ABSTRACT This study examines how auditors adjust their risk responses to the COVID‐19 pandemic, an exogenous shock that heightened uncertainty and constrained access to audit evidence. Using manually collected audit‐procedure disclosures from Key Audit Matters (KAMs) for Chinese A‐share listed companies from 2017 to 2022, we employ a generalized difference‐in‐differences design to identify changes in auditors' procedural and evaluative responses. Auditor risk responses are measured through variations in internal control testing, substantive audit procedures and expert consultations. We find that auditors in more severely affected regions intensified internal control testing, expanded substantive procedures and relied more on expert consultations. Mechanism tests indicate that heightened going‐concern risk plays a limited role, whereas constrained access to audit evidence is the primary channel, particularly for expert consultations. The effects are stronger for firms with greater strategic risk, complexity and external scrutiny and for audits conducted by industry specialists, female partners and more sceptical auditors, but weaker for longer tenured auditors. Enhanced audit responses are associated with lower stock price synchronicity, lower discretionary accruals and longer audit delays. Our findings provide evidence on how auditors adapt audit procedures and evaluations under extreme uncertainty and demonstrate the value of KAM disclosures for understanding reported audit responses.
We draw on an extensive body of research on material weaknesses (MWs) in internal control over financial reporting and employ a robust empirical approach to develop a firm-year measure of MW likelihood, denoted I-score. I-score reflects the likely presence of a MW and captures a key dimension of financial reporting quality. We present multiple MW models and demonstrate that I-score effectively predicts both MWs and financial restatements. Validated across multiple time periods, our I-scores significantly outperform those developed by prior research and are designed for wide applicability. Our results support the usefulness of I-score for academic researchers, investors, auditors, regulators and other financial market participants seeking a reliable, continuous measure of MW likelihood.
This study examines whether managers continue to disclose going-concern risks when audit oversight is reduced. While regulators have generally responded to the concerns regarding going-concern risk disclosures by strengthening audit oversight, Japan's 2009 reform provides a unique setting in which oversight was relaxed. Using data on financially distressed firms, we find that both the likelihood and extent of going-concern disclosures were sustained after the reform. The results indicate that relaxing audit verification did not diminish disclosure and that managerial incentives play an important role in going-concern reporting.
This study investigates the relationship between Critical Audit Matters (CAMs) and subsequent auditor changes. Using a comprehensive dataset of hand-collected CAMs from 2019 to 2022, we find that a higher number of CAMs is associated with an increased likelihood of auditor-client realignment. This association is driven primarily by auditor resignations, rather than dismissals. In addition, firms disclosing multiple CAMs are more likely to experience downward auditor switches. Finally, among firms that disclose at least two CAMs and dismiss their auditors, the successor auditors tend to report fewer CAMs. Overall, our findings suggest that CAM disclosures are associated with economically meaningful outcomes in the audit market, rather than serving solely as a reporting requirement. Consistent with this view, CAMs may play a role in shaping auditor-client matching and the evolution of audit engagements over time.
We examine mandatory audits using Spanish private companies to generate insight into (1) how audit thresholds vary in tightness and impact, (2) which audit thresholds are crossed to cause audit commencement and cessation, (3) whether firms take actions to avoid audits and (4) whether audits provide economic benefits. Sample firms are subject to mandatory audits when they exceed two of three size thresholds for assets, revenue and number of employees. Investigating these thresholds, we find significant variation in their impacts on mandatory audits: The assets threshold is the tightest, whereas the number of employees is the least tight, and revenue best distinguishes mandatory audit status. Using discontinuity analysis, we find evidence that firms take actions to avoid crossing the audit thresholds, especially if another threshold has already been exceeded. Finally, we find that mandatory audits are associated with decreased borrowing costs and increased levels of debt that may persist beyond audit cessation. Our study provides regulators with insights into how each size threshold drives mandatory audit status. We also demonstrate that despite providing economic benefits, firms act to avoid mandatory audits, which suggests that regulators should seek to reduce the frictions driving such behaviour.
