Book-Tax Differences and Audit Risk: Evidence from the United States

43 Pages Posted: 14 Feb 2016

See all articles by Wendy Heltzer

Wendy Heltzer

DePaul University - College of Commerce

Sandra Waller Shelton

DePaul University, College of Commerce-School of Accountancy

Date Written: December 15, 2015

Abstract

Empirical research suggests that book-tax differences (BTDs) are related to greater earnings management. Separately, there is evidence that auditors consider earnings management in their risk-assessment process. Together, these studies suggest that BTDs may be associated with audit risk; this assertion is tested herein by conducting a survey of U.S. auditors. We find that auditors, on average, perceive large BTDs to be related to an increase in audit risk. Auditors perceive large positive BTDs to have a greater impact on audit risk than large negative BTDs, while auditors do not perceive large permanent BTDs to have a different impact on audit risk, vis-à-vis large temporary BTDs. Approximately one-third of surveyed auditors use BTDs to assess audit risk, and an auditor’s perception of the relationship between BTDs and audit risk is a significant determinant of an auditor’s decision to use BTDs to assess audit risk.

Keywords: Book-Tax Differences, Earnings Management, Audit Risk

JEL Classification: M40, M41

Suggested Citation

Heltzer, Wendy and Waller Shelton, Sandra, Book-Tax Differences and Audit Risk: Evidence from the United States (December 15, 2015). Journal of Accounting, Ethics and Public Policy, Vol. 16, No. 4, 2015, Available at SSRN: https://ssrn.com/abstract=2732191

Wendy Heltzer (Contact Author)

DePaul University - College of Commerce ( email )

Chicago, IL
United States

Sandra Waller Shelton

DePaul University, College of Commerce-School of Accountancy ( email )

Chicago, IL 60604
United States
312-326-8098 (Phone)
312-362-6208 (Fax)

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