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Abstract:
Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross-sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample includes all of the former "Big 6" international accounting firms and clients from twenty-nine different industries.

Audit fees; Internal audit; SAS No. 65

Abstract:
Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross-sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample includes all of the former "Big 6" international accounting firms and clients from twenty-nine different industries.

Audit fees; Internal audit; SAS No. 65

Abstract:
We examine the sensitivity of internal auditors' fraud risk assessments and audit effort decisions (i.e., budgeted hours) to variations in management's incentives to intentionally misstate their financial position, and in the quality of a firm's audit committee. Internal auditors are an integral part of an organization's monitoring scheme and it is important to understand how, and how well, their judgments are influenced by factors known to be associated with fraudulent financial reporting.

We hypothesize that internal auditors' fraud risk judgments and audit effort decisions will vary with management incentives and quality of audit committee, consistent with documented archival evidence and professional prescriptions. The experimental results, based on responses from 60 internal auditors completing a hypothetical case regarding a potential acquisition target, indicate that internal auditors' fraud risk assessments are responsive to management incentives and variations in the quality of the audit committee. Our results also indicate that internal auditors' budgeted audit hours are sensitive to variations in management incentives to misreport financial information, but are not sensitive to variations in audit committee quality. This latter result implies that internal auditors are aware that stronger audit committees decrease the risk of fraudulent financial reporting, but do not use that knowledge to reduce fraud related work. These results generally hold for a second experiment in which another group of internal auditors was asked to complete the same hypothetical case, but rather than evaluating an acquisition target, they made planning judgments for an audit area of the company in which they were employed. Thus, the results generally hold whether the internal auditors are performing due diligence for a possible acquisition or are auditing their own organization where they may have incentives congruent with organization management, and may have familiarity with the audit committee.

audit committees, audit planning, fraud risk, internal auditors, management incentives

Abstract:
This study provides evidence on the influence of voluntary attestation outside of the financial statement audit setting. Information preparers can voluntarily employ an independent third party to attest to the reliability of information other than financial statement information. An issue of interest is whether voluntary attestation of information reliability influences users' perceptions and use of this information. The AICPA's Special Committee on Assurance Services has recently drawn attention to the potential role for CPAs in establishing the reliability of information other than financial statement information. Accounting firms are in a unique position to provide voluntary attestation services. However, unlike the market for financial statement auditing, many attestation services can also be performed by professionals other than CPAs. Thus, a secondary issue of import is whether the type of attester influences users' perceptions and use of attested information.

The development of the Performance Presentation Standards (PPS) by the Association for Investment Management and Research provides a setting for examining these issues. PPS are voluntary reporting rules for investment managers to use in reporting historical performance results. Pension fund sponsors place money with investment managers, who select and monitor investments for the pension fund. Fund sponsors select investment managers based, in part, on the investment managers' asserted performance results. This institutional setting comprises information asymmetry between the investment manager and the fund sponsor, with an incentive by the investment manager to present performance results in a favorable light. PPS were developed to mitigate this information asymmetry. Adherence to PPS is voluntary, and attestation of PPS compliance is not required. Potential attesters of PPS compliance include accounting firms and financial services firms.

We conduct an experiment in which pension fund sponsors are provided with case materials and asked whether they would recommend placing pension funds with any of a set of investment managers. We hypothesize that attestation enhances the perceived credibility of investment managers' asserted performance results, and influences fund sponsors' investment decisions. We further hypothesize that the type of attestation firm (Big 6 CPA firm; small, local CPA firm; international financial services firm; small, local financial services firm) influences fund sponsors' perceptions of information credibility and their subsequent investment decisions.

Our results suggest the following. Pension fund sponsors prefer that investment managers present performance results that have been asserted to have been prepared in accordance with AIMR PPS. Further, attestation of this assertion influences fund sponsors' perceptions of information credibility. Specifically, fund sponsors perceive that attested information is more credible than information that has not been attested. We also find that when performance results have been attested by a CPA firm, fund sponsors perceive that information credibility is higher when the attestation is performed by a Big Six firm, rather than by a non-Big Six firm. Surprisingly, our experimental evidence suggests that perceived credibility of performance results is not an important determinant of a fund sponsor's investment decision.

