Risk Monitoring and Control in Audit Firms: A Research Synthesis

This paper summarizes the research literature related to audit firm quality control, with a dual purpose: (1) to provide information on the current state of knowledge with regard to the ways in which audit firms monitor and control firm‐level risk; and (2) to identify specific areas in which there is currently insufficient research. We review literature on a number of specific topics under the overall heading of firm‐level risk monitoring and control, including: client acceptance/continuance procedures, auditor independence (partner and firm rotation, employing former auditors, nonaudit services, partner compensation), electronic decision aids, consultation units, procedures for communicating weaknesses and taking corrective action, and review of engagement activities (including engagement quality reviews, peer reviews, and regulatory inspections). We conclude with a discussion of research relevant to the issue of whether smaller audit firms should be subject to the same level of quality control regulatio...

[1]  M. Curtis.  Are Audit-related Ethical Decisions Dependent upon Mood? , 2006 .

[2]  Jere R. Francis,et al.  Professional Service Fees and Auditor Objectivity , 2004 .

[3]  Jayanth K. Krishnan,et al.  Litigation Risk and Auditor Resignations , 1997 .

[4]  J. Bedard,et al.  Audit Firm Portfolio Management Decisions , 2004 .

[5]  D. Lowe,et al.  A Research Note on the Influence of Outcome Knowledge on Audit Partners' Judgments , 2002 .

[6]  Jere R. Francis.  What do we know about audit quality , 2004 .

[7]  Rani Hoitash,et al.  Auditor fees and audit quality , 2007 .

[8]  Mary Kreiner Ramirez.  Blowing the Whistle on Whistleblower Protection: A Tale of Reform versus Power , 2008 .

[9]  William F. Messier,et al.  Error Detection by Industry‐Specialized Teams during Sequential Audit Review , 2002 .

[10]  Ira N. Greenberg,et al.  Possible ethical issues and their impact on the firm: Perceptions held by public accountants , 1994 .

[11]  Joseph V. Carcello,et al.  Should you offer a job to your external auditor , 2000 .

[12]  Jere R. Francis,et al.  Evidence on auditor risk-management strategies before and after The Private Securities Litigation Reform Act of 1995 , 2002 .

[13]  David F. Larcker,et al.  Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance , 2004 .

[14]  Joseph V. Carcello,et al.  AUDIT COMMITTEE CHARACTERISTICS AND AUDITOR DISMISSALS FOLLOWING NEW GOING CONCERN REPORTS , 2003 .

[15]  Discussion of “The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market”* , 2010 .

[16]  Paul Danos,et al.  Specialized knowledge and its communication in auditing , 1989 .

[17]  Jean C. Bedard,et al.  The Effects of Decision Aid Orientation on Risk Factor Identification and Audit Test Planning , 2002 .

[18]  Thomas C. Omer,et al.  Auditor‐Provided Tax Services: The Effects of a Changing Regulatory Environment , 2006 .

[19]  Xiaohong Liu,et al.  Profit Sharing in an Auditing Oligopoly , 2005 .

[20]  J. Kenneth Reynolds,et al.  Audit‐Firm Tenure and the Quality of Financial Reports* , 2002 .

[21]  Joseph F. Brazel,et al.  Electronic versus Face-to-Face Review: The Effects of Alternative Forms of Review on Auditors' Performance , 2003 .

[22]  Vivek Mande,et al.  The Effect of Audit Committee and Board of Director Independence on Auditor Resignation , 2004 .

[23]  Karim Jamal,et al.  Do Auditors Objectively Evaluate Their Subordinates' Work? , 2001 .

[24]  Stewart A. Leech,et al.  Audit Support Systems and Decision Aids: Current Practice and Opportunities for Future Research , 2007 .

[25]  Rajiv D. Banker,et al.  Impact of Information Technology on Public Accounting Firm Productivity , 2002, J. Inf. Syst..

