Audit Hours Research Articles

Are family firms less audit-risky? Analysing audit fees, hours and rates

We examine differences in audit scope between publicly-listed family and non-family firms in Israel, using a unique dataset that includes external and internal audit hours, audit fees and billing rates. We find that external auditors charge lower average hourly rates for family firms than for non-family firms. However, audit effort, measured as the number of audit hours, is lower in family firms than in non-family firms, but the difference is not statistically significant. Moreover, the number of internal audit hours is smaller, on average, in family firms than in non-family firms. Our findings suggest family ownership affects audit mainly when the family is actively involved in the firm's management. We also examine a subsample of eponymous family firms and obtain similar results. Analysis of a sub-sample of firms that switched from family to non-family status or vice-versa shows that audit fees and hourly rates decrease (increase) when a firm changes its status from non-family (family) to family (non-family) status. Lastly, we find that the reporting quality of family firms is higher than that of non-family firms. Overall, our results suggest that auditors perceive family firms to be less audit-risky.

Impact of Actual-Contractual Difference in Audit Hours and Fees on Stock Price Crash Risk

Impact of Actual-Contractual Difference in Audit Hours and Fees on Stock Price Crash Risk

How hours allocated to year-round auditing procedures affect audit quality

PurposeThis paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.Design/methodology/approachUsing a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.FindingsThe initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.Originality/valueTo the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.

The Relationship between Audit Planning, Audit Hours and Audit Quality for the Adoption of New External Audit Law：Focusing on Auditor Change

The Relationship between Audit Planning, Audit Hours and Audit Quality for the Adoption of New External Audit Law：Focusing on Auditor Change

The Impact of Account-Level Inspection Risk on Audit Program Planning Decisions

SYNOPSIS Prior research suggests oversight inspections lead to unintended consequences by motivating auditors to manage inspection risk. The current study provides evidence of the impact of a misalignment between inspection and mis-statement risks at the account level, where planning decisions are made. We predict auditors feel pressures to address more immediate inspection risks at the expense of adequately responding to mis-statement risks as prescribed by auditing standards. Employing an experiment with 182 experienced auditors, we manipulate account-level inspection risk (low or high). As hypothesized, auditors plan more hours for an account with higher inspection risk and correspondingly assign fewer audit hours to other accounts with lower inspection risk, even if mis-statement risk is high for those accounts, suggesting an unwarranted shift in audit efforts. Our findings suggest inspection risks impair auditors’ effort allocation decisions and thus may undermine the audit risk model as the normative benchmark for program planning. Data Availability: Contact the second author. JEL Classifications: M42; M48.

A hybrid decision support framework for planning a risk-based audit engagement

Internal audit engagement planning is a fundamental component of internal audit activities, and a poor plan can impair the audit quality. However, studies on internal audit engagement planning have limited exposure in the literature. To the best of our knowledge, a comprehensive and robust model has not been established to address the decision-making problems associated with the audit engagement planning process. To fill these gaps, an integrated multi-stage framework is presented for developing a risk-based audit engagement plan. The designed framework includes three stages to carry out the decision procedure. First, a combined method of best worst method and weighted probability-impact score is used to evaluate the risk exposure. Second, risk assessment results are integrated into the weighted multi-choice goal programming (WMCGP) model for selecting the audit scope and allocating budgeted audit hours. Third, WMCGP model assigns audit staff to the selected audit scope to satisfy auditor preference and fitness. Two real-life case studies illustrate that the proposed framework is a useful tool for selecting the critical audit scope and deploying appropriate resources. The research results outperform the manual procedures, enabling the audit team to use constrained resources more effectively and efficiently.

경제 불확실성이 감사보고서의 발행을 지연시키는가?

[Purpose]This study examines the relationship between macro－uncertainty and audit report lag. Also, it analyzes whether this relationship manifests differentially when considering audit hours by rank and auditor characteristics. [Methodology]For analysis, we use a sample of listed firms for the period from 2014 to 2019. Audit report lag was proxied by the number of days from the fiscal year－end to the audit report date. Macro－uncertainty was measured using the volatility index VKOSPI provided by KRX. [Findings]The analysis yields the following results. Firstly, it confirms an increase in audit report lag under high uncertainty. This could be interpreted as auditors increasing audit efforts in response to a rise in audit workload under uncertainty. Secondly, the relation between uncertainty and audit report lag becomes more pronounced in subsamples where audit hours put into by junior and senior staff are high. Thirdly, the relationship between uncertainty and audit report is stronger for Big4 and industry specialist auditors. This could be interpreted as auditors with higher reputation risk or litigation risk allocating relatively more audit effort in response to increased audit risks under uncertainty. [Implications]Despite previous research indicating that uncertainty reduces audit fees and audit hours, this study’s results suggest that reduced audit fees or audit hours does not necessarily imply a decrease in audit effort. Our results provide insight to investors and auditors in providing evidence that increased audit report lag may be due to external environmental factors rather than an increase in firm－specific risk factors.

