Does a Breakdown in Engagement Supervision Reveal Office-level Audit Quality? Evidence from Audit Report Errors

Abstract

Although practitioner literature and auditing standards assert a link between an auditor’s internal review procedures and audit quality, prior archival researchers have struggled to support this claim. We identify an error in the audit report as an observable failure of the review process since engagement partners are required to read the audit report. We expect audit report errors to signal lower vigilance and poorer audit quality in the affected office. Consistent with an office-level effect, we find that clients of Big Four offices committing audit report errors display greater abnormal accruals than do clients of non-offending offices. Our research is among the first to demonstrate archivally that failures in the review process meaningfully signal outcome-based audit quality at the office-level.

Keywords: Audit Quality, Audit Report, Engagement Supervision and Control

JEL Classification: M42, M48