The Interplay between Financial Reporting Biases and Audit Quality

Kronenberger, Sebastian; Laux, Volker

doi:10.2139/ssrn.2818038

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2019

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“…It is commonly made in the auditing literature (e.g., Dye (1993), Dye (1995), Lu and Sapra (2009), Laux and Newman (2010), Ye and Simunic (2013)). For the interaction between …nancial reporting and auditing, see Newman, Patterson, and Smith (2001), Patterson and Smith (2003), Caskey, Nagar, and Petacchi (2010), Mittendorf (2010), Deng, Melumad, and Shibano (2012), and Kronenberger and Laux (2016).…”

Section: The Modelmentioning

confidence: 99%

Auditing Standards, Professional Judgment, and Audit Quality

Gao

Zhang

2019

The Accounting Review

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We propose a model to study how auditing standards affect audit quality. We posit that both auditors' incentives and expertise are relevant for audit effectiveness. Auditing standards are useful in mitigating the auditors' possible misalignment of interest with investors. However, auditing standards also restrict auditors' exercise of professional judgment, which, in turn, leads to compliance mentality and reduces auditors' incentives to become competent in the first place. We identify the conditions under which stricter auditing standards increase or decrease audit quality. Moreover, stricter auditing standards always increase audit fees, but can benefit auditors at firms' expense. The model also generates many testable empirical predictions.

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