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.

scholarly journals Pengaruh Risiko Perikatan Terhadap Keputusan Penerimaan Klien

2019 ◽  
Vol 20 (2) ◽  
pp. 219-227
Author(s):  
Andriadi Fauzi Ramdhani
Keyword(s):  
Multiple Regression ◽  
Business Risk ◽  
Audit Risk ◽  
The Public ◽  
Multiple Regression Technique ◽  
Client Acceptance ◽  
The Impact ◽  
Analyze Data ◽  
Public Accountant ◽  
Client Acceptance Decision

Abstrak. Penelitian ini bermaksud untuk menguji pengaruh risiko bisnis klien, risiko audit, dan risiko bisnis auditor secara parsial dan simultan terhadap keputusan penerimaan klien pada kantor akuntan publik. Penelitian ini menggunakan data primer yang diperoleh menggunakan kuisioner sebagai instrumen pengumpulan data. Setiap partner atau manajer mewakili kantor akuntan publik tempatnya bekerja untuk mengisi kuisioner. Populasi pada penelitian ini adalah kantor akuntan publik di Kota Bandung. Adapun sampel yang digunakan dalam penelitian ini adalah sampling jenuh. Analisis data menggunakan  analisis regresi linier berganda. Hasil pengujian menunjukkan, risiko bisnis klien tidak berpengaruh secara signifikan terhadap keputusan penerimaan klien. Sedangkan, risiko audit dan risiko bisnis auditor berpengaruh signifikan terhadap keputusan penerimaan klien. Secara simultan risiko bisnis klien, risiko audit, dan risiko bisnis auditor berpengaruh signifikan terhadap keputusan penerimaan klien. Kata Kunci: Risiko Bisnis Klien, Risiko Audit, Risiko Bisnis Auditor, Keputusan Penerimaan Klien  Abstract. This study aims to determine the impact of client business risk, audit risk, and auditor business risk on acceptance decision at the public accountant firm in Bandung. The method used in the research was analytical descriptive in which the researcher used questionnaires to collect data and Multiple regression technique to analyze data. The results show that business client’s is not affect on client acceptance decision. But, audit risk and auditor’s business risk significantly affect on client acceptance decision. While simultaneous client’s business risk, audit risk, and auditor business risk significantly affect client acceptance decision.  Keywords : Client Business Risk, Audit Risk, Auditor Business Risk, Client Acceptance Decision.

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.

The impact of non-timely 10-Q filings and audit firm size on audit fees

2018 ◽  
Vol 33 (5) ◽  
pp. 503-516 ◽  
Author(s):  
Tiffany Chiu ◽  
Feiqi Huang ◽  
Yue Liu ◽  
Miklos A. Vasarhelyi
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Audit Fees ◽  
Audit Risk ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

Do Approaching Deadlines Influence Auditors' Materiality Assessments?

2017 ◽  
Vol 36 (4) ◽  
pp. 29-48 ◽  
Author(s):  
G. Bradley Bennett ◽  
Richard C. Hatfield
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Interactive Effect ◽  
Internal Controls ◽  
Audit Firm ◽  
Audit Evidence ◽  
Internal Control Deficiencies ◽  
Deadline Pressure

SUMMARY We conduct an experiment to investigate whether deadline pressure influences auditors' judgments regarding the materiality of identified errors (internal control deficiencies), as well as the sufficiency of audit evidence to test clients' remediation once a deficiency is identified. Additionally, we consider whether judgments are further affected if the audit firm caused the deadline pressure. We manipulate time deadline pressure (low versus high) and the cause of the deadline pressure (audit firm or not). Findings suggest an interactive effect of deadline pressure and source of delay. Auditors assess identified errors as less material when they are both under high deadline pressure and responsible for creating the pressure. Once the deadline passes, auditors' materiality assessments are the highest, indicating that both the incentive to avoid issuing an adverse opinion and deadline pressure are necessary to impact materiality judgments. Further, when responsible for creating deadline pressure, auditors are willing to sample fewer items and to tolerate more errors in their sample when testing client-remediated deficiencies. These findings provide insight on how deadline pressure impacts audit materiality decisions and complements prior research examining consequences of adverse opinions on the audit of internal controls over financial reporting.