[26]  Alice A. Ketchand,et al.  The effects of formal sanctions on auditor independence : what forms of discipline do auditors heed? BY STEVEN GLOVER, JAMES JIAMBALVO AND JANE KENNEDY , 2001 .

[27]  S. Kaplan,et al.  Review Partners' Reactions to Contact Partner Risk Judgments of Prospective Clients , 2003 .

[28]  Doocheol Moon,et al.  Auditor Tenure and Perceptions of Audit Quality , 2005 .

[29]  Michael S. Luehlfing,et al.  An Examination of the Relationship between Audit-Related Risks and the Second Partner Review , 1995 .

[30]  Mark L. DeFond,et al.  Do Non-audit Service Fees Impair Auditor Independence? Evidence from Going-concern Audit Opinions , 2002 .

[31]  D. Rama,et al.  Clients' Expectations on Audit Judgments: A Note , 2004 .

[32]  B. Winograd,et al.  Audit Practices of PricewaterhouseCoopers , 2000 .

[33]  Michael Gibbins,et al.  Evidence About Auditor-Client Management Negotiation Concerning Client's Financial Reporting , 2000 .

[34]  A. Vanstraelen.  Impact of renewable long-term audit mandates on audit quality , 2000 .

[35]  Roger Simnett,et al.  Audit Partner Tenure and Audit Quality , 2006 .

[36]  Dana R. Hermanson,et al.  Auditor Risk Assessment: Insights from the Academic Literature , 2006 .

[37]  Sanjay Kallapur,et al.  Client Importance, Nonaudit Services, and Abnormal Accruals , 2003 .

[38]  William E Messier.  Judgment and decision-making research in accounting and auditing: Research in and development of audit-decisions aids , 1995 .

[39]  Stewart A. Leech,et al.  Audit support systems and decision aids: Current practice and opportunities for future research , 2007, Int. J. Account. Inf. Syst..

[40]  Andrew J. Rosman,et al.  Successful Audit Workpaper Review Strategies in Electronic Environments , 2007 .

[41]  Sally Wright,et al.  Auditor Negotiations: An Examination of the Efficacy of Intervention Methods , 2005 .

[42]  James C. Lampe,et al.  A Study of Whistleblowing Among Auditors , 1992 .

[43]  John P. Keenan,et al.  Culture and Whistleblowing An Empirical Study of Croatian and United States Managers Utilizing Hofstede's Cultural Dimensions , 2003 .

[44]  H. Tan,et al.  Are Reviewers' Judgements Influenced by Memo Structure and Conclusions Documented in Audit Workpapers?* , 2001 .

[45]  Granville KingIII.  The Implications of an Organization's Structure on Whistleblowing , 1999 .

[46]  Thomas C. Omer,et al.  Exploring the Term of the Auditor‐Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation? , 2003 .

[47]  Bernard Pierce,et al.  Management control in audit firms¿Partners¿ perspectives , 2005 .

[48]  Jeffrey R. Cohen,et al.  Auditors' Consideration of Corporate Governance and Management Control Philosophy in Preplanning and Planning Judgments , 2000 .

[49]  Terry D. Warfield,et al.  Antecedents and Consequences of Independence Risk: Framework for Analysis , 2001 .

[50]  M. Geiger,et al.  The Auditor-to-Client Revolving Door and Earnings Management , 2005 .

[51]  Kannan Raghunandan,et al.  Auditor Tenure and Audit Reporting Failures , 2002 .

[52]  K. Pany,et al.  Findings on the Effects of Audit Firm Rotation on the Audit Process under Varying Strengths of Corporate Governance , 2006 .

[53]  Michael L. Ettredge,et al.  Auditor Realignments Accompanying Implementation of SOX 404 ICFR Reporting Requirements , 2010 .

[54]  Robin W. Roberts,et al.  Factors Associated with the Incidence of Reduced Audit Quality Behaviors , 1998 .

