INCREASED AUDIT RISK AND COMPONENT AUDITOR USE. EVIDENCE FROM THE REVELATION OF INTERNAL CONTROL MATERIAL WEAKNESSES

Posted: 24 Mar 2020 Last revised: 14 May 2020

See all articles by Katherine Gunny

Katherine Gunny

University of Colorado at Denver

Juan Mao

University of Texas at San Antonio - Department of Accounting

Jing Zhang

university of Colorado Denver

Date Written: May 13, 2020

Abstract

This paper investigates how increases in client audit risk influence the use of component auditors. Auditors respond to increases in audit risk by making adjustments to the audit engagement such as increasing fees and/or increasing effort. As more audit resources are demanded by clients with increased audit risk, one way for the lead auditor to free up resources is to allocate more work to component auditors. Using a difference-in-difference research design, with the revelation of an internal control material weakness (ICMW) as an event for increased audit risk, we find that component auditor use increases after the revelation of an ICMW, and increases even more when the ICMW is severe. We also find that the increase in component auditor use after an ICMW is positively associated with the likelihood of ICMW remediation. Thus, we identify a situation where component auditor use enhances audit quality and provides a benefit to the company (i.e., increased likelihood of ICMW remediation). Our study should be of interest to regulators, given the criticism by the PCAOB regarding firms’ use of component auditors and the evidence in prior literature on how component auditor use influences audit quality.

Suggested Citation

Gunny, Katherine and Mao, Juan and Zhang, Jing, INCREASED AUDIT RISK AND COMPONENT AUDITOR USE. EVIDENCE FROM THE REVELATION OF INTERNAL CONTROL MATERIAL WEAKNESSES (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3544391 or http://dx.doi.org/10.2139/ssrn.3544391

Katherine Gunny

University of Colorado at Denver ( email )

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

Juan Mao

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8305 (Phone)

Jing Zhang (Contact Author)

university of Colorado Denver ( email )

1475 Lawrence St
Denver, CO
Denver, CO 80202
United States

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