On Controlling for Misstatement Risk

2021 ◽  
Author(s):  
James R Moon ◽  
Jonathan E Shipman ◽  
Quinn T Swanquist ◽  
Robert L. Whited
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Future Research ◽  
Coefficient Estimates ◽  
Recent Approach ◽  
Material Weaknesses ◽  
Ex Ante ◽  
Alternative Approaches

Ex ante misstatement risk confounds most settings relying on misstatements as a measure of audit quality, but researchers continue to debate how to effectively control for this construct. In this study, we consider a recent approach that involves controlling for prior period misstatements (“Lagged Misstatements”). Using a controlled simulation and a basic archival analysis, we show that a lagged misstatement control can significantly bias coefficient estimates. We demonstrate this bias using audit fees as a variable of interest but also show the same issue manifests for other measures that respond to the restatement of misstated financial statements (i.e., internal control material weaknesses and auditor changes). We conclude by discussing alternative approaches for controlling for ex ante misstatement risk and providing guidance for future research.

Audit Fees after Remediation of Internal Control Weaknesses

2011 ◽  
Vol 25 (1) ◽  
pp. 87-105 ◽  
Author(s):  
Vishal Munsif ◽  
K. Raghunandan ◽  
Dasaratha V. Rama ◽  
Meghna Singhvi
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Future Research ◽  
First Year ◽  
Section 404 ◽  
The Third ◽  
Material Weaknesses ◽  
Audit Fee

SYNOPSIS: In this study, we examine audit fees for SEC registrants that remediate previously disclosed material weaknesses in internal control. We find that remediating firms have lower audit fees when compared to firms that continue to report material weaknesses in internal control. However, the remediating firms continue to pay, in the year of remediation as well as one and two years subsequent to remediation, a significant audit fee premium compared to firms that have clean Section 404 reports in each of the first four years. Firms that had an adverse Section 404 report only in the first year, but remediated the problems in year two and had clean Section 404 reports in years three and four, pay an audit fee premium of 32 (21) percent in the third (fourth) year when compared to firms that had clean Section 404 reports in each of the first four years. The results, thus, suggest that audit fees are “sticky” for firms that have material weaknesses in internal controls over financial reporting, and suggest some interesting questions for future research.

scholarly journals Audit Quality and Disclosures of Less-Experienced Participating Audit Firms in PCAOB Filings

2020 ◽  
Vol 14 (2) ◽  
pp. P1-P8
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Future Research ◽  
Subsequent Increase ◽  
Market Prices ◽  
Quarterly Earnings ◽  
Audit Firms ◽  
Reported Earnings ◽  
The Universe

SUMMARY In “Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings” (Dee, Lulseged, and Zhang 2015), we examine quality for issuer audits disclosed as involving less-experienced “participating auditors.” We find that market prices of these issuers reacted negatively at the time of disclosure, and investors' valuations of their post-disclosure quarterly earnings declined; investors have greater uncertainty in the numbers reported. In addition, the quality of the reported earnings is lower. However, we do not see a subsequent increase in audit fees, which suggests clients do not increase demands for higher quality to counteract the uncertainty in investors' perceptions of audit quality. Since our sample is limited to less-experienced participating auditors, the results are not readily generalizable to the universe of participating auditors. Future research using Form AP data can explore if our findings are generalizable to issuer audits involving the wider population of participating auditors.