전문성이 필요한 산업에 속한 피감사기업을 감사하는 산업전문감사인의 감사행태

[Purpose] This study aims to examine the behavior of industry specialist auditors according to industry characteristics. Specifically, this study aims to provide evidence on the audit efficiency of industry specialist auditors by analyzing whether the audit hours and audit fees of industry specialist auditors are differentiated for industries requiring industry specialization designated by the Financial Supervisory Service.
 [Methodology] We used a sample of 19,115 firms and years for Korean listed companies from 2008 to 2020. For the industries requiring specialization, we used the industry groups selected by the Financial Supervisory Service in November 2023 based on the opinions of listed companies and accounting firms.
 [Findings] The results show that, first, industry specialist auditors are associated with higher audit fees and more audit hours on average, but these fees and audit hours are significantly lower for industries designated as requiring industry specialty, which can be interpreted as an audit efficiency. Second, the above association does not appear in the analysis using hourly audit fees, explaining the process by which efficiency gains are passed on to client firms. Third, the relations does not appear in analyses of audit quality measured by the absolute value of performance－matched discretionary accruals, providing further evidence of the efficiency with which audit quality is maintained at lower levels of audit time. These results can be interpreted as indicating that industry specialist auditors perform the audit process efficiently in industries where specialization is essential, and that the benefits of reduced audit efforts are fully passed on to the clients through this efficient audit process.
 [Implications] The contribution of this study is that it provides evidence on the audit efficiency of industry specialist auditors through data that directly manifests the need for specialization while reflecting the perspectives of both audited companies as consumers and accounting firms as suppliers of industry specialization.

Rank-Specific Audit Hour Dynamics: Managerial Stock Ownership and Fraud-Induced Moderation

Rank-Specific Audit Hour Dynamics: Managerial Stock Ownership and Fraud-Induced Moderation

경제환경적 불확실성 하에서의 감사품질

[Purpose] This paper examines the impact of macro-uncertainty on audit quality. Furthermore, it explores whether the relationship between uncertainty and audit quality varies based on the audit effort exerted by senior CPAs within audit firms.
 [Methodology] This paper uses Korean listed firms from the years 2014 to 2019 and utilizes 9,772 number of observations. To quantify uncertainty, this study employs VKOSPI, an option-based measure of uncertainty provided by KRX. For assessing audit quality, the absolute magnitude of discretionary accruals is utilized.
 [Findings] Using regression analyses, this paper finds a negative relation between VKOSPI and discretionary accruals, meaning that audit quality improves under uncertainty. Further analyses indicate that this negative relationship between VKOSPI and discretionary accruals is observed specifically within the subsample of firms audited by auditors with above median input from senior managers.
 [Implications] By using recent sample after year 2014, this paper shows evidence that audit fee discount under uncertainty does not lead to deterioration of audit quality. Korea has put consistent effort to increase the responsibility of auditors. As one example, Korean companies are obliged to disclose number of staff put to audt process, audit hours, audit plan, and actual audit implementations. The results of our paper indicates that a series of efforts to strengthen auditors’ responsibilities are somewhat effective.

감사품질이 ESG 수준에 미친 영향

[Purpose] As the societal demand for ESG has increased recently, auditors are facing a situation where non－financial factors need to be considered along with financial factors. This study empirically examines whether the audit quality affects the level of ESG within companies.
 [Methodology] This study measures audit quality using variables such as audit fees, audit hours, and the status of large accounting firms. The ESG level of companies is measured using ESG information from the KCGS. We perform empirical analyses while controlling for various factors that may affect both audit quality and the ESG level.
 [Findings] Our empirical results reveals a significant positive correlation between audit quality and the ESG level of companies. We also perform robustness analysis to address cause issues by adjusting the time difference between audit quality and the ESG level. The results of robustness analysis support our hypothesis.
 [Implications] The findings of this study suggest that audit quality plays an important role in ESG, which is considered a crucial element for corporate sustainability. Our results provide empirical evidence for the need for auditor certification related to non－financial indicators.

Does external auditor coordination influence internal auditor effort?

