The Impact of Inspection Risk on Audit Effectiveness and Efficiency

• In Event: Risk Assessment and Planning Judgments

Abstract

Recent research suggests oversight inspections may lead to unintended consequences such as excessive documentation and over-auditing. By controlling the level of misstatement risks, this study seeks to provide direct evidence of the impact of inspection risks on audit effectiveness and efficiency. We also examine auditor responsiveness to elevated misstatement risks identified by fieldwork testing. We employ an experiment with 149 experienced auditors using a 2 (high inspection risk versus low inspection risk) x 2 (low misstatement risk versus high misstatement risk) research design, where inspection risk (misstatement risk) is manipulated between subjects (within-subjects). As hypothesized, auditors increase planned hours in response to higher inspection risk and correspondingly assign fewer audit hours to accounts with lower inspection risk. The latter action can reduce audit quality since despite lower inspection risk the underlying misstatement risks remain. Also, after fieldwork has revealed one account with increased misstatement risk, participants allocate fewer additional hours to this the more hours they initially planned for the high inspection risk account. Supplemental analysis indicates participants with prior inspection experience are prone to decreased responsiveness as a direct result of heightened inspection risk. In all, our findings suggest inspection risks potentially harm audit efficiency and effectiveness.

Authors

• Dominic Detzen, Vrije Universiteit Amsterdam

• Anna Gold, Vrije Universiteit Amsterdam

• Arnold Wright, Northeastern University