The Effect on Audit Quality of Resource Allocation across CPA Ranks at Audit Engagement Level and Audit Firm Level

• In Event: Audit Quality

Abstract

This study examines the effect on audit quality of resource allocation across CPA ranks and audit engagement levels, and how the effectiveness of engagement-level audit efforts is moderated by audit firm-level quality assurance efforts, including the number of hours spent by external specialists and quality control at engagement levels. We find evidence that the effect of resource allocation varies across different ranks within audit teams, while allocating more resources across ranks increases audit quality. The associations between engagement-level audit efforts by rank and audit quality are weaker when firm-level audit quality control efforts are extraordinary, suggesting a possible substitutional role of firm-level quality assurance. In addition, we find that audit fee insufficiency erodes the positive association between audit efforts across different ranks and audit quality. Our results have implications for investors and regulators who make use of additional information on resource allocation across CPA ranks at different engagement levels. The results also suggest that information on audit firm-level efforts in the form of hiring external specialists and investing quality control hours at different engagement levels may be useful for financial statement users in the evaluation of earnings quality.

Authors

• Ho-Young Lee, Yonsei University

• Scott Whisenant, University of Kansas

• Jooanne Choi, Bentley University