Changes in Audit Quality under Auditing Standard No. 5

Abstract

ABSTRACT We examine the impact of Auditing Standard No. 5 (AS5) on audit quality. Prior research suggests a reallocation of resources toward higher-risk clients with no overall change in audit quality associated with the adoption of AS5. However, using financial restatements as our proxy for audit quality, we find the likelihood that financial statements are subsequently restated decreases in the AS5 period. These results are robust to several additional analyses. In addition to testing the occurrence of a restatement event, our results indicate that the duration of the restated period decreases during the AS5 period. Consistent with the objectives of AS5, we also find that the improvements in audit quality associated with AS5 are greater for complex firms than non-complex firms. Overall, using financial restatements as our proxy for audit quality, our results suggest that audit quality improves following the issuance of AS5. JEL Classifications: M41 Data Availability: The data used in this paper are publicly available from the sources indicated in the text.