Small Audit Research Articles

SAS 58, Audit Firm Size, And The Incidence Of Uncertainties In Audit Reports: An Empirical Study

This study develops and investigates two hypotheses: (1) that adoption of SAS 58 should be associated with an increase in the incidence of uncertainties referenced in the audit reports of small audit firms and (2) that there should be no change in the incidence of uncertainties referenced by large audit firms. The empirical results support both hypotheses. The main implication is that standard-setting bodies need to begin giving consideration to the possibility of size-related differences in the effects of changes in auditing standards.

A Study Of Differential Attitudes Held BY Auditors From Large And Small U.S. Firms Toward Audits Performed By Small Public Accounting Firms.

In an experiment (N=46), auditors from large U.S. firms attached greater relevancy to GAAS and assigned higher levels of quality to audit procedures applied to a small business audit than did auditors from small U.S. firms. These findings suggest the existence of a perception gap. Auditors from large firms may not be fully aware of the audit dilemmas facing small firms with small business audit clients.

Evaluation of patient outcomes: pressure ulcer prevention mattresses

This article reports the findings of a small evaluation audit which compares the Dyna-Form Mercury Advance Mattress to that of the Softform Premier Active Mattress (a foam mattress with dynamic underlay). A small group of patients with similar co-morbidities who were an emergency admission were recruited to an evaluation audit. Their median age and Waterlow score indicated that these patients were at high risk of pressure ulcer development. All patients were given the same nursing care on the two mattresses and all were moved, handled and repositioned 2-4 hourly. Of the patients nursed on the Dyna-Form Mercury Advance mattress, three did not develop pressure ulcers. The two who already had pressure ulcers when they were recruited appeared to have healed within four days. Of the patients nursed on the Softform Premier Active mattress, three patients did not develop ulcers and two did. Although the sample size was small, the comprehensive assessment gave interesting results, particularly on the Dyna-Form Mercury Advance. A larger study may be of benefit to demonstrate efficacy of these products further.

The Differential Impact of the Force of Law Australian Auditing Standards

This qualitative study explores whether the impact of the introduction of the legally enforceable Australian Auditing Standards (ASAs) differs between audit firms based on their size. It complements and extends the Australian Government's pre-implementation April 2006 Regulation Impact Statement ( AUASB 2006 ) and Hecimovic et al.'s (2009) study exploring the perceptions of key stakeholders. The results of the current study, based on data from extensive interviews with auditors from small, medium and large audit firms, suggest that compliance with the legally enforceable ASAs does not appear to increase perceived audit quality or public confidence. The study also finds that the costs/benefits to small audit firms and their clients differ to those of medium and large firms, raising questions about the viability of smaller firms remaining in the audit market.

The riskiness of audit firm continuing clients' portfolio

PurposeThe purpose of this paper is to test whether firms audited by the same Big 4 audit firm (Big 4 continuing clients) are more/less likely to report material weaknesses (systemic material weaknesses) in internal controls over a financial reporting than those audited by the same Non‐Big 4 audit firm (Non‐Big 4 continuing clients) over the period 2005‐2008. It also investigates whether the number of material weaknesses and that of systemic material weaknesses varies among the two groups.Design/methodology/approachLogistic regression and count regression analysis for panel data tests the hypotheses using all firms that had SOX 404 filings and that were audited by the same auditor over the period 2005‐2008 (1,668 firms; 6,672 firm‐year observations).FindingsFindings document that Big 4 continuing clients are less likely to report material weaknesses and systemic material weaknesses than Non‐Big 4 continuing clients, especially during the first two years of investigation. Results also demonstrate that the number of material weaknesses and that of systemic material weaknesses reported by Big 4 continuing clients is significantly lower than that reported by Non‐Big 4 continuing clients, primarily for the years 2005 and 2006.Originality/valueFindings support the risk avoidance perspective where large audit firms avoid riskier clients due to potential litigation costs and/or due to potential sanctions by the Public Company Accounting Oversight Board (PCAOB). Results also suggest that smaller audit firms did not extensively test the quality of internal controls prior to the year 2004. They highlight that the enactment of SOX 404 and the establishment of the PCAOB heightened audit firms focus on internal controls and raised their sensitivity to audit risk arising from weaknesses in internal controls over financial reporting.

