Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The Impact of Client and Misstatement Characteristics on The...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.08 Evaluation of Errors – Statistical and Non-statistical 
    135 Views
    Title:
    The Impact of Client and Misstatement Characteristics on The Disposition of Proposed Audit Adjustments
    Practical Implications:

    The findings suggest that the frequency of waived audit adjustments dramatically declined right after accounting scandals and passage of the Sarbanes-Oxley Act, suggesting the regulatory environment led to changes in auditor-client resolution of proposed adjustments. Further, repeat adjustments are often waived, perhaps because this sets a precedent making it difficult to withstand client objections.  Finally, auditors are more likely to waive reclassification entries than those impacting income, suggesting an implicit belief that these types of adjustments are less important to users even though reclassifications could impact various widely used ratios.

    For more information on this study, please contact Jennifer Joe.

    Citation:

    Joe, J., Wright, A., and S. Wright. 2011. The Impact of Changes in the Reporting Environment and Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments. Auditing: A Journal of Practice & Theory (May): 103-124.

    Keywords:
    Proposed adjustments; waiving audit adjustments; auditor-client relationship; resolution of audit adjustments.
    Purpose of the Study:

    We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several US financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX).  During this period auditors and their clients faced increased scrutiny from investors and regulators.  In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB) and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments including the effect of client tenure, strength of internal controls, and repeat adjustments. 

    Design/Method/ Approach:

    Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. The desired data are abstracted directly from the working papers by a partner or manager through an instrument. 

    Findings:

    We find that 24.2% of proposed adjustments were subsequently waived. Audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. 

    Category:
    Auditor Judgment
    Sub-category:
    Evaluation of Errors - Statistical and Non-statistical