Is it Better to Kill Two Birds with One Stone? Internal Control Audit Quality and Audit Cost for Integrated vs. Non-integrated Audits

Posted: 14 Nov 2021

See all articles by Joshua L. Gunn

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Lin Liao

Nanjing Audit University; affiliation not provided to SSRN

Shan Zhou

The University of Sydney

Date Written: November 12, 2021

Abstract

Audits of internal control over financial reporting (ICFR) are typically “integrated” with the audit of the financial statements (FS)— both audits are conducted by the same audit firm, which designs procedures to satisfy the objectives of both audits simultaneously. A common assumption is that integrating the two audits is more effective and efficient than performing them separately. However, this assumption has not been tested empirically. Using a sample of Chinese companies that employ different audit firms for their FS and ICFR audits (i.e., non-integrated auditors), we find evidence that challenges this assumption. Specifically, we find ICFR audit quality is higher for non-integrated audits compared to integrated audits. Moreover, total audit fees are lower for non-integrated audits, despite higher ICFR audit fees.

Keywords: Audit quality; audit cost; internal control over financial reporting; SOX

Suggested Citation

Gunn, Joshua L. and Li, Chan and Liao, Lin and Zhou, Shan, Is it Better to Kill Two Birds with One Stone? Internal Control Audit Quality and Audit Cost for Integrated vs. Non-integrated Audits (November 12, 2021). Available at SSRN: https://ssrn.com/abstract=3961928

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Lin Liao

Nanjing Audit University ( email )

86 Yushan W Rd, Pukou
Nanjing, Jiangsu 210017
China

affiliation not provided to SSRN

Shan Zhou

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

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