[55]  Jean C. Bedard,et al.  KRiskSM: A Computerized Decision Aid for Client Acceptance and Continuance Risk Assessments , 2002 .

[56]  N. Brennan,et al.  A Study of Whistleblowing Among Trainee Auditors , 2007 .

[57]  Scott D. Vandervelde,et al.  Do Auditor‐Provided Nonaudit Services Improve Audit Effectiveness?* , 2007 .

[58]  Joseph V. Carcello,et al.  Going-Concern Opinions: The Effects of Partner Compensation Plans and Client Size , 2000 .

[59]  H. Koh,et al.  The Effects Of Client Employment On Auditor Independence , 1993 .

[60]  J. Krishnan,et al.  Auditor switching and conservatism , 1994 .

[61]  Daniel Bradlow.  Private Complainants and International Organizations: A Comparative Study of the Independent Inspection Mechanisms in International Financial Institutions , 2005 .

[62]  Randal J. Elder.  A comment on "audit quality in audits of federal programs by non-federal auditors" , 1997 .

[63]  Gregory M. Trompeter,et al.  Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts , 2007 .

[64]  Randy K. Chiu,et al.  Ethical Judgment and Whistleblowing Intention: Examining the Moderating Role of Locus of Control , 2003 .

[65]  K. Johnstone.  Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation , 2006 .

[66]  Gilles Hilary,et al.  The Credibility of Self-Regulation: Evidence from the Accounting Profession's Peer Review Program , 2005 .

[67]  C. Dee,et al.  Prominent Audit Clients and the Relation between Discretionary Accruals and Non-Audit Service Fees , 2006 .

[68]  Ananda Ganguly,et al.  The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market , 2004 .

[69]  Roger H. Hermanson,et al.  Client Satisfaction and Big 6 Audit Fees , 1999 .

[70]  J. Bedard,et al.  Risk Management in Client Acceptance Decisions , 2003 .

[71]  Gregory M. Trompeter,et al.  The Effect of Non-Audit Services on Client Risk, Acceptance and Staffing Decisions , 2005 .

[72]  S. Cory,et al.  Whistleblowing and management accounting: An approach , 1989 .

[73]  Marcia P. Miceli,et al.  Does Type of Wrongdoing Affect the Whistle-Blowing Process? , 2004, Business Ethics Quarterly.

[74]  Dasaratha V. Rama,et al.  Audit fees, non-audit fees, and auditor reporting on UK stressed companies , 2003 .

[75]  K. Raghunandan,et al.  Local and Regional Audit Firms and the Market for SEC Audits , 2004 .

[76]  Carlin Dowling.  The compensatory and complementary influence of individual , team and firm level factors on appropriate audit support system use , 2006 .

[77]  A Theory Of Audit Partnerships - Audit Firm Size And Fees , 1987 .

[78]  J. M. Cook,et al.  The Future of the Accounting Profession , 1993 .

[79]  Donald Stokes,et al.  Auditor Independence and Fee Dependence , 2002 .

[80]  Rachel Schwartz,et al.  An Experimental Investigation of Retention and Rotation Requirements , 2001 .

[81]  E. Michael Bamber,et al.  An Investigation of the Effects of Specialization in Audit Workpaper Review , 1997 .

[82]  Stacey M. Whitecotton,et al.  An Examination of Auditors' Reporting Intentions When Another Auditor Is Offered Client Employment , 2001 .

[83]  Robert R. Tucker,et al.  Second Partner Review: An Analytical Model , 1995 .

[84]  Stephen Kwaku Asare,et al.  The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness , 2007 .

[85]  Marilyn F. Johnson,et al.  The Relation between Auditors' Fees for Nonaudit Services and Earnings Management , 2002 .

[86]  A. R. Wyatt.  Accounting Professionalism—They Just Don't Get It! , 2004 .

[87]  Ed O'Donnell,et al.  The Halo Effect in Business Risk Audits: Can Strategic Risk Assessment Bias Auditor Judgment about Accounting Details? , 2005 .