The purpose of this study is to investigate how the level of controls testing coordination with the external auditor affects internal auditors' effort. The internal auditor's planned substantive testing audit hours are the measure of effort in this study. Regulators and stakeholder organizations have encouraged more collaboration between external and internal auditors to improve audit efficiency. The effect of external auditor coordination on internal auditors' planned audit hours has important implications for audit efficiency and effectiveness. An experiment is conducted with 112 internal auditors to examine the hypothesized effect. The study uses a 2 × 2 between-subjects design and manipulates fraud risk and external auditor coordination. Consistent with my prediction, I find that coordination moderates the relationship between fraud risk and planned audit hours. The results illustrate that although high external auditor controls testing coordination decreases internal auditors' planned substantive testing audit hours, internal auditors are more sensitive to responding to fraud risk when external auditor controls testing coordination is high.

The joint effects of partner rotation and allocation of audit hours on audit quality

PurposeThis study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.Design/methodology/approachUsing proprietary data of partners’ names and audit hours in the year-round context, the authors build a model testing input factors related to audit production and new partner assignment in 1,209 Korean listed firms during the period of 2015–2018.FindingsThe results show that in the partner rotation, the more audit hours spent, the more audit hours are allocated to the year-round audit, or more nonpartners’ audit hours are allocated to the year-round audit, the higher the audit quality. Subsample analyses show that these findings are concentrated in firms with longer audit tenure or low audit risk.Research limitations/implicationsThe findings may provide regulatory authorities with practical guidelines concerning partner rotation and how to allocate audit hours to different audit stages and ranks (partner vs staff).Originality/valueTo the best of the authors’ knowledge, this study provides the first evidence of the joint effects of partner rotation and audit hour allocation on audit quality.

Auditors’ sensitivity to business risk under business risk auditing

This study uses Chinese data and a difference-in-differences design to investigate the effect of the adoption of business risk auditing (BRA) on auditors’ sensitivity to business risk. We find that BRA adoption has an incremental positive effect on the relationship between business risk and audit hours in non-state-owned enterprises (NSOEs) but not in state-owned enterprises (SOEs). This result suggests that BRA increases auditors’ sensitivity to business risk in NSOEs. This effect is more pronounced when a client firm has a more complex business or the auditor is a non-Big10 domestic audit firm. The results of further tests show that an increase in audit hours due to BRA adoption results in an improvement in audit quality in NSOEs but not in SOEs. In addition, BRA adoption also has an incremental positive effect on the relationship between business risk and audit fees in NSOEs but not in SOEs.

COVID-19에 따른 감사인의 대응

[Purpose] The purpose of this study is to investigate auditors response to Coronavirus Disease(COVID-19). The outbreak of COVID-19 paralyses health, social, and economic parts and eventually it had considerable economic and financial impacts worldwide. To prevent the spread of the COVID-19, the government have urged people to stay at home. The COVID-19 led to negative impact on firms’ liquidity, profits and going-concern assumptions. Therefore, auditors might encounter some challenges during COVID-19 such as new audit procedures, a lack of verifying financial information and exceptional situation of manipulating accounting numbers. We investigate whether auditors input more audit hours during COVID-19.
 [Methodology] This study uses 3,800 listed firm-years samples during prior year(2019) and the initial year of the COVID-19 outbreak(2020). We use audit hours of managers, registered certified public accountants, staff auditors, and all auditors for auditors response. To control industry effects during COVID-19, we apply fixed effects on our regression model.
 [Findings] We find auditors input more working hours on year-end audits during COVID-19. It indicates that all types of auditors might put more efforts to mitigate audit risk. Also, we find that year-end audit hour ratio is increased during COVID- 19.
 [Implications] As COVID-19 increases audit risk and also have auditors adopt a new audit procedures, COVID-19 could be a challenge to auditors. This study empirically shows how auditors respond to COVID-19. The auditors spend more audit hours during COVID-19 to mitigate audit risk and apply new procedures.

Economic policy uncertainty, audit quality, and earnings manipulation

ABSTRACT This study examines how audit quality is related to the risk of earnings management when economic policy uncertainty increases. After analyzing 10,524 firm-year samples in Korea from 2012 to 2019, we find that when economic policy uncertainty is high, audit quality, measured by audit fees, audit hours, revised disclosure of financial reports, and discretionary accruals, increases. This implies that auditors increase audit quality at a time of economic policy uncertainty, which results in the improvement in financial information quality. Also, we find that during periods of high economic policy uncertainty, companies with high risk of earnings manipulation disclose higher quality financial information, but pay less audit fees. This suggests that auditors who audit firms with high risk of earnings manipulation adjust to increased audit risk by putting more effort into improving financial information quality, but such increased audit efforts are not reflected in audit fees. The results of the study imply that auditors’ efforts to control audit risks contribute to improving financial information quality in the presence of earnings manipulation risk where information asymmetry increases due to economic policy uncertainty.

