International Journal of Auditing

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 1090-6738

Issue Number

No. 28-1, January 2024

Latest documents

Issue Information
No abstract is available for this article.
Compromising your morals: The perils of new beginnings as an auditor
This real‐world inspired case describes an ethical dilemma for a recently hired auditor and new Certified Public Accountant (CPA)/Associate Chartered Accountant (ACA) who must choose between cheating on a mandatory firm audit training and exam and suffering the possibility of negatively affecting her advancement with the firm and future compensation. The purpose of this case is to provide students the opportunity to identify an ethical dilemma, apply accounting ethics codes to evaluate potential responses and recommend an ethical course of action. Students completing this case will (1) understand the common pressures and complexities associated with an ethical dilemma; (2) be exposed to the American Institute of Certified Public Accountants' (AICPA Code) Code of Professional Conduct and the International Ethics Standards Board (IESBA Code) International Code of Ethics for Professional Accountants; (3) apply knowledge of the AICPA Ethics Decision Tree to a real‐world inspired ethical dilemma; (4) evaluate and analyse the various courses of action to an ethical dilemma; and (5) demonstrate the impact tone at the top and organizational culture have on employees and the firm. The case was very effective in exposing and enhancing student's overall knowledge 4.28 (σ = 0.57) and application 4.28 (σ = 0.65) of the AICPA Code.
CEO locality and audit fees
Recent literature suggests that compared to non‐local CEOs, local CEOs care more about reputation capital and hence exhibit a longer‐term orientation. Building on this literature, we address the audit pricing of CEO locality. Our empirical analyses reveal that audit fees for firms with local CEOs are lower than those for firms without local CEOs, suggesting a lower audit risk associated with local CEO clients. Seeking the underlying reasons, we indeed find that both client business risk and misreporting risk are lower for firms with local CEOs. Our results are robust to using the matched sample, controlling for potentially correlated variables, change analyses and other alternative specifications. We add to a maturing stream of auditing literature that CEOs' individual traits affect audit pricing.
Are abnormal audit fees informative about audit quality? The moderating role of office resource availability
We contribute to the literature on the relation between client‐level abnormal (excess) audit fees and audit quality by offering a novel perspective. We posit that audit office‐level resource availability moderates the relation between client‐level audit fees and audit quality. This is because office‐level resources (audit partners, staff, technology and administrative support) are generally shared across engagements and can augment those engagements that are resource constrained. We first provide evidence that office‐level resource availability is informative about audit quality incremental to client‐level abnormal fees and several other client and auditor characteristics, including office size. More importantly, we find that client‐level abnormal fees are informative about audit quality only for audit offices that are resource‐constrained but not for offices that are not resource‐constrained.
Managerial litigation risk and auditor choice
Our study investigates the causal relationship between managerial litigation risk and auditor choice decisions. Exploiting the staggered adoption of universal demand (UD) laws at the state level in the United States, we use a stacked regression approach and find a lower propensity for affected firms to switch to higher‐quality auditors after the exogenous reduction of managerial litigation risk. This result supports the managerial entrenchment hypothesis that lower litigation risk leads to more managerial entrenchment, which allows managers to be opaque in order to enjoy private benefits. This negative effect is mitigated for firms with more audit committee industry expertise and for firms that are more reliant on external finance. Our study contributes to our understanding of how regulatory changes that have an impact on agency problems affect firms' demand for auditing.
Quo vadis, internal auditing? A vision for internal auditing in 2030
We aim to respond to calls in internal auditing (IA) literature and to the current changes in the IA field by describing the driving forces and vision of the future for IA in the year 2030. [Correction added on 24 August 2023, after first online publication: The definition of IA in the preceding sentence has been corrected in this version.] The goal was to prompt in‐depth discussion informed by the divergent views of experts. As a contribution, we identify three key driving forces: prolific data and its application, globalization and new value chains between organizations. Further, the study reports a vision for the future of IA. By surveying a wide range of stakeholders, including the board, management, internal auditors, teachers and a legislator, we expand on the views in earlier literature regarding IA, IA developments and the application of Delphi argument analysis in voluntary IA context. The findings are of value in researching, planning, educating and developing IA activities to understand where IA is going and where divergences among stakeholders arise.
Auditors' interpretation of risk and the quality of analysts' earnings forecasts: Evidence from textual analysis of key audit matters
This study examines the impact of key audit matters (KAMs) on the quality of analysts' earnings forecasts in the emerging Chinese market. The nature of KAMs is auditors' interpretations of the risk of material misstatements. Based on a quasi‐natural experimental environment created by the phased adoption of communicating KAMs in the emerging Chinese market, we find that communicating KAMs can improve the quality of analysts' earnings forecasts by increasing forecast accuracy and decreasing dispersion. We also find that the extent of auditors' interpretations of the risk of material misstatements is positively related to the quality of analysts' earnings forecasts. The positive relationship between the extent of auditors' interpretations of the risk of material misstatements and the quality of analysts' earnings forecasts is more pronounced for firms with less information transparency and less skilled analysts.
Relational contracting theory and internal audit: Chief audit executives' perspectives on creating and strengthening trust by building credibility and clarity
Using the lens of relational contracting, we examine internal auditors' efforts in building a relationship of trust with management within the context of operational audits. We gain insights into the day‐to‐day practices of internal auditors by interviewing 28 chief audit executives of internal audit departments across Australia and find that internal auditors undertake numerous measures to demonstrate credibility and provide clarity on their intentions in an attempt to gain managements' respect and confidence. However, we also find that some of the measures auditors undertake in a defensive corporate culture support the notion of ‘trust begets trust’. Consequently, such measures may not only assist in establishing a relational contract with management but also highlight the potential risks to internal auditor independence.
Audit market concentration, legal regime, and audit fees: An international investigation
Despite regulators' on‐going concerns on the high concentration of the current audit market, the effects of concentration on auditors' behavior is still debated. We provide an answer to this unresolved issue by considering the role of legal regime in shaping auditors' pricing strategy in a concentrated market. Using data from 33 countries, we find no significant association between audit market concentration and audit fees in the pooled international sample. However, a country's legal regime changes this association dramatically: the association is significantly positive in countries with a weak legal regime but becomes weaker and eventually turns negative as countries' legal regime becomes stronger. Our study highlights the importance of country‐level institutions in determining how market structure affects market participants' behavior.
Engagement partner identification format and audit quality
Exploiting the staggered adoption of three key regulations that implemented distinct engagement partner identification (EPI) formats for separate groups of Canadian firms over a 10‐year period, we investigate the association between eight audit quality proxies and three EPI formats: two indirect (auditor permit number in the report, Form AP) and one direct (partner name in the report). This unique setting not only enables us to examine the short‐term association between three different EPI formats and audit quality but also to investigate the long‐term association for one EPI format (auditor permit number). In the main analysis, out of 32 results of interest, only three are significant and indicate a positive association. Hence, our results show no widespread effect of EPI on audit quality, suggesting that the inconsistent results reported in prior studies may not be driven by the different formats explored or the short window investigated.