[88]  David Woodliff,et al.  The Effect of Risk of Misstatement on the Propensity to Commit Reduced Audit Quality Acts under Time Budget Pressure , 2004 .

[89]  K. Raghunandan,et al.  Auditor Resignations and the Market for Audit Services , 1999 .

[90]  Hun-Tong Tan,et al.  Effects Of Expectations, Prior Involvement, And Review Awareness On Memory For Audit Evidence And Judgment , 1995 .

[91]  Joseph V. Carcello,et al.  Inappropriate Audit Partner Behavior: Views of Partners and Senior Managers , 1996 .

[92]  Joseph J. Schultz,et al.  An Investigation Of The Reporting Of Questionable Acts In An International Setting , 1993 .

[93]  An Empirical Analysis of Voluntarily Supplied Client-Auditor Realignment Reasons , 2004 .

[94]  Steven E. Salterio.  Researching for Accounting Precedents: Learning, Efficiency, and Effectiveness* , 1994 .

[95]  Steven E. Salterio,et al.  Accounting Consultation Units: An Organizational Memory Analysis* , 1997 .

[96]  Mary S. Doucet,et al.  Auditor Tenure, Fixed Fee Contracts, and the Supply of Substandard Single Audits , 1993 .

[97]  Mario J. Maletta,et al.  The Influence of Nonaudit Service Revenues and Client Pressure on External Auditors' Decisions to Rely on Internal Audit* , 2005 .

[98]  Ryan LaFond,et al.  Do Nonaudit Services Compromise Auditor Independence? Further Evidence , 2003 .

[99]  Frederick L. Jones,et al.  Client risk and recent changes in the market for audit services , 1998 .

[100]  Jean C. Bedard,et al.  The effect of training on auditors' acceptance of an electronic work system , 2003, Int. J. Account. Inf. Syst..

[101]  Christopher P. Agoglia,et al.  The Effects of Alternative Justification Memos on the Judgments of Audit Reviewees and Reviewers , 2003 .

[102]  Stephen A. Zeff,et al.  How the U.S. Accounting Profession Got Where It Is Today: Part II , 2003 .

[103]  Joseph F. Brazel,et al.  The Effect of Audit Review Format on the Quality of Workpaper Documentation and Reviewer Judgments , 2005 .

[104]  Kathryn Kadous,et al.  The Effect of Quality Assessment and Directional Goal Commitment on Auditors' Acceptance of Client‐Preferred Accounting Methods , 2003 .

[105]  D. Simunic,et al.  Audit risk in a client portfolio context , 1990 .

[106]  Steven E. Kaplan,et al.  Wrongdoing by Consultants: An Examination of Employees’ Reporting Intentions , 2005 .

[107]  Michael Favere-Marchesi,et al.  The Impact of Continuity on Concurring Partner Reviews: An Exploratory Study , 2005 .

[108]  David D. Williams,et al.  Former Audit Partners and Abnormal Accruals , 2004 .

[109]  William F. Messier,et al.  Engagement quality review: insights from the academic literature , 2007 .

[110]  K. Raghunandan,et al.  Types of nonaudit fees and financial reporting quality , 2007 .

[111]  Susan Z. Shu,et al.  Auditor resignations: clientele effects and legal liability☆ , 2000 .

[112]  Lawrence J. Abbott,et al.  Auditor Selection and Audit Committee Characteristics , 2000 .

[113]  Dennis Murray,et al.  The Association between Auditor Quality and Auditor Size: An Analysis of Small CPA Firms , 1998 .

[114]  K. Raghunandan,et al.  Initial Evidence on the Association between Nonaudit Fees and Restated Financial Statements , 2003 .

[115]  Lynford Graham,et al.  The Effect of Electronic Audit Environments on Performance , 2005 .

[116]  William R. Kinney,et al.  Auditor Independence, Non‐Audit Services, and Restatements: Was the U.S. Government Right? , 2004 .