Client Engagement Risks and the Auditor Search Period

2011 ◽  
Vol 25 (4) ◽  
pp. 685-702 ◽  
Author(s):  
Samer K. Khalil ◽  
Jeffrey R. Cohen ◽  
Kenneth B. Schwartz
Keyword(s):  
Internal Control ◽  
Financial Distress ◽  
Business Risk ◽  
Audit Risk ◽  
Industry Specialization ◽  
Client Engagement ◽  
Or Management ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
Internal Control Weaknesses

SYNOPSIS This paper investigates whether client engagement risks lengthen the client acceptance phase for audit firms and result in a longer auditor search period for their clients. Using a sample of auditor resignations over the period 2003–2008, we document that the auditor search period is longer for firms associated with client business risk (financial distress) and audit risk (internal control weaknesses or management integrity issues), while it is shorter for firms representing reduced auditor business risk (auditor industry specialization). These findings highlight the importance of client risk assessment and explain audit firms' response to perceived client risks.

Auditor Resignations and Auditor Industry Specialization

2008 ◽  
Vol 22 (3) ◽  
pp. 279-295 ◽  
Author(s):  
William J. Cenker ◽  
Albert L. Nagy
Keyword(s):  
Audit Quality ◽  
Local Level ◽  
Primary Analysis ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Audit Firms ◽  
Logistic Regressions ◽  
Auditor Specialization ◽  
Local Levels

SYNOPSIS: The increase of Big 4 auditor resignations in the newly regulated auditing environment creates a rich setting to examine the supply-side effects of auditor industry specialization. The authors estimate logistic regressions to examine whether audit firms consider industry specialization at both the local and national levels when deciding on whether to retain or resign from audit clients. The results show a negative relation between auditor industry specialization and auditor resignations when the auditor is a joint specialist (i.e., a specialist at both the national and local levels) and when the auditor is a local specialist only (i.e., a local specialist but not a national specialist). The national specialization alone variable (i.e., the auditor is a national specialist but not a local specialist) is not significant for our primary analysis; however, additional analyses reveal that the significance of this variable varies when incorporating alternative measurements for auditor specialization in the models. Thus, the overall evidence of the national specialization effect on the auditor’s resignation decision is mixed and inconclusive at this point. Based on the additional analyses, the joint and the local specialization effects generally appear to be robust. As such, we conclude that auditors perceive their firms’ industry expertise, particularly at the local level, as reducing both clientele mismatch and litigation risks, and hence improving audit quality.

scholarly journals An Account Analysis Of PCAOB Inspection Reports For Triennially-Inspected Audit Firms

2011 ◽  
Vol 9 (3) ◽  
Author(s):  
Mark Landis ◽  
Scott I. Jerris ◽  
Mike Braswell
Keyword(s):  
Audit Quality ◽  
Audit Risk ◽  
Business Combinations ◽  
Client Engagement ◽  
Audit Failure ◽  
Business Transactions ◽  
Cpa Firms ◽  
Audit Firms ◽  
Public Company ◽  
Primary Type

Since 2005, the PCAOB (Public Company Accounting Oversight Board) has been issuing inspection reports for triennially-inspected audit firms as part of its overall mission to improve audit quality. This study analyzes the findings in the PCAOB inspection reports by classifying the audit deficiencies cited in the reports by area of deficiency and type of audit failure. CPA firms can utilize these findings in their efforts to reduce client engagement audit risk. The results indicate that the overall number of cited deficiencies is declining each year, revenue and asset accounts are the most frequently cited accounts, business combinations and equity transactions are the most cited transactions, and insufficient testing or documentation is the primary type of audit failure. We also document that most departures from GAAP occur in the accounting for business transactions or in liability accounts.

scholarly journals Constructing the Audit Risk Assessment by the Audit Team Leader When Planning: Using Fuzzy Theory

Mathematics ◽  
2021 ◽  
Vol 9 (23) ◽  
pp. 3065
Author(s):  
Luis Porcuna-Enguix ◽  
Elisabeth Bustos-Contell ◽  
José Serrano-Madrid ◽  
Gregorio Labatut-Serer
Keyword(s):  
Risk Assessment ◽  
Internal Control ◽  
Fuzzy Theory ◽  
Team Leader ◽  
Audit Risk ◽  
Audit Firms ◽  
Private Data ◽  
Raising Awareness ◽  
Core Conditions ◽  
Audit Team

