employees. The packets were mailed to 1,400 auditors who met the above criteria. 125 partners responded resulting in approximately a 9 percent response rate.

    Findings:
    • Partners can or try to predict the engagements that will be selected for either an IQR or PCAOB inspections.
    • While partner believe they can more easily predict the specific year of an IQR, no difference was found in their abilities to select which specific engagements will be selected for IQRs or PCAOB inspections.
    • Partners perceive both PARs to be very detailed.
    • Partners believe that IQRs are more likely to cover all audit areas and that IQR reviewers have a better understanding of their firms’ audit methodologies than do PCAOB inspectors.
    • Partners believe that both IQRs and PCAOB inspections affect their professional reputation.
    • IQRs provide more timely feedback than do PCAOB inspections, and partners perceive IQR feedback to be more beneficial.
       
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)
  • Jennifer M Mueller-Phillips
    Audits of Complex Estimates as Verification of Management...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 11.09 Evaluation of Evidence 
    Title:
    Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice.
    Practical Implications:

    Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.  

    Citation:

    Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.

    Keywords:
    Complex Estimates, Subjectivity, Institutional Theory, Valuation Specialists, Professional Skepticism, Interviews
    Purpose of the Study:

    Complex estimates are increasingly important to financial statements and of growing concern to both regulators and investors. While auditors have well-established procedures for auditing more objective account balances (i.e., valued at historical cost), little is known about the process auditors use to evaluate more subjective, complex estimates. This article conducts interviews with experienced audit personnel to determine how auditors evaluate such estimates, determines the problems with such approaches, and uses “institutional theory” to theorize the reason such problems exist and persist. The authors consider the influence of both audit firms themselves and regulators (i.e., information from PCAOB inspection reports) on auditors’ complex estimate audit procedures.

    Design/Method/ Approach:

    The authors conducted semi-structured phone interviews with experienced audit personnel. Participants are from 6 large accounting firms with at least manager level experience. Interviews were conducted between October and November 2010. The authors analyzed the audit process steps discussed by participants for complex estimates and coded these steps according to the PCAOB auditing standards related to accounting estimates (AU 342 and 328).  For steps that could not be appropriately classified into ones discussed by the auditing standards, the authors developed additional classifications.

    Findings:

    While auditing standards allow for different approaches to evaluating complex estimates (e.g., testing management process, preparing independent estimate, etc.), the authors find that auditors usually just test management’s process (i.e., verifying inputs such as historical cost, understanding who and how estimate is generated, testing controls surrounding process, and testing sensitivity of assumptions used).  

    Based on institutional theory, the authors theorize two key reasons that auditors mainly use management process verification when auditing complex estimates instead of other (potentially more creative and skeptical) approaches. The reasons are:

    • Both audit firm policies and professional standards generally emphasize management process verification techniques over other potential techniques. Additionally, regulators (i.e., PCAOB) reinforce/encourage this behavior because inspection findings largely focus on problems with auditing management’s process instead of suggesting alternative, superior auditing methods.
    • Audit firms employ valuation specialists who have the necessary knowledge to more critically analyze complex estimates. This fact means that financial statement auditors generally do not have the necessary knowledge to critically analyze management’s models or develop an independent expectation. When auditors do use such specialists, they over-rely on their work.
    • Given the lack of guidance regarding complex estimates, firms tend to use practices that have been previously legitimized. For auditing of complex estimates, verification (which works well to audit less subjective accounts) is used to audit more subject complex estimates. Auditing standards also mainly emphasize verification.
    • Given inspection pressures, firms find it safer and more legitimate to mimic each other’s policies and procedures for auditing complex estimates instead of develop new ones.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Auditors’ Professional Skepticism, Evaluation of Evidence, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Sustainability ServicesTraining & General Experience, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    Do auditor judgment frameworks help in constraining...
    research summary posted November 14, 2016 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections 
    Title:
    Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards
    Practical Implications:

    By examining the cognitive impact of the different judgment frameworks, this study provides academics, practitioners, and regulators with important insight into why counterfactual reasoning and a structured thought process differentially enhance auditors’ professional skepticism. 

    Citation:

    Backof, A. G., E. M. Bamber and T. D. Carpenter. Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards. Accounting, Organizations and Society 51: 1-11. 

    Keywords:
    auditing, accounting standard precision, judgment frameworks, psychological distance, and abstract mindsets.
    Purpose of the Study:

    Auditors are being called on to exercise substantially more professional judgment during the financial reporting process due in part to the global trend towards less precise accounting standards; consequently, the Advisory Committee on Improvements to Financial Reporting (CIFiR) recommended that the Public Company Accounting Oversight Board (PCAOB) develop guidelines on how the PCAOB plans to evaluate the reasonableness of judgments made based on PCAOB auditing standards. Although the PCAOB has not yet done this, audit firms have developed their own judgment frameworks based on CIFiR’s identification of key components underlying reasonable accounting judgments. Further, the Center for Audit Quality (CAQ) recently published a professional judgment resource that audit firms can use to enhance their professional judgment process. This study examines how alternative specification of these judgment frameworks affect auditors’ constraint of management’s aggressive financial reporting under accounting standards that differ in their level of precision.