Students' Perceptions of Work-Based Training and Examination-Based Learning Relating to the Professional Competence of Auditors and the Impact of Regulatory Changes on Audit Training in the UK

The purpose of this paper is to investigate students' perceptions of work-based training and examination-based learning as it relates to the professional competence of auditors. The paper takes as its motivation the fall in the number of accountants registering as qualified auditors in the UK following fundamental changes in the audit environment. Legislation aimed at reducing red tape has resulted in a large number of UK companies taking advantage of an audit exemption, and most of these are clients of small audit firms. This legislative change has had significant pedagogic implications on the experiential learning of audit trainees and the availability of training opportunities for them. The contribution of the paper is to explain the perceived relevance and importance of training opportunities to trainees seeking to obtain audit qualifications. Using data from an on-line questionnaire and focus groups, the study reports that trainees in smaller firms lack opportunities to obtain sufficient audit experience, and there is a lack of synchronization between limited practical experience and classroom tuition provided before taking auditing examinations. The implications are that effective audit training will become restricted to large audit firms the trainees in which often choose different career paths to auditing, thereby limiting the number of qualified auditors in the UK in the future.

The effect of SOX on small auditor exits and audit quality

We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.

The combined reverse scarf and opening wedge osteotomy of the proximal phalanx for the treatment of iatrogenic hallux varus

Backgrond : Hallux varus is a complication of hallux valgus surgery. Historically the standard treatment has been to arthrodese the first metatarso-phalangeal (MTP) joint. More recently other options have come to light, including reverse osteotomies and tendon-transfer procedures. Objectives : This paper presents a small retrospective audit of patients who developed hallux varus following the combined rotation scarf and Akin osteotomy for hallux valgus, and their subsequent treatment with a stepwise approach of soft tissue release and ultimately reverse scarf osteotomy and opening wedge osteotomy of the proximal phalanx. Method : Five patients attended for a retrospective audit including reasons for revision surgery, review of intermetatarsal (IM) and first metatarso-phalangeal joint (MTPA) angles, AOFAS scores and patient satisfaction. Results : At a mean follow up of 38 months, mean IM angle and MTP joint angle improved from 5 to 9° and −10° to 11° respectively. Mean first MTP joint dorsiflexion and plantarflexion was 26° and 19° respectively. One patient was completely satisfied and four were satisfied with reservations with their surgical outcome and 100% felt they were better off as a result of their surgery. Conclusion : The stepwise approach to the reverse scarf and opening wedge osteotomy of the proximal phalanx for iatrogenic hallux varus is an alternative to first MTP joint arthrodesis for those with a viable joint.

Implementation of a bowel care protocol within ICU

This 11 bedded level 3 ICU did not have a formal bowel care protocol in place. Bowel care was addressed by giving a variety of aperients and a general observation over a period of several months was that constipation was a problem. A small audit was carried out in June to July 2008 on 7 patients. All patients were intubated and ventilated, receiving enteral feeding and had not had bowel surgery. The objectives were to determine how long after admission were aperients given, what aperients were given and how long after admission were bowels opened. Patients were commenced on aperients on day 4 of admission on average. All patients received prune juice BD and then varients of Movicol, Lactulose, Microlax and senna. Bowels were opened on day 9 of admission on average. A need for a bowel care protocol was identified. A protocol was developed between June 2008 and February 2009. Inservice sessions for staff were carried out from Mar 2009 onwards and the protocol was implemented in June 2009. A repeat audit in May to June 2010 was carried out on 7 patients. Patients were commenced on the protocol on day 1.6 of admission on average. Bowels were opened on day 5.3 of admission on average. It was clear from the results that the implementation of a formal protocol has improved bowel care and decreased constipation.

Big 4 auditor affiliation and accruals quality in Bangladesh

PurposeBangladesh is an emerging economy and international audit firms operate there through affiliated local audit firms. The Bangladesh audit market can be characterized as an intensely competitive small audit market with relatively poor demand for high‐audit quality. In addition, Bangladesh has a relatively small and under developed but growing capital market that is characterized by poor corporate regulation and weak investor protection. The purpose of this paper is to examine the association between Big 4 affiliated auditors and accruals quality in Bangladesh.Design/methodology/approachFollowing prior literature, this paper uses both absolute discretionary accruals and signed discretionary accruals as proxies of accruals quality. The sample is 382 firm‐year observations and covers fiscal years 2000‐2003.FindingsIt was found that the association between Big 4 affiliates and accruals quality in Bangladesh depends on measures of accruals quality and accruals models used. Overall, Big 4 affiliates do not have a positive impact on accruals quality of their clients in Bangladesh.Originality/valueThis paper contributes to the literature on audit quality and accruals quality. The results potentially suggest that Big 4 affiliates do not have any positive impact on accruals quality of clients in an intensely competitive audit market where the demand for quality audit is poor and monitoring is lax and raise potential implications for policy makers and market participants in Bangladesh.

