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SubscribeWorking Paper: Putting the IT in AudIT Risk: IT Complexity and IT Auditor Mitigation
Paper Authors: Jake Sigler, Preeti Choudhary, and Vikram Ramadas
Abstract: This study examines the impact a public company’s information technology (IT) complexity from financial reporting systems has on audit risk. Using proprietary data from the PCAOB, we develop two composite scores of IT complexity. We validate that higher IT complexity is associated with greater core audit effort, fees, relatively more IT audit effort, and more auditor identified risks. Despite our finding that the auditor identifies more audit risk for clients with complex IT systems, we find the auditor is unable to, on average, fully address all the audit risks stemming from IT complexity, even after controlling for the audit risks identified. We find ways to improve audit quality related to IT. Specifically, altering the amount of IT audit effort in the early phase of the audit and staffing more experienced IT audit managers can address some of these risks. Finally, we find staffing experienced IT audit managers has benefits beyond audit quality, as they are also associated with better reliability of the client’s IT systems. Overall, this study quantifies the risk of IT complexity on audits and underscores the importance of audit planning and staffing in addressing these risks.
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