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    The Association between Audit-Partner Quality and Engagement...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
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    Title:
    The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements
    Practical Implications:

     This study provides useful insights into how audit-partner quality affects engagement-level quality and underscores the importance of audit-partner identification; furthermore, this study could lead to future research which can explore whether audit-partner quality affects the cost of equity and debt capital above and beyond audit-firm and audit-client characteristics with the hopes of deepening the understanding of auditor performance and the market perception of auditor reputation at the audit-partner level.

    Citation:

    Wang, Yanyan, Lisheng Yu, and Yuping Zhao. 2015. The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements. Auditing: A Journal of Practice and Theory 34 (3): 81-111.

    Keywords:
    Audit-partner quality, audit failure rate, audit quality control, restatements
    Purpose of the Study:

    This paper attempts to address two specific research questions in this paper:

     

    • Does audit-partner quality affect engagement-level audit quality?
    • How do engagement-team-level and audit-firm-level quality reviews moderate the influence of audit-partner on engagement-level quality?

    Most of the research that has been done on this subject focuses on firm-level or office-level audit quality; however, it is the opinion of the authors that both firm-level and office-level audit quality is driven by the quality of the engagements supervised by individual audit partners.  As a result, the authors decided to investigate just how integral of a role audit partners actually play in the engagement quality equation.  This research is especially interesting for the following reasons:

     

    • The complex nature of auditing implies that it is a judgment and decision-making process which is heavily affected by the characteristics of the person making the decisions.
    • Some insight will be shared on the current debate regarding mandatory disclosure of the engagement partner in the audit report.
    Design/Method/ Approach:

               The authors collected their evidence by merging data from the following sources for the period 2004-2009:

     

    • All available firm-year observations from the China Stock Market and Accounting Research database (CSMAR), which included financial and stock market data, audit opinions, and names of audit firms
    • All identities of the signing audit partners, obtained from CSMAR
    • All restatement announcements collected from annual report disclosures
    Findings:
    • The authors find that the probability of future restatements is higher for annual reports audited by audit partners with higher past-audit failure rates.
    • The authors find that engagement partners who actually conduct the audit have significantly greater influence on future restatement probability than review partners
    • The authors find that clients audited by high-quality audit firms are less likely to restate; however, older firms and firms with higher book-to-market ratio are more likely to restate current year annual reports.
    • The authors find that audit-firm-level quality control slightly attenuates the influence of review partners, but no quality control effectively weakens the influence of engagement partners.  Given that engagement partners play much more of a ro0le in the audit than the review partners, the findings fail to substantiate the mitigating effects of quality control.
    • The authors find that economic incentives amplify engagement partner’s influence on audit quality.
    Category:
    Audit Quality & Quality Control, International Matters
    Sub-category:
    Audit Partner Identification by Name, Engagement Quality Review – Processes & Effectiveness