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A Modified Audit Production Framework: Evaluating the Relative Efficiency of Audit Engagements

55 Pages Posted: 18 Dec 2008  

W. Robert Knechel

University of Florida - Fisher School of Accounting

Paul Rouse

University of Auckland - Business School

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center)

Date Written: December 2, 2008

Abstract

We develop a model of audit production based on Data Envelopment Analysis (DEA) using labor cost as input and hours spent on evidence-gathering activities that determine the level of assurance as output. Client characteristics are considered exogenous factors that affect audit production as a whole. We apply the model to a sample of U.S.-based engagements from an international accounting firm. Results indicate that a constrained DEA model using variable returns to scale is appropriate for modeling audit production. We find that audits are more efficient for clients that are larger, have a December year-end, and are highly automated. Audits are less efficient when the auditor relies on internal control, tax services are provided, and the client has subsidiaries. We also find that a well-specified regression-based production model can control for factors that influence auditor efficiency. Finally, we find that inefficiencies are impounded in fees for some industries and firm offices.

Keywords: audit production, Data Envelopment Analysis, efficiency

JEL Classification: M49, H25, D40

Suggested Citation

Knechel, W. Robert and Rouse, Paul and Schelleman, Caren, A Modified Audit Production Framework: Evaluating the Relative Efficiency of Audit Engagements (December 2, 2008). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1317744

W. Robert Knechel (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Paul Rouse

University of Auckland - Business School ( email )

Private Bag 92019
Auckland
New Zealand
+64 9 373 7599 (Phone)
+64 9 373 7406 (Fax)

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center) ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands

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