The impact of audit committee existence and characteristics on auditor auditee negotiation outcomes: an empirical study in the Tunisian context

The main purpose of this paper is to analyse the relationship between auditor auditee negotiation outcome and the existence and characteristics of the audit committee in Tunisian context. The multivariate tests were led on a sample of 142 Tunisian firms for the period 2006-2007. The results of our study reveal that audit committee existence has a significant influence on auditor auditee negotiation outcome. Meanwhile, audit committee independence, audit committee expertise and the number of meetings were not relevant in explaining auditor auditee negotiation outcomes. Within the control variable, the size of the audit firm is positively significant indicating that Big 4 audit firms are more likely to agree with their auditees than smaller audit firms. This study has important implications on the auditing profession and regulators in Tunisia. So, it reinforces the role of audit committee as corporate governance mechanisms in reducing auditor auditee conflict and in improving financial information quality.

Do Individual Auditors Affect Audit Quality? Evidence from Archival Data

We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze about 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.

The Determinants and Costs of Non-Compliance with SEC Reporting Requirements: Evidence from SEC 10-K Comment Letters

Securities and Exchange Commission (SEC) comment letters provide independent and timely feedback on the clarity of disclosures and on the extent to which filings comply with Generally Accepted Accounting Principles and SEC reporting regulations. We investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation. We find that in addition to factors explicitly stated to increase SEC scrutiny in Section 408 of the Sarbanes-Oxley Act, low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter, the extent of comments, and the cost of remediation. The probability that the comment letter results in a restatement is higher for smaller companies and for companies engaging a small audit firm. We also provide evidence that comments relating to accounting issues result in higher remediation costs, largely due to the additional time required to resolve comments relating to classification issues and fair value issues. Our findings should be of interest to stakeholders who use SEC comment letters to assess disclosure quality and reporting compliance, and to managers and other stakeholders impacted by costs associated with the SEC’s review process.

Gender Identity Disorder in Greater Manchester, Lancaster and Sheffield

The concept of gender identity disorder (GID) is complex, children may hide their conflict and receive intense reactions when they do disclose. Currently both the World Health Organisation and the American Diagnostic and Statistic Manual of Mental Disorders are being rewritten; this process has highlighted the dilemmas posed by choosing a gender that differs from ones birth sex. The aetiology and prevalence of GID is yet to be fully elucidated. A brief questionnaire examining age, ethnicity, comorbidity and service use was cascaded to identify colleagues in Central Manchester and surrounding trusts. Seven trusts were approached and 19 cases identified, 11 children were female at birth. This small audit demonstrates that there is a need for local and specialist services to manage both GID and the accompanying psychopathology.

Audit Pricing: The Size Factor

Based on data from the German market, this study aims at adding further findings to international research in the field of audit pricing, which so far was mainly focused on the US and Australasian market. First, for Germany we can affirm past research that Big4 auditors earn a premium over other auditors. We can also affirm that providing non-audit services has a positive influence on the audit fees. Beyond these results, we can show that the market leader of our sample, KPMG, can even earn an audit fee premium over the remaining Big4 auditors. We can prove a positive effect of non-audit services on audit fees for Big4 audits only. Furthermore, we can show a significant influence of risk variables such as leverage or past losses for the small audit clients in our sample only. Finally, this study shows that using the logarithm of the number of employees instead of the logarithm of total assets is a good proxy for company size.