The aim of this study is to construct the assessment of the expected audit risk by the audit team leader (ATL) during the planification phase of the audit. The ATL plays an important role within the audit, and even more so regarding small and medium-sized (SME) audit firms. The audit risk assessment is critical as relying more (less) on internal controls implemented by the client leads to performing less (more) substantive audit procedures. This is determined by the ATL based on their professional judgement and previous experience. The use of fuzzy theory has powerful potential into the audit arena, as the audit risk assessment (outcome) is critically related to the auditors’ judgement and perception. We argue that ATL characteristics are core conditions in determining the audit risk assessment when planning. Using hand-collected and private data from Spanish SME audit firms, we find that a comprehensive set of conditions must be given for perceived high audit risk. The results indicate that female and inexperienced ATLs planning the audit of indebted firms with high proportions of capital assets, less profitability, and with a larger board sizes, as they are expected to have bad internal control. The same conditions are met when expecting errors, as well as shorter audit tenures. Finally, conditions such as the ATL’s experience gains importance in expecting irregularities. This paper extends our understanding of the role of ATL characteristics on the audit risk assessment when planning and raising awareness on studying SME audit firm behavior.

Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation

2000 ◽  
Vol 19 (1) ◽  
pp. 1-25 ◽  
Author(s):  
Karla M. Johnstone
Keyword(s):  
Internal Control ◽  
Risk Evaluation ◽  
Business Risk ◽  
Audit Risk ◽  
Audit Firm ◽  
Risk Characteristics ◽  
Audit Fee ◽  
Audit Evidence ◽  
Client Acceptance ◽  
Client Acceptance Decision

Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firm's risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process. To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement. In terms of risk adaptation, partners screened clients based on the clients' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactive risk-adaptation strategies (e.g., adjusting the audit fee, making plans about necessary audit evidence, etc.) to make less “acceptable” clients more acceptable. It appears that avoiding risk, rather than proactively adapting to risk, is descriptive of how audit partners currently make the client-acceptance decision.

Auditor Industry Specialization, Auditor Changes, and Accounting Restatements

2008 ◽  
Vol 22 (4) ◽  
pp. 389-413 ◽  
Author(s):  
Robin N. Romanus ◽  
John J. Maher ◽  
Damon M. Fleming
Keyword(s):  
Financial Reporting ◽  
Error Detection ◽  
Financial Statement ◽  
Corporate Boards ◽  
Accounting Restatements ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
The Impact

SYNOPSIS: The increasing occurrence of accounting restatements has drawn considerable attention from regulators, audit firms, and corporate boards concerning audit and financial statement quality. Research suggests that auditor industry specialization is associated with improved error detection and greater financial statement quality. We examine the impact of auditor industry specialization on a sample of restatement and nonrestatement firms and find that auditor industry specialization is negatively associated with the likelihood of accounting restatement. In addition, focusing on the subset of restatement firms, we find that auditor industry specialization reduces the likelihood of issuing restatements affecting core operating accounts, suggesting that industry specialization adds value in auditing a particularly critical area of the firms’ continuing operations. Finally, we find changing from a nonspecialist to a specialist auditor increases the likelihood of restatement, and changing from a specialist to a nonspecialist reduces the likelihood of restatement. Our findings are consistent with industry specialization enhancing auditors’ role in improving the quality of the financial reporting process, particularly related to the core operations of their clients.

Auditor Differentiation, Mitigating Management Actions, and Audit-Reporting Accuracy for Distressed Firms

2011 ◽  
Vol 30 (1) ◽  
pp. 1-20 ◽  
Author(s):  
Liesbeth Bruynseels ◽  
W. Robert Knechel ◽  
Marleen Willekens
Keyword(s):  
Financial Distress ◽  
Manufacturing Industries ◽  
Short Term ◽  
Industry Specialization ◽  
Reporting Accuracy ◽  
Going Concern ◽  
Management Actions ◽  
Audit Firms ◽  
Going Concern Opinion ◽  
Distressed Firms

