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Audit process ineffectiveness: evidence from audit report errors

Brooke Beyer (Department of Accounting, Kansas State University, Manhattan, Kansas, USA)
Michelle Draeger (Colorado State University College of Business, Fort Collins, Colorado, USA)
Eric T. Rapley (Colorado State University College of Business, Fort Collins, Colorado, USA)

Journal of Accounting Literature

ISSN: 0737-4607

Article publication date: 18 June 2024

65

Abstract

Purpose

The process performed during a financial statement audit is critical but is unobservable to external stakeholders. This can create challenges in assessing the quality of individual audit engagements. This study’s objective is to introduce and investigate an archival measure based on publicly available information that proxies for audit process ineffectiveness.

Design/methodology/approach

We proxy for audit process ineffectiveness using errors in the audit report. We examine audit reports to identify errors because the audit report represents the auditor’s primary communication with financial statement users and is subject to rigorous preparation and review. We first examine if typical factors influencing audit process ineffectiveness are associated with audit report errors. We then examine whether audit reports containing errors are associated with audit quality measures.

Findings

We find that errors are more likely to be present in audit reports when time pressure exists and less likely when auditors exert more effort and when audit engagement risk is higher. Results also show that errors in audit reports are positively associated with financial reporting misstatements, measured by subsequently disclosed Big R restatements and out-of-period adjustments.

Originality/value

Collectively, our evidence suggests that an audit report containing an error is a suitable proxy for audit process ineffectiveness. This proxy has audit quality implications because inattentiveness in one area of the audit process could indicate inattentiveness in another area.

Keywords

Acknowledgements

We appreciate the research assistance from Kenneth Hannan, Carley Heath, Allison Schaefer, Stephanie Schlei, Hannah Smith, David Stebbins and Caleb Thetford. We thank Jacquelyn Gillette and Gabriel Pündrich for generously sharing their MD&A grammatical violation data. We are also grateful for the helpful comments and suggestions from anonymous journal and conference reviewers, participants in the AAA Annual Meeting (2021), Colorado State University Brown Bag, Hawaii Accounting Research Conference (2021), Kansas State University workshop, Oklahoma State University Ph.D. Alum Brown Bag and the University of Colorado Denver workshop. We thank Andrew Acito (discussant), Lauren Cooper, Derek Johnston, Bill Kinney, Lisa Kutcher, Eric Lohwasser, Mollie Mathis, Nate Nguyen, Zvi Singer (discussant), Mikhail Sterin and Thomas Vance. Brooke D. Beyer is thankful for the summer research support grant provided by the College of Business Administration at Kansas State University.

Citation

Beyer, B., Draeger, M. and Rapley, E.T. (2024), "Audit process ineffectiveness: evidence from audit report errors", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-09-2023-0159

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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