Working Paper: Monitoring Quality of Group Audits: Internal and Regulatory Inspections of Component Audits of U.S. Issuers 

Paper Authors:  Denise Downey, Colleen Boland, and Jean Bedard

Abstract: This study responds to concerns regarding the quality of global group audits by examining internal quality reviews (IQRs) and regulatory inspections of non-U.S. component audits (CAs) performed on behalf of U.S. lead auditors. Our investigation is guided by a conceptual model of factors influencing risks that both CA and lead team supervisors fail to detect deficiencies. In their IQR programs, firms target larger and more complex CA engagements in which knowledge of U.S. standards may be lacking, in countries with weaker regulation and less U.S. CA experience. IQR deficiencies are associated with larger CA engagements applying PCAOB standards, performed by larger CA firms in countries with less CA activity. PCAOB Part I deficiencies are more often found in larger CA firms auditing smaller components (suggesting less attention relative to the firm’s local clients), and greater scope of audit work, longer tenure and higher engagement profitability (suggesting incentives for client retention).

To inquire about this paper, please email [email protected].

Disclaimer

The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).

The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.