Quality Control Rigidity and Audit Outcomes

Abstract

While audit firms’ quality control systems are critical to the execution of consistent, high-quality audits, these systems are largely unobservable. We overcome this observability challenge by relying on linguistic patterns indicating template use in CAM disclosures to proxy for firms’ quality control system rigidity, supporting its validity with a survey of practicing auditors. We observe variation in our proxy for quality control rigidity across audit firms, and that our quality control rigidity measures are negatively associated with both CAM-specific and non-CAM PCAOB inspection findings. We also provide evidence that quality control rigidity is associated with higher quality audits of internal controls but lower quality audits of complex estimates, consistent with theory and experimental research suggesting that the effectiveness of a rigid system varies with task uncertainty. Our findings provide important insight into the design and effectiveness of quality control systems.

Keywords: audit, quality control, Critical Audit Matter disclosure, rigidity, template use, audit quality, task uncertainty, fair value estimates, internal controls, PCAOB

JEL Classification: M42, M48