Determining the Optimal External Audit Interval for Private (and Family-Controlled) Companies

Abstract

This paper suggests and applies a method of optimally varying the external audit interval in response to variations in agency costs. Flexibility in the audit interval can be seen as a way of meeting the growing call to adapt the traditional attest service to meet a wider range of needs of decision makers. The study applies the model of optimal internal audit scheduling in Boritz and Broca (1986) to determine the optimal timing of financial statement audits for a sample of 53 private (and family-controlled) companies. The optimal interval between audits is the result of a trade-off between the audit cost and the losses that are expected to accrue in the absence of auditing. The rate at which losses accrue in the absence of auditing defines the riskiness of the firm. This study extends prior research on optimal audit scheduling in several ways: the audit units are external audit units, the audit cost is a function of the audit interval and actual rather than hypothetical data are used.