Relation between Audit Effort and Financial Report Misstatements: Evidence from Quarterly and Annual Restatements

39 Pages Posted: 15 May 2013 Last revised: 1 Mar 2017

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Yuping Zhao

University of Houston

Date Written: May 14, 2013

Abstract

We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements.

Keywords: audit effort, audit fees, financial report misstatements

JEL Classification: M49

Suggested Citation

Lobo, Gerald J. and Zhao, Yuping, Relation between Audit Effort and Financial Report Misstatements: Evidence from Quarterly and Annual Restatements (May 14, 2013). The Accounting Review, Volume 88, Issue 4, 2013, Available at SSRN: https://ssrn.com/abstract=2265051

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Yuping Zhao (Contact Author)

University of Houston ( email )

334 Melcher Hall
Houston, TX 77204
United States
713-743-2166 (Phone)
713-743-4828 (Fax)

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