Using data pertaining to China's mandatory two-signature regime, under which a certified public accountant licensed as an audit manager can serve as an audit report signatory, we examine whether reallocating accountability within the audit engagement team is associated with audit quality. We find that audit reports signed by an audit partner and manager are of higher quality than those signed by two audit partners. Additional analyses show that this effect is especially pronounced among audit clients with complex operations and that signing by a partner and manager is associated with improved audit efficiency due to reductions in audit report lags and audit fees. Our study extends audit accountability research by providing novel evidence that the identity combination of audit partner and manager signatories changes accountability pressure across hierarchical levels and process versus outcome audit engagement responsibilities, with implications for audit effort, scepticism and issue escalation within the audit engagement team.
This study examines the impact of deep-level value diversity within audit teams on audit quality. Although prior research on audit teams has primarily focused on surface-level diversity, which is related to observable characteristics such as gender, background or hierarchical position and generally viewed as beneficial due to its potential to broaden the team's knowledge base, deep-level diversity may have a different impact. Deep-level diversity refers to differences in underlying non-visible attributes, such as personal values, which only become apparent through interpersonal interaction. These differences can negatively influence team functioning, as people tend to communicate and collaborate more effectively with those who share similar values. Using survey data from 66 complete audit teams (258 auditors), we find that higher value diversity is indeed negatively associated with audit quality. Moreover, our findings provide conditional and range-specific exploratory evidence suggesting that this negative association becomes more pronounced as time pressure increases.
In this Perspective essay, I offer some provocations about the future of auditing. I suggest that auditing is currently undergoing technological change in its practice unlike any other in its history in which notions of evidence and auditability have become fluid. The pervasiveness of algorithms in auditee systems necessitates that auditing itself becomes algorithmic in nature. Although there may be considerable efficiency benefits from this, there is a risk that auditing becomes 'platformized' as one app attached to auditee systems. This in turn implicates the non-independence of the evidentiary basis of the audit. At the extreme, auditing becomes algorithmically self-referential, and the human auditor is reduced to the 'de-skilled' curator of analytical models and their decisions. At the same time, the underlying algorithms remain beyond auditability and human comprehension. I suggest that scholars have an opportunity to explore these processes empirically and that practitioners and professional institutes need to be vigilant about the side effects of technology in auditing. They must nurture the human-centric and dialogic nature of the practice in the face of these changes.
Prior research examining value-added auditing in auditor-client relationships is primarily based on the auditor's perspective. We extend this line of research by examining how governance patterns and clients' perceived risk of material misstatement and cognitive conflict are associated with the provision of value-added audit services. Using the partial least squares (PLS) technique to analyse survey data collected from 249 senior managers in listed firms in Australia, we found that clients' perceived risk of material misstatement is positively related to the service provision, both directly and indirectly, through cognitive conflict. Of the two governance patterns, only contractual use is directly related to the service provision. Moreover, cognitive conflict between clients and auditors is found to mediate the relationship between relational governance and service provision. Overall, our study highlights the distinct roles of relational and contractual governance, perceived risk of material misstatement and cognitive conflict in interdependent relationships between auditors and clients, contributing to the provision of value-added audit services.
This study investigates whether implementation of internal audit recommendations and management's acceptance of internal audit findings are associated with the extent of external auditors' reliance on internal audit work. Data were collected from two sources. We obtained 325 survey responses from the heads of internal audit of companies listed on the Bursa Malaysia, along with the annual reports of the surveyed companies for 2022-2023. Using a unified regression framework, the results indicate a significant positive association between the implementation of internal audit recommendations and external auditors' reliance decisions. Management's acceptance of IA findings and audit committee oversight features, particularly private meetings between the head of internal audit and the audit committee, are also positively associated with reliance on internal audit work. These findings have important implications for external auditors, senior managers and regulators, by providing insight into how observable IA outputs and governance mechanisms shape external auditors' reliance decisions. Specifically, greater reliance may enable external auditors to reduce duplicative audit procedures, whereas senior management may be encouraged to strengthen corrective actions by implementing internal audit recommendations.