A Comparative Evaluation of Belief Revision Models in Auditing

1999 ◽  
Vol 18 (2) ◽  
pp. 105-127 ◽  
Author(s):  
Ganesh Krishnamoorthy ◽  
Theodore J. Mock ◽  
Mary T. Washington
Keyword(s):  
Control System ◽  
Belief Revision ◽  
Internal Control ◽  
Theory And Practice ◽  
Manipulation Check ◽  
Audit Risk ◽  
Adjustment Model ◽  
Internal Control System ◽  
Audit Evidence ◽  
Belief Adjustment

External auditors typically gather audit evidence in a sequential fashion and revise their estimates of likelihood of material misstatements based on the evidence collected. Optimal utilization of audit evidence can help control audit risk and improve audit efficiency and effectiveness. This paper first shows how a typical audit risk assessment and belief revision task can be modeled using four theoretical models of belief revision. Then the descriptive properties of these models are evaluated based on the actual judgments of experienced auditors who assessed the likelihood of error in a task involving inventory valuation. A realistic audit case was administered to 101 experienced auditors. Models based on the following theories were evaluated: a version of Bayesian inference labeled Cascaded Inference Theory (Schum 1987; Schum and DuCharme 1971), two versions of the Belief Adjustment Model (Hogarth and Einhorn 1992), and a version of the Dempster-Shafer Theory of Belief Functions (Srivastava and Shafer 1992; Shafer 1976). The experimental task involves belief revision after combining evidence about the reliability of a client's internal control system with substantive evidence relating to inventory pricing. Both the experimental and manipulation check results show that the auditors were sensitive to differences in the source reliability and diagnosticity of the manipulated audit evidence. The analytical results reveal that the four models differ in the way they interpret evidence relating to internal control system reliability and the manner in which such evidence is aggregated with price test evidence. Yet, all four models correctly predict the direction of auditor belief revision. The study reveals that important structural differences in the models result in differences in the magnitude, but not the direction of belief revision. This theoretical and empirical evidence has heretofore been unavailable in the literature. Further, the version of the Hogarth and Einhorn (1992) Belief Adjustment Model that views control systems reliability as negative evidence is the only model that captures both the direction and magnitude of auditors' belief revision. Finally, auditors' belief revision was lower than that predicted by the remaining three models, with the extent of discounting ranging from 31 percent to 40 percent. Under-utilization of evidential value with respect to any of the models implies opportunities to improve audit performance either through training or with decision aids. The paper discusses implications for both audit theory and practice.

Nonlitigation Risk and Pricing Audit Services

2005 ◽  
Vol 24 (1) ◽  
pp. 37-53 ◽  
Author(s):  
Richard W. Houston ◽  
Michael F. Peters ◽  
Jamie H. Pratt
Keyword(s):  
Financial Statements ◽  
Future Research ◽  
Litigation Risk ◽  
Business Risk ◽  
Audit Risk ◽  
Audit Fee ◽  
Potential Damage ◽  
General Business

In this study we expand the audit fee model introduced by Simunic (1980) and extended by Houston et al. (1999) by adding a third factor, nonlitigation risk, which refers to general business risks and/or opportunities that extend beyond litigation risk or the conduct of the audit (e.g., opportunities for future audit and nonaudit revenues, potential damage to the auditor's reputation from involvement with a client). In an experiment, we ask audit partners and managers to assess various risks and develop an audit plan after reviewing one of four risk-increasing audit scenarios—the discovery of an error, the discovery of a GAAP inconsistency, a client buyout where the audited financial statements are used in the determination of the exchange price, and the loss of a major client customer. We find that, in the error and buyout cases, audit fee increases are explained only by the planned increase in audit investment; in the GAAP inconsistency case, the audit fee increase is explained in part by the planned increase in audit investment, but to a greater extent by residual litigation risk; in the loss of customer case, the audit fee increase is explained by the planned audit investment, residual litigation risk, and nonlitigation risk. These results suggest that business risk is comprised of at least three factors (acceptable audit risk, residual litigation risk, and nonlitigation risk), and that auditors are compensated to act as auditors, provide insurance for investor losses, and bear risks associated with factors that extend beyond the conduct of the audit. We also discuss how nonlitigation risk can clarify the results of previous research and be used in future research.

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>

Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence

2014 ◽  
Vol 90 (4) ◽  
pp. 1517-1546 ◽  
Author(s):  
Hua-Wei Huang ◽  
K Raghunandan ◽  
Ting-Chiao Huang ◽  
Jeng-Ren Chiou
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Fee ◽  
Significant Attention

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

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