Abstract:
We examine internal auditors fraud risk decisions in response to variations in audit committee quality and management performance incentives. Using an experimental approach, we find that internal auditors serving in a either a self-assessment role or a due diligence role were sensitive to variations in management performance incentives, linked these variations to fraud risk assessments and altered their audit plans accordingly. With respect to audit committee quality, internal auditors in both roles were sensitive to variations in quality, but the responses to quality variations depended on whether they were in a due diligence or self-assessment role. With respect to the former, they linked the variation in quality to fraud risk, but did not alter the scope of their planned audit effort. With respect to the latter, they neither linked the variations in quality to fraud risk nor to planned scope.

Abstract:
We examine the association between the identification of audit deficiencies by the PCAOB in its inspection reports of small accounting firms, and the issuance of the going concern (GC) opinion by these firms in the years preceding and following the PCAOB report. After controlling for clients' financial condition, the presence of deficiencies and the number of deficiencies reported for their audit firms are negatively associated with a GC opinion. Also, the presence of deficiencies and the number of deficiencies are positively associated with a change from a non-GC opinion in the year prior to the inspection to a GC opinion in the year following inspection. Our results indicate that the PCAOB's inspection reports identifying audit firm deficiencies signal the presence of undetected or underreported going concern problems, and the issuance of these reports is associated with a greater likelihood of GC opinions in the year following the inspection year.

PCAOB Inspection, Going-Concern, Audit Quality

Abstract:
This paper investigates how external auditor provision of significant non-audit services and client pressure to use the work of internal audit influence external auditors' use of internal auditors' work. More specifically, we study how external audit evidence gathering choices are influenced by non-audit fees and client pressure. Our research is motivated by an observation that the magnitude of non-audit services provided to audit clients introduces the risk that client management may leverage its position with the external auditor and potentially affect the audit process. We address this issue by extending prior research and focusing on the importance of various explanatory variables, including non-audit service revenues, client pressure, internal audit quality, and coordination, to the external auditor's decision to rely on the work of internal audit. We use data primarily obtained through surveys completed by internal and external auditors. The survey responses represent 74 separate audit engagements. Our findings reveal that when significant non-audit services are not provided to a client, internal audit quality and the level of internal/external auditor coordination positively affect auditors' internal audit reliance decisions. However, when the auditor provides significant non-audit services to the client, internal audit quality and the extent of internal/external auditor coordination do not significantly affect auditors' reliance decisions. Furthermore, when significant non-audit services are provided, client pressure significantly increases the extent of internal audit reliance. Thus, external auditors appear to be more affected by client pressure and less concerned about internal audit quality and coordination when making internal audit reliance decisions at clients for whom significant non-audit services are also provided.

Audit evidence, client pressure, internal audit, non-audit service revenues

Abstract:
Through review and synthesis, we evaluate the extent to which existing auditing research supports the contention that audit firm and auditor industry concentration, specialization, experience, and knowledge improve client-relevant audit outcomes. We classify the twenty-three published auditing research studies that directly investigate these issues into two broad levels of analysis: [1] eighteen studies investigating audit firms, and [2] five studies investigating individual auditors. We summarize and critically evaluate the issues, methods, and insights in this research, and offer suggestions for improving its ability to opine on the issue we investigate. Our review suggests weak evidence supporting the arguments that: [1] audit firm industry concentration affects client-relevant outcomes [audit fees, audit quality]; and [2] individual auditor industry experience and industry specialization affect auditor industry knowledge, decision processes, and audit quality. We argue for future research directed towards identifying the: [1] synergies and costs of increasing audit firm and auditor industry specialization, and [2] interactions of functional and industry specialization. We also argue for an increased diversity of research methods in industry related auditing research.