Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

58 Pages Posted: 15 Jul 2016 Last revised: 9 May 2018

See all articles by Lori Shefchik Bhaskar

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Marcy L. Shepardson

Indiana University - Kelley School of Business - Department of Accounting

Date Written: April 26, 2018

Abstract

The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits – in which substantial ICFR testing is required – may result in lower FS-audit quality than similar FS-only audits. We compare a 2007 – 2013 sample of small, U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality.

Keywords: Risk Assessment, Audit Methodology, PCAOB Standards, SOX, Internal Controls, Audit Quality

Suggested Citation

Bhaskar, Lori Shefchik and Schroeder, Joseph H. and Shepardson, Marcy L., Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One? (April 26, 2018). Kelley School of Business Research Paper No. 16-58. Available at SSRN: https://ssrn.com/abstract=2809680 or http://dx.doi.org/10.2139/ssrn.2809680

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Joseph H. Schroeder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Marcy L. Shepardson

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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