This paper examines the role of country-level regulatory disclosure requirements in moderating the relationship between audit partner tenure and audit fees. Using a sample of publicly listed companies in Western Europe, our findings reveal that audit partners with longer tenure charge higher fees, reflecting their incremental contribution to the audit process. This fee premium is more pronounced in countries with weaker disclosure requirements, where companies pay 15.33% higher audit fees when compared to companies with stronger regulatory requirements, highlighting the critical role of audit partners' firm-specific tenure in providing assurance about the credibility of financial information in such contexts. Additional analyses show that a new EU regulatory disclosure requirement had a positive effect on audit fees only in previously weak regulatory disclosure requirement settings, confirming the importance of audit partner tenure in explaining the high audit fee premiums. Overall, our study provides valuable insights for policymakers, practitioners and academics.
With the growth in reporting of sustainability information and the necessity to improve the credibility and trustworthiness of this information, independent assurance of sustainability information is becoming increasingly important. Internationally, we have seen the recent development of reporting standards on sustainability and climate-related information, accompanied by the development of assurance standards by the IAASB. With countries and companies increasingly reporting this information and adopting these standards, the need for high-quality research has never been greater. In this perspectives article invited by the editor-in-chief, we identify trends in the most recent sustainability assurance research (107 publications in leading journals from 2018-2025), examining research methods, topics and publication outlets. To identify how this body of research has the potential to inform assurance standard-setting, we develop an assurance quality framework (adapted from the IAASB's Audit Quality Framework) and code these publications against the elements of this developed framework. We also identify and categorise from these 107 publications any references to, and implications for, assurance standards. In this way, we outline current level of knowledge and identify potential future research topics. The changing assurance environment, challenges remaining and gaps in the research allow us to identify unresolved issues needing further research, which can also inform future policy and practice.
We examine how critical audit matter (CAM) disclosures changed over the first 4 years of their adoption in the United States. Controlling for client firm and auditor characteristics, we find a significant decline in both the number of disclosed CAMs and the length of CAM reports. Even as CAM disclosures become less extensive over time, they remain significantly associated with client firm size, complexity, profitability, liquidity and uncertainty. Lastly, although audit fees are positively associated with CAMs in the first year, this relationship reverses in subsequent years, particularly for large accelerated filers. Our findings offer evidence of sustained informativeness of CAMs and improved efficiencies for auditors and their clients.
This study examines how the relative financial strength of business groups, compared with their affiliated companies, affects audit pricing, using data from publicly listed companies in China. We find that affiliates of financially stronger business groups pay significantly lower audit fees, suggesting that group-level financial strength reduces auditors' perceived risk and the required audit effort. This effect is more pronounced when auditors are located in the same province as the parent company, facilitating better access to private information, and when affiliates are more operationally integrated with their parent companies, such as sharing industry classification or board members. These findings indicate that auditors incorporate group-level financial information into audit pricing only when the benefits of doing so outweigh the costs of acquiring and processing such information. We also find that affiliates of financially stronger groups engage in more related-party transactions (RPTs) for risk-sharing purposes, but no evidence of decreased RPTs for expropriation purposes, and the effect of group financial strength on audit fees is stronger for distressed affiliates compared with non-distressed ones. Overall, the study highlights the importance of considering group-level financial characteristics in understanding audit fee variation among group-affiliated companies.
The global transition from voluntary to mandatory sustainability reporting has heightened the demand for credible, comparable and decision-useful sustainability information. In this context, assurance plays a crucial role in reinforcing trust and accountability. Responding to widespread regulatory and market expectations, the International Auditing and Assurance Standards Board (IAASB) developed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, the first comprehensive, profession-agnostic international standard dedicated to sustainability assurance. In this Perspectives article invited by the Editor-in Chief, we analyse the rationale, development process and implications of ISSA 5000 within the broader evolution of sustainability reporting and assurance. It examines how the IAASB, in coordination with the International Standards Board of Accountants (IESBA), expedited the standard-setting process to deliver a globally applicable framework aligned with the public interest. Drawing on extensive stakeholder consultation, the article explores how ISSA 5000 addresses fundamental challenges (materiality, ethical requirements, assurance levels and the use of experts) while balancing conceptual robustness with practical applicability. The study further investigates the emerging challenges of adoption and implementation across jurisdictions, particularly in relation to the European Union's (EU) Corporate Sustainability Reporting Directive (CSRD) and parallel developments in other regulatory regimes. By formalizing a unified assurance framework, ISSA 5000 marks a pivotal step in institutionalizing sustainability assurance as a distinct professional field. The article concludes by outlining future research opportunities on assurance quality, cross-jurisdictional convergence, practitioner adaptation and the evolving role of technology in shaping assurance practice.