    Design/Method/ Approach:

    The authors conduct an experiment using a 2 x 4 factorial design to investigate these issues. A number of audit managers and partners from a Big 4 accounting firm participated in a case requiring them to audit management’s lease classification decision. The setting is created to be on where auditors stand to benefit from a well-reasoned judgment process that includes the consideration of alternatives and focuses auditors on the big picture economics rather than the transactional details.  

    Findings:
    • The authors find that the judgment frameworks are more effective under less precise standards. In particular, the pro/con framework based on CIFiR’s recommendation to consider the “pros and cons for reasonable alternatives” effectively enhances auditors’ skepticism of aggressive reporting under less precise standards, but not more precise standards.
    • The authors’ evidence suggests that both the pro/con why framework and pro why framework lead to an even greater reduction in auditors’ allowance of aggressive reporting under less precise standards; however, only the pro why framework curbs aggressive reporting under more precise accounting standards. 
    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)
  • Jennifer M Mueller-Phillips
    Do Income Tax-Related Deficiencies in Publicly Disclosed...
    research summary posted September 13, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections 
    Title:
    Do Income Tax-Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts?
    Practical Implications:

     While many studies examine how the Part I inspection report or the PCAOB inspection process as a whole impact the auditor and audit committee decision making, the research on the impact of Part II reports is limited. Furthermore, the PCAOB is publicly issuing Part II inspection reports with greater frequency; thus, an understanding of how the failed remediation of Part II reports influences the audit firm and its clients is of importance to a number of parties.

    Citation:

     Drake, K. D., N. C. Goldman, and S. J. Lusch. 2016. Do Income Tax-Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts? The Accounting Review 91 (5): 1411-1439.

    Keywords:
    PCAOB inspections, auditor scrutiny, valuation allowances, and uncertain tax benefits
    Purpose of the Study:

    The Public Company Accounting Oversight Board (PCAOB) is responsible for overseeing the quality of external audits through a rigorous inspection process that examines both audit engagements and audit firm quality control processes. At the completion of their review, the PCAOB issues their findings to the inspected audit firm via inspection reports. This led the authors to investigate whether a change in auditor scrutiny over income tax accounts, prompted by the failed remediation of a PCAOB Part II inspection report, results in changes in client financial reporting of income taxes. Utilizing the unique situation of Deloitte & Touche LLP’s 2007 Part II inspection report, which identifies concerns about the firm’s quality controls with respect to the audit procedures performed on income tax accounts, the authors delve into whether the failed remediation and subsequent public disclosure of the report led to observable changes in financial reporting for income tax accounts among Deloitte’s client.  

    Design/Method/ Approach:

    The authors focus on the time period beginning with Deloitte’s 2007 Part II report, which was issued privately to Deloitte on May 19, 2008 and ending with the remediation period on May 18, 2009. The sample chosen was annually inspected audit firms between 2006 and 2012. The authors also investigate which components of the annual UTB reconciliation drive the changes in the total UTB balance.

    Findings:
    • The authors find that an increase in auditor scrutiny over income tax accounts in response to PCAOB Part II findings is associated with changes in financial reporting of income tax accounts.
    • The authors find that the changes implemented by Deloitte result in an increase in reported valuation allowances and an increase in the reserve for uncertain tax positions among its clients.
    • The authors find that the UTB result is not driven by changes in tax avoidance but is driven but increases in the reserve related to current-year and prior-year positions.
    • The authors do not find that additional auditor scrutiny influences the income tax accounts when examining non-tax related Part II reports. This suggests that the effect the authors identify is in response to the specific deficiencies identified in the Part II report rather than a general reaction to failing the remediation of a Part II report. 
    Category:
    Auditor Judgment, Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)
  • Jennifer M Mueller-Phillips
    Documentation Requirements and Quantified versus Qualitative...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections 
    Title:
    Documentation Requirements and Quantified versus Qualitative Audit Risk Assessments
    Practical Implications:

    This study should be of interest to both regulators and audit firms.  In the future, standard setters should consider how natural human behavior may result in unintended consequences.  By considering psychology, standard setters may be able to write the standards in a way to minimize those potential consequences or at least be aware of the risks. 
        This study should also be of interest to audit firms because current auditing standards are neutral with respect to whether audit documentation of risk assessments are performed quantitatively or qualitatively.  This implies that either option is adequate and treats the potential costs as minor.  As risk assessments that are more lenient in nature tend to lead to fewer audit procedures and less substantive evidence, the costs may be more than inconsequential. 

