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).

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