Empirical Tests of Audit Budget Dynamics

35 Pages Posted: 8 Aug 2005

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Jean C. Bedard

Bentley University - Department of Accountancy

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: July 2007

Abstract

Previous research in non-audit contexts suggests that managers design budgets based on prior performance relative to budget targets, and that this "ratcheting" response can be asymmetrical (i.e., greater increase in target following good performance than the decrease in target following correspondingly bad performance). This implies a dynamic view of budgeting, in which the budget is an endogenous feature of the business environment, a perspective that is rare in the auditing literature. We hypothesize and find asymmetric budget ratcheting by audit firm supervisors in a sample of audit engagements. Further, we find that engagement teams' reported hours also vary asymmetrically with prior budget variance. Our results suggest temporal interdependence between audit firm supervisors and engagement teams as both parties act strategically to adapt budgeting and reporting behavior based on prior budget variances, with associated implications for audit quality.

Keywords: Audit planning, Time budget pressure, Audit quality, Ratcheting

JEL Classification: M42, M50

Suggested Citation

Ettredge, Michael L. and Bedard, Jean C. and Zehms, Karla M., Empirical Tests of Audit Budget Dynamics (July 2007). Available at SSRN: https://ssrn.com/abstract=771004 or http://dx.doi.org/10.2139/ssrn.771004

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Karla M. Zehms (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

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