The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence

2021 ◽  
Author(s):  
Dereck Barr-Pulliam ◽  
Helen L Brown-Liburd ◽  
Kerri-Ann Sanderson
Keyword(s):  
Quality Assurance ◽  
Internal Control ◽  
Data Analytics ◽  
Audit Quality ◽  
Financial Statements ◽  
Entire Population ◽  
Statistical Sampling ◽  
Testing Methods ◽  
Audit Failure ◽  
Audit Data

Audit data analytics (ADAs) allow auditors to analyze the entire population of transactions which has measurable benefits for audit quality. However, auditors caution that the level of assurance on the financial statements is not incrementally increased. We examine whether the testing methodology and the type of ICFR opinion issued affect jurors' perceptions of auditor negligence. We predict and find that when auditors issue an unqualified ICFR opinion, jurors make higher negligence assessments when auditors employ statistical sampling than when they employ ADAs. Further, when auditors issue an adverse ICFR opinion, jurors attribute less blame to auditors and more blame to the investor for an audit failure. Additionally, jurors perceive the use of ADAs as an indicator of higher audit quality and are less likely to find auditors negligent. However, jurors do not perceive a difference in the level of assurance provided when auditors use ADAs versus sampling testing methods.

The Failure to Remediate Previously Disclosed Material Weaknesses in Internal Controls

2012 ◽  
Vol 31 (2) ◽  
pp. 73-111 ◽  
Author(s):  
Jacqueline S. Hammersley ◽  
Linda A. Myers ◽  
Jian Zhou
Keyword(s):  
Interest Rates ◽  
Control Systems ◽  
Internal Control ◽  
Credit Rating ◽  
Control Sample ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Committees ◽  
Annual Reports ◽  
Material Weaknesses

SUMMARY In this paper, we study a sample of companies that fail to remediate previously disclosed material weaknesses (MWs) in their internal control systems and, thus, disclose the same MWs in two consecutive annual reports. Their failure to remediate is surprising given that regulators, credit rating agencies, and academics contend that the remediation of MWs is important. We form a control sample of companies that initially disclosed MWs in their internal control systems, but subsequently remediated these weaknesses, and investigate the characteristics of the remediated and unremediated MWs, the characteristics of remediating versus non-remediating companies, and the consequences to non-remediating companies. Regarding the characteristics of companies failing to remediate, we find that companies are less likely to remediate previously disclosed MWs when the weaknesses are more pervasive (i.e., when they are described as at the entity level, when there are more individual weaknesses) and when their operations are more complex (i.e., they have more segments and have foreign operations). In addition, companies with smaller audit committees are less likely to remediate. Regarding the consequences, we find that companies failing to remediate MWs experience larger increases in audit fees and a higher likelihood of auditor resignation as the number of MWs increases. We also find that non-remediating companies are more likely to receive modified audit opinions and going-concern opinions. Finally, we find that companies failing to remediate are more likely to miss filing deadlines and experience increased cost of debt capital (i.e., they receive poorer credit ratings when entity level MWs are present, and are charged higher interest rates). Data Availability: Data are publicly available from sources identified in the text.

scholarly journals Audit Fees and Financial Performance of Deposit Taking Saccos in North RIFT, Kenya

2020 ◽  
Vol 6 (5) ◽  
pp. 15-27
Author(s):  
Dorris Serem ◽  
Dr. Rashid Fwamba ◽  
Dr. Alala Benedict
Keyword(s):  
Financial Performance ◽  
Audit Quality ◽  
Secondary Data ◽  
Financial Statements ◽  
Audit Fees ◽  
Positive Influence ◽  
Auditor Independence ◽  
Audit Firm ◽  
Firm Experience ◽  
The Impact