The Impact Of Audit Quality On Earnings Management To Achieve User Reference Points In EPS

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Prior research (Thomas, 1989; Das and Zhang, 2003; Jordan et al., 2008a) presents evidence that managers manipulate income to round up earnings per share (EPS) to key user reference points when unrounded EPS fall only slightly below these breakpoints.<span style="mso-spacerun: yes;">  </span>In the U.S., studies on audit quality suggest that, relative to small audit firms, large CPA firms provide higher quality audits and, as such, more aggressively constrain their clients’ attempts to manage earnings in general (e.g., see Francis and Krishnan, 1999; Krishnan, 2003).<span style="mso-spacerun: yes;">  </span>However, research outside the U.S. finds no consistent audit quality differential based on auditor size (e.g., see Piot and Janin, 2007; Maijoor and Vanstraelen, 2006).<span style="mso-spacerun: yes;">  </span>The current study examines whether audit quality, as proxied by auditor size, in the U.S. constrains earnings management to effect user reference points in EPS.<span style="mso-spacerun: yes;">  </span>Using the Big 4 versus non-Big 4 dichotomy as the measure of auditor size and audit quality, results suggest that audit quality significantly restricts management’s attempts at rounding up EPS as clients of Big 4 firms show no major signs of this manipulative behavior while non-Big 4 auditees appear to round up the first digital position right of the decimal point in EPS across zero to increase the digit immediately left of the decimal point by one.</span></span></p>

Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms

SUMMARY: After the demise of Arthur Andersen, the public accounting industry has witnessed a significant migration of public clients to second-tier (Grant Thornton and BDO Seidman) and smaller third-tier accounting firms. While prior literature documents that smaller auditors are perceived by the stock market as an inferior substitute for a Big 4 auditor, this perception appears to have changed in recent years. In this paper, we analyze market responses to auditor switching from Big 4 to smaller accounting firms during 2002 to 2006. We break our sample period into two separate periods (Periods 1 and 2) based on when regulatory changes occurred. These changes included Sarbanes-Oxley (SOX) 404 implementation, Public Company Accounting Oversight Board (PCAOB) inspections, and a tightened Form 8-K filing deadline. We find a relatively more positive stock market reaction to clients switching from a Big 4 to a smaller third-tier auditor in Period 2. This relatively more positive reaction in Period 2 reflects companies seeking better services rather than a lower audit fee, when an audit quality drop is less likely. Overall, our results suggest that companies and investors have become more receptive to smaller accounting firms.

Still Sad after Successful Renal Transplantation: Are We Failing to Recognise Depression? An Audit of Depression Screening in Renal Graft Recipients

Background: Depression is common in chronic physical illness, including renal graft recipients. There is evidence that depression is an independent marker of poorer prognosis in dialysis patients. In the UK, screening is advocated by the National Institute for Health and Clinical Excellence guidelines, and validated screening tools exist, such as the Beck Depression Inventory (BDI). Methods: We audited our renal graft recipient outpatient clinic to see if screening was being undertaken by our clinicians, and to confirm the rates of depressive symptoms in our population as reported by the BDI. Results: In a sample of 58 transplant patients, we found that the screening rate for depression was poor, particularly by nephrologists (n = 8, 13.8%). In addition, 13 (22.4%) of our patients had significant depressive symptoms (BDI score ≧16). Following univariate analysis, we found that the most important predictor of current significant depressive symptoms was a past history of depression. Conclusions: Despite the limitations of our small audit, our results confirm that depression is under-screened in renal graft recipients, even in those with a known history of depression. We recommend increased awareness of depression and implementation of regular screening in an outpatient setting; in this regard, the BDI may have utility.

Rectal irrigation for patients with functional bowel disorders.

Functional bowel disorders encompass a number of symptoms including abdominal, pelvic and/or anal pain, bloating, nausea, disturbed bowel function, faecal urgency or incontinence, straining to evacuate bowels, incomplete emptying and constipation. This article examines the causes and effects of functional bowel problems on patients' quality of life. It provides an overview of the treatment options and clinical management of these conditions, focusing on biofeedback and rectal irrigation. The author reports results from a small scale audit at her hospital and concludes that rectal irrigation is a valuable treatment option for patients with functional bowel disorders.

Rectal irrigation for patients with functional bowel disorders

Functional bowel disorders encompass a number of symptoms including abdominal, pelvic and/or anal pain, bloating, nausea, disturbed bowel function, faecal urgency or incontinence, straining to evacuate bowels, incomplete emptying and constipation. This article examines the causes and effects of functional bowel problems on patients' quality of life. It provides an overview of the treatment options and clinical management of these conditions, focusing on biofeedback and rectal irrigation. The author reports results from a small scale audit at her hospital and concludes that rectal irrigation is a valuable treatment option for patients with functional bowel disorders.