    For more information on this study, please contact M. David Piercey.
     

    Citation:

    Piercey, M. D. 2011. Documentation Requirements and Quantified versus Qualitative Audit Risk Assessments. Auditing: A Journal of Practice & Theory 30 (4):223-248.

    Keywords:
    quantitative versus qualitative audit risk assessments; elastic re-definition; documentation requirements
    Purpose of the Study:

    The purpose of this study is to examine whether there are any potential unintended consequences that result from Auditing Standard No. 3 (AS3) – Audit Documentation, which requires auditors to document most judgments.  The intent of AS3 is to improve documentation so that it is easier to inspect the firms’ working papers and understand what was done and why.  The expectation is that due to the increased potential scrutiny from reviewers (e.g., PCAOB review or litigation) the added documentation will cause auditors to improve their judgments and increase their levels of objectivity and professional skepticism.   
    This study looks at auditor risk assessments, which, according to the standard, can be documented quantitatively (i.e., using numerical assessments) or qualitatively (i.e., using worded assessments).  The author is concerned that if an auditor has a preference to arrive at a conclusion that is client-preferred and more lenient, the added documentation requirements will cause auditors to be even more lenient than if they were not required to meet these new documentation requirements.  This would be contrary to what one would expect given the potential risk of the firm opening itself up to liability in the event of review or litigation.
     

    Design/Method/ Approach:

    The author conducted an experiment including auditors of all ranks from 2 large accounting firms and senior accounting students prior to May 2011.  The experiment manipulated two factors (documentation requirements and response mode).  Participants were asked perform a risk assessment of material misstatement in one of three ways (one of which is quantitative and two are qualitative).  Then participants were told whether or not their assessment was going to be documented (or not) in the working papers and thus be subject to potential PCAOB review.  

    Findings:
    • The author finds that when auditors are required to document risk assessments and assess risk in qualitative terms, they are more apt to be even more lenient when they have pressures to provide a client-preferred assessment.  The qualitative terms seem to allow auditors to rationalize the more lenient judgments.
    • When using quantitative assessments, the author does not find similar results.  There is no difference in these judgments regardless of whether auditors are required to document their judgments in working papers or not.
    • These findings are not unique to auditors.  Humans, in general, assess risk differently when they are doing so with words instead of numbers. 
       
    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Documentation Specificity, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)
  • Jennifer M Mueller-Phillips
    Error Management In Audit Firms: Error Climate, Type, And...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Error Management In Audit Firms: Error Climate, Type, And Originator
    Practical Implications:

    The findings of this study are important for audit firms when considering how audit offices implement the normally positive tone at the top of the firms that seem to favor practices and policies that support an open error management climate (EMC). First, our results suggest that successfully establishing an open EMC is beneficial for an audit firm in most (but not all) situations examined in terms of enhancing the firm’s ability to uncover internally errors that otherwise may remain undetected in audit working papers. Our findings imply, however, that these benefits can only be achieved when an open EMC is not only stated in formal firm policies but is actually implemented and consistently applied at the individual audit office level. Second, our findings imply that increasing auditors’ willingness to report their own conceptual errors (e.g., where an ineffective procedure is employed or incorrectly implemented) is particularly challenging and requires measures to support auditors in overcoming their concerns about presenting a good impression to their firm, given that an open EMC was not sufficient by itself to increase the reporting of conceptual errors. Finally, the generally high willingness to report own errors suggests that a key question is how to enhance the likelihood that auditors will indeed self-detect these errors.

    Further our findings suggest that audit regulators and inspectors need to be careful in their attempts to ensure that audit firm’s implement policies that support audit quality.  In particular, proposals that would link compensation, discipline and other within firm sanctions for audit quality reducing actions need to be considered carefully in light of the effects that such policies would have on the firm’s error management climate.  Careful delineation between repeat offenders being punished versus supporting an open learning environment for initial reporting of errors needs to be carefully considered and communicated or else the error management climate can quickly become a blame climate where errors are not reduced, just hidden better.

    For more information on this study, please contact any of the authors.

    Citation:

    Gold, A., U. Gronewold, and S. E. Salterio. 2014. Error management in audit firms: Error climate, type, and originator. The Accounting Review 89 (1): 303-330. 

