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Does Auditor Independence Enhance the Effectiveness of Continuous Auditing?

Fri, January 16, 10:15 to 11:45am, TBA

Abstract

Increasingly more internal audit functions use internally developed continuous auditing technology to provide more timely assurance to management. However, participation in the development process and subsequent use could present independence concerns. In this study I conduct two experiments, using 235 practicing internal auditors, that examine whether and how the frequency of internal audits (continuous vs. periodic) and auditor independence (separate vs. combined assurance and consulting activities) affect perception of the likelihood managers will manipulate earnings using either accrual-based (Experiment One) or real (Experiment Two) earnings management. In both experiments, I predict and find that internal auditors expect the likelihood of earnings management will be lower when the internal audit function uses continuous auditing, regardless of the level of independence. However, the effect of independence is context-dependent such that accrual-based (real) earnings management is less likely when the internal audit function is independent (not independent), regardless of audit frequency. The findings of this study are important to regulators, accounting researchers, audit practice, improving corporate governance.

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