The effects of non-Big 4 mergers on audit efficiency and audit market competition☆

This study examines whether recent mergers between small and midsize accounting firms influence competition by increasing the number of firms that can compete with larger rivals in the U.S. public company audit market. I find that in-market mergers generate efficiencies that are reflected in a post-merger reduction in audit hours but not in reduced audit quality. For both in-market and out-of-market mergers, clients switching to post-merger firms are more likely to be accelerated filers and are significantly larger in terms of several proxies for size and complexity. Lastly, I find that an increase in market-level merger activity is associated with lower profitability of Big 4 firms operating in the same market but only in the smaller client segment. These findings suggest that recent mergers have actually increased competition in some segments of the audit market despite already high concentration and concerns about a lack of sufficient competition.

Eliciting deliberative and implemental mindsets in audit planning

AbstractThere is concern that rather than critically deliberating specific circumstances, auditors focus on selecting and documenting defensible audit positions. Currently, subordinate auditors perform tasks mindful that they will be accountable for their work both inside (e.g., partners) and outside (e.g., PCAOB) the firm and adopt “implementation intentions” based on previous review experiences to guide their performance. In the context of fraud‐detection planning, we consider an alternative approach in which subordinate auditors work under contingent reward agreements under which they will be compensated for effective fraud‐detection plans. Lacking an anticipated course of action, they invoke a “deliberative mindset” in order to create a task strategy. In an experiment, auditors completed a fraud‐detection planning task under contingent rewards, accountability, or anonymity. We find that auditors operating under contingent rewards used deliberative mindsets. They were better able to identify potential fraud, select more effective procedures, and plan more hours for effective procedures. Auditors under accountability completed the planning task based on implementation intentions. They focused on broadly increasing audit hours across procedures, including allocating significantly more hours to less effective procedures. Mediation analysis shows that improved planning performance resulted from the use of deliberative mindsets and not implementation intentions.

An analysis of audit effort/hour demand based on shareholder ownership power

PurposeAudit hour reporting is rare internationally. Thus, to what extent shareholders have the power to influence audit effort/hour demand is a question left unanswered. This study aims to use unique South Korean data to determine whether the increasing power of the largest foreign/domestic shareholders and blockholders can influence audit hour demand.Design/methodology/approachIn this study ordinary least squares (OLS) regression analysis is conducted using a sample of Korean listed firms over the 2004–2018 sample period.FindingsThe results show: as the percentage equity holding of the largest foreign shareholder and blockholder (>5%) increases, audit hour demand increases. As the shareholding of the largest domestic shareholder increases, audit hour demanded decreases. The association between audit fees/hours is not qualitatively indifferent, after controlling for the audit fee premium effect. Furthermore, the largest foreign shareholder is shown to demand increasingly higher levels of audit hours from Big4 auditors, relative to NonBig4. All results are consistent with audit demand theory.Originality/valueWhilst previous studies offer audit fee/risk interpretations, this study extends the literature by developing a framework to explain why audit hour demands differ for specific groups. Because audit hour information is rare internationally, the study has important policy implications.

Big data analytics and auditor judgment: an experimental study

PurposeAuditors’ skills and knowledge of data analytics and big data can influence their judgment at the audit planning stage. At this stage, the auditor will determine the level of audit risk and estimate how long the audit will take. This study aims to test whether big data and data analytics affect auditors’ judgment by adopting the cognitive fit theory.Design/methodology/approachThis was an experimental study involving 109 accounting students as participants. The 2 × 2 factorial design between subjects in a laboratory setting was applied to test the hypothesis.FindingsFirst, this study supports the proposed hypothesis that participants who are provided with visual analytics information will rate audit risk lower than text analytics. Second, participants who receive information on unstructured data types will assess audit risk (audit hours) higher (longer) than those receiving structured data types. In addition, those who receive information from visual analytics results have a higher level of reliance than those receiving text analytics.Practical implicationsThis research has implications for external and internal auditors to improve their skills and knowledge of data analytics and big data to make better judgments, especially when the auditor is planning the audit.Originality/valuePrevious studies have examined the effect of data analytics (predictive vs anomaly) and big data (financial vs non-financial) on auditor judgment, whereas this study examined data analytics (visual vs text analytics) and big data (structured and unstructured), which were not tested in previous studies.