SUMMARY: In this paper we examine whether there is auditor differentiation through industry specialization and audit methodology in judging the adequacy of mitigating management actions as implemented by financially distressed companies. Using a sample of U.S. companies from manufacturing industries (SIC 20–39) that went bankrupt between 1999–2002, we find evidence that specialist auditors are more likely to issue a going-concern opinion for soon-to-be bankrupt companies when management undertakes strategic turnaround initiatives, relative to non-specialist auditors. Interestingly, and counter to our expectations, we find that audit firms that use a business risk audit methodology are less likely to issue a going-concern opinion for a firm that subsequently goes bankrupt if the client has undertaken operating initiatives to mitigate financial distress. Finally, we also find very strong evidence that all auditors, irrespective of type, are less likely to issue a going-concern opinion for clients that subsequently go bankrupt when the client has plans to raise cash in the short term.

Accruals intensity and auditor choice

2019 ◽  
Vol 27 (3) ◽  
pp. 444-463
Author(s):  
Wael Aguir ◽  
Linxiao Liu ◽  
Emeka Nwaeze
Keyword(s):  
Financial Reporting ◽  
Industry Specialization ◽  
Content Type ◽  
Auditor Choice ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
The Relationship ◽  
The City ◽  
Industry Specialist

Purpose The purpose of this paper is to examine the relationship between the intensity of accruals and auditor industry specialization. It investigates whether a client firm’s accruals intensity is a factor associated with the firm being audited by an industry specialist auditor. Design/methodology/approach This paper employs an empirical archival methodology using publicly available data. The sample consists of client firms that switched auditors from 2004 to 2014. Findings The results show that accruals intensity is positively associated with the choice of an industry specialist auditor, measured both at the national and the city levels. These findings imply that companies with high levels of accruals choose an industry specialist auditor to signal the quality of their accruals and to gain more credibility for their financial reporting. Originality/value This paper provides original empirical evidence of the association between accruals intensity and the choice of an industry specialist auditor. This link is new to the literature. Extant literature shows that firms with high levels of accruals are regarded as risky and suffer from reduced credibility in financial markets. This study contributes to the literature by showing that these firms choose an industry specialist auditor to alleviate investors’ credibility concerns about the high levels of accruals. These findings provide insightful information to audit firms, to managers of firms that inherently display high levels of accruals and to the capital markets participants in general.

scholarly journals Engagement Risk: Perceptions And Strategies From Audit Partners

2011 ◽  
Vol 5 (4) ◽  
Author(s):  
Jack R. Ethridge ◽  
Treba Marsh ◽  
Bonnie Revelt
Keyword(s):  
Risk Perceptions ◽  
Moderate Degree ◽  
Fraud Triangle ◽  
Business Risk ◽  
Financial Loss ◽  
Audit Risk ◽  
Audit Firm ◽  
General Management ◽  
Audit Firms ◽  
Potential Damage

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The audit function creates several important relationships among the various parties.<span style="mso-spacerun: yes;">&nbsp; </span>One of the significant and potentially problematic relationships is between the audit firm and the audit client.<span style="mso-spacerun: yes;">&nbsp; </span>The decision by the audit firm to accept or retain a client is crucial because of the potential risk of being associated with certain clients. The potential damage can range from financial loss and/or loss of prestige to the ultimate demise of the audit firm.<span style="mso-spacerun: yes;">&nbsp; </span>Engagement risk is considered to be composed of three components: entity&rsquo;s business risk, audit risk, and auditor&rsquo;s business risk. This research questioned whether audit firms have significantly changed their views regarding engagement risk and how they evaluate and manage this risk.<span style="mso-spacerun: yes;">&nbsp; </span>An analysis of the surveys revealed that 83% of the respondents believed their views regarding the importance of engagement risk have changed, but only to a moderate degree.<span style="mso-spacerun: yes;">&nbsp; </span>In evaluating engagement risk, audit partners considered management integrity in general, management integrity toward fraud, and the presence of the elements of the fraud triangle to be the most important factors. Assignment of more experienced audit staff and increased substantive tests of account balances were the most frequently used mitigating strategies.<span style="mso-spacerun: yes;">&nbsp; </span>Based upon these results, which were consistent with our previous study, it appears there have not been significant changes in audit partners&rsquo; views regarding the importance of the client acceptance/retention decision.<span style="mso-spacerun: yes;">&nbsp; </span><span style="mso-spacerun: yes;">&nbsp;</span></span></span></p>

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