The collapse of Deposit-Taking SACCOS and financial institutions in Kenya has caught the attention of the public and supervisory agencies to query the quality of audit. SACCO Societies Regulatory Authority on its inspection report indicated that SACCOs have been implicated in maladministration, scams and fraudulent dealings that led to their eventual collapse. SASRA also revoked licenses and rejected audited financial statements of some Deposit Taking SACCOs between 2013 to 2017.These financial scandals have been traced to poor audit quality. The study aimed to test the impact of audit quality on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. The study sought to establish the influence of audit fees on financial performance; determine the influence of audit firm tenure on financial performance; establish the influence of auditor independence on financial performance and to determine the influence of audit firm experience on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. This study was based on Agency theory, Role theory and the Concept of audit expectation gap, and Stakeholders’ theory. This research adopted descriptive cross-sectional research design. The target population for the study was 266 staff of all the 16 registered Deposit-Taking SACCOs in North Rift Region, Kenya. The sample size was 48 respondents comprising of chief executive officers, finance officers and internal auditors of the Deposit-Taking SACCOs selected using purposive sampling method. Primary and secondary data was used. Questionnaires collected primary data while audited annual financial statements of SACCOs provided secondary data. Inferential and descriptive statistics was used in analyzing data through SPSS version 25. It emerged that audit fees, audit firm tenure and audit firm experience have a significant positive influence on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. Auditor independence had an insignificant positive influence on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. The study concluded that audit quality has a positive noteworthy impact on financial performance of Deposit-Taking SACCOs in Kenya. The study recommends that regulatory authorities should formulate strict rules on audit fee charges and oversee the implementation of the same. Also, SASRA should ensure DT-SACCOs implement auditor rotation in compliance with auditing regulations and standards. DT-SACCOs to consider auditor’s professional competence and experience before initiating any audit engagement. Finally, DT-SACCOs and auditors should reinforce the professional code of ethics in regard to auditor independence in terms of familiarity between auditor and the client that may lead audit work into jeopardy.

Do abnormal IPO audit fees signal IPO audit quality and post-IPO performance? A principal-agent analysis based on evidence from China.

2020 ◽  
Author(s):  
K. Hung Chan ◽  
Phyllis L. L. Mo ◽  
Weiyin Zhang
Keyword(s):  
Financial Performance ◽  
Agency Theory ◽  
Initial Public Offering ◽  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Main Interest ◽  
Ipo Performance ◽  
Market Participants ◽  
Public Offering

We assess the unexplained information content of abnormal audit fees using a sample of initial public offering (IPO) audits in China. We find that abnormal IPO audit fees are positively associated with manipulation of pre-IPO real activities, suggesting lower audit quality for IPO financial statements. We further find that abnormal IPO audit fees are negatively associated with post-IPO financial performance. These results suggest a strong alignment of interests between the principal (pre-IPO shareholders), whose main interest is to gain listing status, and its agent (the auditor), who is willing to cooperate with the principal for extra economic rents (abnormal audit fees). Our findings that abnormal IPO audit fees are associated with lower audit quality and can help predict post-IPO financial performance have important implications for audit regulators, IPO market participants, and the applicability of agency theory in the context of IPO audits.

An Understanding of the Differences between Internal and External Auditors in Obtaining Information about Internal Control Weaknesses

2016 ◽  
Vol 28 (3) ◽  
pp. 83-99 ◽  
Author(s):  
Ian Burt
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Relevant Information ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Organizational Silence ◽  
Internal Control Weaknesses ◽  
External Auditor

ABSTRACT The Institute of Internal Auditors (IIA) argues that internal auditors often have a strong “employee” identity within their organization. While external auditors are concerned that this employee identity might negatively impact internal auditors' objectivity, the IIA argues this identity can actually be beneficial as employees may be more willing to share sensitive and audit-relevant information with the internal auditor than they would with the external auditor. Through an experiment relying on the social identity and organizational silence literatures, I test the prediction that non-audit employees will identify more highly with the internal than the external auditor and they will thus, be willing to share more information about internal control weaknesses with the internal than the external auditor. The results from a moderated mediation analysis support this prediction and also show the effect is stronger as the severity of the internal control weakness increases. Overall, this research informs external auditors and regulators about conditions under which the internal auditor may have an advantage over the external auditor in obtaining information that could help improve audit quality. It also informs managers about an important role played by their internal auditors that may result in increased quality of the internal control system while also potentially lowering audit fees.

