Abstract
Current literature on audit workload stress suggests that the pressure may adversely affect audit quality. However, compromised audit quality would attract regulatory enforcement and costly reputation loss. Therefore, it is crucial to explore the association between audit workload and audit conservatism as a mechanism to mitigate audit risks. Using a new audit engagement database provided by PCAOB to measure the workload at the partner level, this study argues that the probability of issuing modified audit opinion and going concern opinion is predicted to increase as the audit workload escalates conditional on the ability to manage the workload. The findings show that audit workload induces over-conservatism as it increases the probability of modifying audit opinion and committing a type I error by reducing the accuracy of going concern opinion. This study also demonstrates that the workload effect is less severe for audit firms with sufficient resources and industry-specific knowledge that necessary to manage the workload effectively. This study examines the determinants of audit conservatism from the auditor side, while current literature focuses more on the client’s characteristics. This study sheds light on the importance of the audit resources to mitigate the stress effect. However, this study is unable to observe the number of non-listed audit clients of audit firms due to the limitations of audit engagement database.
Highlights
Audit industry has been growing gradually in recent years, and auditor workload stress has intensified because of increasing clients’ demands and tougher regulators’ requirements
This study focuses on audit conservatism as a means to mitigate audit risk while prior studies examine audit quality as an outcome of audit process
The findings suggest that auditors of big audit firms experience less stress effects and are less likely to issue an modified audit opinion (MAO)/going concern opinion (GCO) as they have sufficient resources to manage workload stress
Summary
Audit industry has been growing gradually in recent years, and auditor workload stress has intensified because of increasing clients’ demands and tougher regulators’ requirements Audit literature indicates that audit workload stress would adversely affect audit quality as auditors have limited attention to appropriately implement audit procedures to many audit clients in the same time (Gul et al, 2017; López & Peters, 2012) This limited cognitive ability due to the busyness may inflate the probability of committing type II error (Coram et al, 2004; Kelley & Margheim, 1990; Margheim et al, 2005). This study sheds light on a better understanding of how the ability to manage workload such as audit resources and knowledge affect the likelihood of increasing audit conservatism to combat workload stress. The findings suggest that auditors of big audit firms experience less stress effects and are less likely to issue an MAO/GCO as they have sufficient resources to manage workload stress. H2: The workload stress effect is moderated by audit firms resources
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