Do Client Firms’ IT Asset Portfolios Increase Audit Risks?

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 4: Internal Client Characteristics and Audit Planning

Abstract

We examine the relationship between client firms’ IT asset portfolios and audit risk. The advances in information technology (IT) have changed the way firms conduct business in using electronic commerce strategies, preparing financial reports, and having their financial statements audited. Therefore, client firms’ IT asset investment could have effects on audit risk. On one hand, the IT complexity creates challenges for auditors in auditing the effectiveness of internal control and detecting misstatements caused by error and fraud. On the other hand, IT decreases audit risk by improving operations and internal control effectiveness which may decrease inherent risk and internal control risk. Therefore, the relationship between clients’ IT asset portfolios and external audit risk remains an empirical question. Using proprietary IT assets data from CI Technology Database of US firms during 2000 to 2009, we find that IT asset portfolios are positively related to audit fees and abnormal audit fees (both proxy for audit risk) and negatively related to the probability of issuance of a going-concern audit opinion. Our results hold with various model specifications and robustness tests.

Authors

• Shipeng Han, The University of Memphis

• Zabihollah Rezaee, The University of Memphis

• Joseph H. Zhang, The University of Memphis