Assessment of the quality of the audits of Vietnamese commercial banks financial statements

2021 ◽  
pp. 232-238
Author(s):  
Thi Thu Ha Le ◽  
Thanh Thuy Pham
Keyword(s):  
Quality Control ◽  
Internal Control ◽  
Commercial Banks ◽  
Audit Quality ◽  
Financial Statements ◽  
Base System ◽  
Internal Control System ◽  
Level Of Knowledge ◽  
Audit Reports

The aim of the research is to assess the quality of the audits of Vietnamese commercial banks’ fi nancial statements in recent years. Two audit quality indicators are used in the assessment: fi rstly, the quality of the audit reports and the audited fi nancial statements; and secondly, the quality of the factors aff ecting audit quality. One of the factors aff ecting audit quality the characteristic of audit organizations such as the scale of the organizations, the level of knowledge in the fi eld of banking audit, Qualifi cations and experience of auditors, Independence of the auditor and the audit organization, Cost of the audit, Audit procedures, Audit quality control. Other factors are quality control of audit of fi nancial statement of commercial banks; communication between banking supervisors; legislative base (system of accounting standards, standards on auditing); and the eff ectiveness of the internal control system (ICS) of commercial banks. To study and assess the quality of the audits of commercial banks’ fi nancial statements, the authors conducted questionnaires, interviews on audit and study of audited accounting (fi nancial) statements. The result of the research indicates that the audits of Vietnamese commercial banks’ fi nancial statements have basically met the quality required by the current auditing standards. However, there are still some shortcomings in audit methodology and procedures, audit reports and audited fi nancial statements. The authors also suggest some measures to the audit fi rms and government bodies to improve the audit quality.

scholarly journals Examining the Potential Benefits of Internal Control Monitoring Technology

2010 ◽  
Vol 85 (3) ◽  
pp. 1001-1034 ◽  
Author(s):  
Adi Masli ◽  
Gary F. Peters ◽  
Vernon J. Richardson ◽  
Juan Manuel Sanchez
Keyword(s):  
Internal Control ◽  
Continuous Monitoring ◽  
Audit Fees ◽  
Monitoring Technology ◽  
Technology Governance ◽  
Sarbanes Oxley ◽  
Information Technology Governance ◽  
Time Period ◽  
Material Weaknesses ◽  
Potential Benefits

ABSTRACT: We analyze the potential benefits that firms can realize from implementing technology specifically aimed at monitoring the effectiveness of their internal control systems. The Committee of Sponsoring Organizations of the Treadway Commission asserts that effective internal control monitoring should enhance the efficiency of internal control processes, and, in turn, the assurance over such processes (COSO 2009a). We develop hypotheses to test the realization of these potential benefits. Specifically, we identify a sample of firms that implemented internal control monitoring technology in response to the internal control requirements of the Sarbanes-Oxley Act. Consistent with our hypotheses, we document that the implementation of internal control monitoring technology is associated with lower likelihood of material weaknesses, smaller increases in audit fees, and smaller increases in audit delays during the post-SOX time period. We discuss the potential implications of our findings for research related to continuous monitoring, client-provided assurance assistance, and information technology governance.

Abnormal Audit Fees and Restatements

2012 ◽  
Vol 31 (1) ◽  
pp. 79-96 ◽  
Author(s):  
Alan I. Blankley ◽  
David N. Hurtt ◽  
Jason E. MacGregor
Keyword(s):  
Internal Control ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Prior Work ◽  
Audit Risk ◽  
Negatively Associated ◽  
Control Quality ◽  
Sarbanes Oxley ◽  
The Relationship

SUMMARY We investigate the relationship between audit fees and subsequent financial statement restatements in the years following the Sarbanes-Oxley Act of 2002 (SOX). After controlling for internal control quality, we find that abnormal audit fees are negatively associated with the likelihood that financial statements are subsequently restated. This result conflicts with prior work that finds that audit fees are positively associated with future restatements. Overall, our evidence is consistent with the notion that restatements reflect low audit effort or underestimated audit risk in the periods leading up to the restatement year.

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