    Keywords:
    error discovery, working paper review, error reporting, error management, climate, audit quality
    Purpose of the Study:

    Audit firms use their formal review process as a crucial mechanism to detect errors in audit working papers in order to ensure audit quality and avoid litigation or sanctions by oversight bodies (e.g., PCAOB) that might result if major audit errors remain undetected. While prior research has shown that this process is very effective, it is still a long way from being perfect, as a high portion of errors usually remains undetected as evidenced by continued inspection findings. This study suggests that an additional mechanism of uncovering audit errors, over and above the review process, is auditors’ self-discovery and internal reporting of such errors. Given staff auditors are likely to be tasked with activities that bring them frequently in contact with the working papers (whether electronic or paper based), enhancing their self-review and encouraging them to report any problems that they encounter may result in a greater ability of audit firms to detect errors in the working papers.

    This study investigates factors that may influence the willingness of staff auditors to report such discovered errors. Specifically, it is argued that the treatment of staff auditors who discover errors in the audit files by their superiors affects their willingness to report these errors. The way staff auditors are treated by their superiors is labeled as the audit office error management climate (EMC). EMC is the set of shared beliefs, norms, and common practices regarding the management of discovered errors and mistakes in an organization. The organizational literature distinguishes between two extremes of an EMC, a relatively more “open” one where error reports are used to enhance organizational learning and only repeated errors by individuals attract sanctions, versus a relatively more “blame” oriented climate that routinely sanctions the individual who commits an error. The following research questions are addressed in the study:

    • How does the individual audit office EMC affect the auditor reporting of discovered errors within the audit firm?
    • How does the effect of different audit office EMCs on the reporting of errors depend on
      • the type of error discovered (mechanical, e.g., arithmetic, vs. conceptual, e.g., omitting an important audit procedure) in the audit working papers, and
      • the error originator, that is, who committed the error, the discoverer him or herself or a peer? 
    Design/Method/ Approach:

    The experimental research evidence was collected in 2009. As part of series of experiment audit staff from several German audit firms took part in the research. The staff completed a simulated task involving the discovery of an error in the working papers after all detailed file reviews had been completed but before the auditor’s report was issued and the financial statements were released. Participants were asked to indicate how likely they were to report the discovered error to an appropriate responsible person for the audit engagement.

    Findings:
    • Generally, we find that an auditor’s willingness to report discovered errors is higher in an open error management climate (EMC) than in a blame EMC.
    • We also find that EMC mainly results in increases to the reporting of mechanical but not conceptual errors.
    • We further report EMC only increases peers’ errors reporting but this increase is up to the already high level of reporting for self-committed errors.
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    Investigating Inspection Risk: An Analysis of PCAOB...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs 
    Title:
    Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews
    Practical Implications:

    This paper complements and extends the limited extant research on inspection risk by clearly defining the construct and providing empirical evidence consistent with its existence and impact on auditors’ planning decisions. The authors contend that while auditors may perceive that PARs do not influence effort or fees, both PARs likely cause auditors, perhaps unconsciously, to increase effort and fees. 

    Citation:

    C. M. Stefaniak, R. W. Houston, and D. B. Brandon. 2017. Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews. Auditing: A Journal of Practice and Theory 36 (1): 151 – 168.

    Keywords:
    inspection risk, audit quality, PCAOB inspections, and internal quality reviews
    Purpose of the Study:

    The authors report the results of an experiment that examines how auditor anticipation of the two primary external and internal post-audit reviews (PAR), specifically, U.S. Public Company Accounting Oversight Board (PCAOB) inspections or public accounting firms’ internal quality reviews (IQRs), affects auditors’ perceptions of overall engagement risk, as well as effort and pricing decisions. The authors define inspection risk as “the risk that an auditor or audit firm will suffer harm as a result of a PAR.” Although the current PAR regime has been in place for over ten years, there is little empirical evidence concerning whether, and to what extent, anticipating a PAR impacts auditor behavior, and whether the effects of anticipating a PCAOB inspection or IQR differ. IQRs also remain largely uninvestigated, despite researchers beginning to investigate external PCAOB reviews. 

    Design/Method/ Approach:

    To investigate how PAR salience affects auditors’ judgments and decisions, the authors conduct a 1 x 3 between-subjects experiment using a number of high-level auditors as participants. They manipulate PAR salience as PCAOB inspection salient, IQR salient, or no explicit expectation of a PAR. 

    Findings:
    • The authors find that PAR salience yields greater perceived overall engagement risk, even after controlling for traditional engagement risk-related factors, implying that auditors perceive inspection risk as incremental to these factors.
      • In addition, increased PAR salience results in greater audit effort and fees, consistent with an inspection risk component.
    • The authors find that both PARS yield higher fees, with the higher fees attributable only to greater effort, rather than an “inspection risk premium.”
    • PCAOB inspection results are more visible than IQRs, and partners perceive that PCAOB inspections can yield greater negative consequences for themselves and their firms; therefore, the authors find that PCAOB inspection salience involves larger increases in perceived overall engagement risk and audit effort than does IQR salience.
      • However, the authors do not find differences in audit fees between PCAOB and IQR salience. 
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)

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