In Event: Breakfast and Research Forum
In Roundtable Session: Table 11: Management's Role in Auditing Outcomes
We investigate the relationship between investment efficiency and audit effort. Investment efficiency is when management makes positive net present value project decisions, which are aligned with the interests of the owners. These decisions are beneficial to the firm’s long-run profitability and continuance as a going concern. We predict that firms which are investment efficient require less audit effort. Specifically, we argue that auditors reduce audit effort by relying on entity level controls related to control environment of investment efficient firms (e.g., management and board of directors’ competence and integrity). We measure audit effort as audit delay. We predict and find that audit delay is negatively associated with investment efficiency. Our findings further our understanding about whether auditors rely on internal controls over financial reporting in order to effectively reduce their effort and conduct a more efficient audit.