The Effect of Anticipated Inspection Focus on Audit Effort.

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Abstract

This study examines the effect of anticipated inspection focus on audit effort. We find that anticipation of inspection focus on a specific area (that does not have high risk of material misstatement) leads auditors to increase audit effort in that area. Our results show that this ultimately leads to a decrease in audit effort difference between high vs. normal risk accounts. This is concerning as, to the extent that auditors put greater focus on inspection risk, as opposed to the actual risk of material misstatement, audit quality will suffer. We also examine the effect of implementing an auditor judgment rule (AJR) and find that the effect of AJR on audit effort depends on the level of current inspection risk. This study answers the call for more research on how PCAOB inspections affect the audit process and our findings would likely be of interest to regulators and standard setters.

Authors

• Jennifer McCallen, University of Massachusetts-Amherst

• Yoon Ju Kang, University of Massachusetts-Amherst