Outsourced External Audit Work and Audit Quality

Posted: 12 Sep 2018

See all articles by Carol Callaway Dee

Carol Callaway Dee

University of Colorado Denver

Katherine Gunny

University of Colorado at Denver

Ayalew Lulseged

University of North Carolina (UNC) at Greensboro

Date Written: August 30, 2018

Abstract

We examine whether audit quality is reduced when part of the audit is conducted by auditors other than the audit firm signing the audit report (“other” or “participating” auditors) which typically occurs in a multinational group audit. Prior literature suggests group audits could face difficulties in coordinating work across multiple countries and legal jurisdictions. PCAOB concerns over audit quality when participating auditors are involved led to a requirement that audit firms disclose their use of participating auditors on Form AP. Consistent with concerns of the PCAOB, we find audit quality is lower when participating auditors are involved in the engagement compared to those without participating auditors. In analyses on a sample limited to engagements with participating auditors, we find having more than one participating auditor leads to lower audit quality relative to having only one participating auditor. We find no evidence to suggest that the percentage of the audit conducted by participating auditors influences audit quality. Other than the legal origin of the participating auditor, we find no evidence to suggest participating auditor characteristics (i.e. affiliated with the lead Big 4 auditor; not registered with the PCAOB; inexperienced with SEC clients of their own; or domiciled in a country that does not allow PCAOB inspections) influence audit quality. Lastly, we find higher audit fees for engagements that use more than one participating auditor, suggesting group audits entail a higher risk premium and increased costs to coordination.

Keywords: PCAOB; other auditors; participating auditors; audit quality; abnormal accruals; Form AP; AuditorSearch; outsourced audit work

Suggested Citation

Dee, Carol Callaway and Gunny, Katherine and Lulseged, Ayalew, Outsourced External Audit Work and Audit Quality (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=3241793

Carol Callaway Dee (Contact Author)

University of Colorado Denver ( email )

1475 Lawrence St.
Campus Box 165, PO Box 173364
Denver, CO 80217-3364
United States

Katherine Gunny

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Ayalew Lulseged

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

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