This paper investigates how the quality of key audit matters (KAMs) disclosures and KAMs-related audit efforts interact to improve financial reporting quality, and how these effects vary by audit regimes, joint versus single audits and Big Four participation. Drawing on agency and signalling theories, we posit that under joint audit regimes, the quality of KAMs disclosures constrains managerial discretion more effectively when auditors allocate significant efforts to audit procedures related to KAMs, and that Big Four involvement amplifies these mechanisms. Using UK- and French-listed companies from 2017 to 2021, we find that the interaction of KAMs disclosures quality and KAMs-related audit efforts significantly enhances financial reporting quality in joint audit markets but not in single-audit settings. This effect is further strengthened when a Big Four auditor is involved in a joint audit. These associations hold under alternative accrual specifications, real-activities controls, COVID-19 adjustments and auditor tenure. Our study contributes to the literature by operationalizing agency and signalling theories through the interaction of two text-based measures, KAMs disclosure quality and KAMs-related audit efforts, shedding light on their combined effect on financial reporting quality within joint and single audit settings. The findings also offer practical benchmarks for audit committees and regulators by identifying conditions, such as audit regimes and Big Four involvement, under which KAMs disclosures are most effective.
There is limited empirical evidence on the impact of audit quality on earnings quality in social enterprises, especially among microfinance institutions (MFIs). To address this research gap, we frame our analysis using agency theory and examine a sample of 5284 MFIs from 115 emerging countries between 2007 and 2014. We define earnings quality as the extent to which reported earnings are less affected by earnings management. Our findings suggest that Big 4 auditors enhance earnings quality in MFIs. However, we also observe that MFIs are more likely to misreport during economic downturns and that Big 4 auditors are less effective in curbing this discretionary behaviour under such conditions.
This study examines the association between sales order backlog and audit fees. We hypothesize that backlog indicates operating, supply chain and financial reporting quality risks, leading to higher audit fees. Analysing US-listed firms from 2000 to 2022, we find a positive relationship between order backlog and audit fees. Moreover, the positive association strengthens with heightened supply chain risk, suggesting that auditors adjust audit fees for order backlog-related risks. The association is more pronounced for firms with make-to-stock practices. Our findings are robust to several endogeneity tests. This study contributes to the audit fee literature by demonstrating the positive association between order backlog and audit fees, enhancing our understanding of audit fee determinants.
Audit committee members' (ACMs) need to exercise appropriate levels of scepticism in overseeing the financial reporting and auditing processes. However, concerns have been raised about ACMs' application of scepticism. Responding to calls for research on audit committees' oversight processes, this paper employs a multimethod qualitative design to examine ACM scepticism through their questioning behaviour. First, we analyse the questions 29 very experienced ACMs prepare for external auditors and CFOs regarding a significant accounting estimate. We outline the observed similarities and differences in the questioning behaviour between ACMs with alternate expertise, namely, former audit partners and nonaccountant directors. The questions reveal the focus and nature of ACMs' scepticism and questioning behaviour, and how this differs between former audit partners and nonaccountant directors. Second, we conduct supplementary interviews with Big 4 audit partners about their experiences of ACM questioning behaviour and scepticism to triangulate our findings from our analysis of ACM questions.
NASDAQ firms are not required to have an internal audit function. We exploit this voluntary setting to provide further insight into internal audit's role as a governance function. We search proxy statements and other sources to identify whether NASDAQ firms have an internal audit function. Firms with a higher risk profile are more likely to have an internal audit function, whereas smaller/resource constrained firms are less likely to invest in internal audit. NASDAQ firms with an internal audit function are more likely to report a material weakness under Sarbanes-Oxley Section 302 or 404, indicating that internal audit reduces information asymmetry by communicating internal control issues.
