Quality Control in Audit Firms: Do Auditors Learn from Going Concern Errors?

52 Pages Posted: 1 Aug 2018

See all articles by Jaehan Ahn

Jaehan Ahn

Northeastern University - Accounting Group

Kevan L. Jensen

University of Oklahoma - John T. Steed School of Accounting

Date Written: December 31, 2017

Abstract

This study examines whether auditors use their own going-concern opinion (GCO) errors (i.e., endogenous, results-based audit-quality signals) as audit-quality signals, and whether they use those signals to make adjustments in their subsequent office-wide audit quality. We argue (along with the PCAOB) that GCO errors signal potentially undesirable conservatism levels by auditors, and hence undesirable levels of audit quality. Auditors who recognize this should be able use GCO errors for quality-control purposes. We specifically examine whether auditors adjust their office-wide conservatism (i.e., audit quality) in response to changes in the number of Type I or Type II GCO errors observed in their office in a given period. Using several measures of auditor conservatism (signed abnormal accruals, likelihood of GCO, and subsequent GCO errors) we find evidence that auditors systematically decrease (increase) their office-wide conservatism levels subsequent to increases (decreases) in Type I errors. We also find evidence that auditors systematically increase (decrease) their office-wide conservatism levels subsequent to increases (decreases) in Type II errors. These results suggest that auditors use observable audit-quality signals for real-time quality-control purposes.

Keywords: audit quality, going-concern errors, auditor learning, quality control

JEL Classification: M42

Suggested Citation

Ahn, Jaehan and Jensen, Kevan L., Quality Control in Audit Firms: Do Auditors Learn from Going Concern Errors? (December 31, 2017). Available at SSRN: https://ssrn.com/abstract=3153078 or http://dx.doi.org/10.2139/ssrn.3153078

Jaehan Ahn

Northeastern University - Accounting Group ( email )

404 Hayden Hall
360 Huntington Ave.
Boston, MA 02115
United States

Kevan L. Jensen (Contact Author)

University of Oklahoma - John T. Steed School of Accounting ( email )

307 West Brooks
Norman, OK 73019-4004
United States

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