Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews

Abstract

SUMMARYWe report the results of an experiment that examines how the salience of post-audit reviews (PARs; i.e., U.S. Public Company Accounting Oversight Board [PCAOB] inspections and public accounting firms' internal quality reviews [IQRs]) affects auditors' perceptions of inspection risk (i.e., the risk that an auditor or audit firm will suffer harm as a result of a PAR), as well as audit effort and fees. Using large-firm, high-level auditors as participants, we find that PAR salience (i.e., anticipation of a PAR) yields higher perceived overall engagement risk assessments, even after controlling for traditional audit risk factors, consistent with auditors viewing inspection risk as incremental to these risk factors. Further, we find that auditors respond to PAR salience by increasing both audit effort and fees—with higher perceived engagement risk and greater audit effort for PCAOB inspections than IQRs. Finally, we observe that increases in audit fees are fully explained by effort.