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
Date Written: May 14, 2013
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: Suggested Citation