Interim Restatements and the Audit Engagement

Abstract

Misstatements in 10-K reports can take years to detect, but misstatements in a current 10-Q report can provide auditors with timely information regarding the inherent risk of a client, which may facilitate auditors responding to this risk prior to the completion of the contemporaneous audit. We examine the audit implications of 10-Q misstatements and explore how the timing of the detection and correction of these interim misstatements affects an audit. We find that auditors respond to interim restatements by charging higher fees, taking more time to complete an audit, and issuing more ICMWs. Despite these changes, interim restatements are negatively associated with year-end financial reporting quality. We further distinguish between early and late interim restatements based on whether a misstatement was corrected before or after the fiscal year-end. We find some supporting evidence that late interim restatements have greater impacts on audit engagements, consistent with the notion that late detection of misstatements allows less flexibility for the client and auditor to adjust to heightened engagement risk. Overall, we provide evidence on how interim restatements in general, and the timing of such restatements in particular, have different implications for audit engagements.

Keywords: Audit engagement, restatements, interim restatement, financial reporting quality JEL Classifications: M49

JEL Classification: M42