Does Task-Specific Knowledge Improve Audit Quality: Evidence from Audits of Income Tax Accounts

Abstract

Two forms of expertise can influence audit quality: industry and task-specific expertise. If tax knowledge is task-specific rather than industry-specific, audit offices with increased exposure to complex tax issues will develop this task-specific expertise. Using outcomes related to income tax account audits, we examine whether tax task-specific knowledge (TSK) accumulates at the audit office level and affects the income tax accounts’ audit quality. We find that tax TSK increases the income tax accounts' audit quality, suggesting individual tax TSK accumulates at the office level. Additionally, semi-structured interviews of partners/senior managers at a Big 4 audit firms validate group processing theory as an explanation for TSK developing at the office level. We contribute to and extend the literature examining audit office expertise by providing evidence that exposure to complex tax issues develop TSK. That TSK accumulates at the office level and enhances audit quality. These findings provide archival and qualitative evidence of how TSK develops at the office level.

Keywords: Income Tax Audit Quality, Tax Restatements, Task Expertise, Income Tax Complexity, Task-specific Expertise