There has been growing recognition in recent years of the importance of corporate governance in ensuring sound financial reporting and deterring fraud. The audit serves as a monitoring device and is thus part of the corporate governance mosaic. The objective of this paper is to examine the impact of various corporate governance factors, such as the board of directors and the audit committee, on the audit process. Importantly, there is little professional guidance on how auditors should consider such factors when formulating an appropriate audit strategy, and there has been only one prior study on this issue (Cohen and Hanno 2000). Because there are no current specific auditing standards that relate to the effect of corporate governance on the audit process, we conducted a semi‐structured interview with 36 auditors on current audit practices in considering corporate governance in the audit process. Reflecting on client experiences, auditors indicate a range of views with regard to the elements included in the rubric of “corporate governance”. Most significantly, auditors view management as the primary driver of corporate governance. The inclusion of top management in the “corporate governance mosaic” is inconsistent with agency theory's prescription of the board and other mechanisms serving as a means to independently oversee management's actions to protect stakeholders. Auditors consider corporate governance factors to be especially important in the client acceptance phase and in an international context. Further, despite the attention placed on the audit committee in the academic literature, in the business community, and by regulators in different countries (e.g., Canada, United States, Australia), several respondents indicated that their experiences with their clients suggest that audit committees are typically ineffective and lack sufficient power to be a strong governance mechanism. Implications for research and practice are presented.

Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and the extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company's operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and nonaudit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process. Data Availability: All data are gathered from publicly available sources.

SUMMARY: The objective of this paper is to provide a more comprehensive view of corporate governance than that considered by the traditional agency literature predominately employed in auditing and accounting studies of governance. Specifically, we discuss three widely recognized additional theoretical perspectives: resource dependence, managerial hegemony, and institutional theory. Resource dependence is developed in the strategic management literature and focuses on the contribution of governance mechanisms as a vehicle to help a firm achieve or further its strategic objectives. In contrast with the agency and resource dependence perspectives which offer a functional view of governance, the managerial hegemony perspective views the board and its attendant committees as being under the control of management and hence could be potentially viewed as dysfunctional from a stakeholder viewpoint. Finally, institutional theory, developed in the sociology of organizations and organizational behavior literatures, suggests that it is necessary to understand the substance of the interactions between different governance parties and how these parties use at times symbolic gestures and activities to maintain their form to all relevant parties. Although the value of using multiple theoretical perspectives with respect to governance has been well recognized in the economics and behavioral literatures, this is the first paper that we are aware of that examines the effect of using alternative theories of governance on auditing issues that are influenced by the governance structure of a firm. In addition, we examine how these theories provide a useful basis for reconciling conflicting findings in the existing agency-based audit-related governance literature. Finally, we provide examples of how these alternative theories provide important new insights to issues in auditing research and practice.

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This study examines the impact of alternative risk assessment (standard risk checklist versus no checklist) and program development (standard program versus no program) tools on two facets of fraud planning effectiveness: (1) the quality of audit procedures relative to a benchmark validated by a panel of experts, and (2) the propensity to consult fraud experts. A between‐subjects experiment, using an SEC enforcement fraud case, was conducted to examine these relationships. Sixty‐nine auditors made risk assessments and designed an audit program. We found that auditors who used a standard risk checklist, structured by SAS No. 82 risk categories, made lower risk assessments than those without a checklist. This suggests that the use of the checklist was associated with a less effective diagnosis of the fraud. We also found that auditors with a standard audit program designed a relatively less effective fraud program than those without this tool but were not more willing to seek consultation with fraud experts. This suggests that standard programs may impair auditors' ability to respond to fraud risk. Finally, our results show that fraud risk assessment (FRASK) was not associated with the planning of more effective fraud procedures but was directly associated with the desire to consult with fraud specialists. This suggests that one benefit of improved FRASK is its relation with consultation. Overall, the findings call into question the effectiveness of standard audit tools in a fraud setting and highlight the need for a more strategic reasoning approach in an elevated risk situation.

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The value of audit services is determined by an auditor's ability to both (1) discover misstatements in the client's accounting system and (2) report those misstatements (DeAngelo [1981a, 1981b]). Audit adjustments reflect the auditor's discovery of a potential breach in the client's accounting system. The decision to waive an audit adjustment is important, since it can potentially lead to misleading financial statements. Waiving an adjustments) may also result in litigation and loss of auditor reputation. Despite its importance, we have very little empirical evidence on the decision to waive an adjustment. The purpose of this study is to initiate an understanding of the importance placed by auditors on a number of factors noted in the literature in determining whether a proposed audit adjustment is waived. The study reported here utilizes archival data gathered from actual audit engagements to examine variables that may explain the decision to waive an audit adjustment. The findings reveal that in addition to materiality, a number of factors appear to be considered, including directional impact on income, the nature of the adjustment (objective versus subjective), and size of the client. Finally, a number of adjustments exceeding materiality were waived, highlighting the need for future research to more fully understand factors affecting this important decision and to ensure that business decisions (e.g., client pressures) do not overly influence the auditor.

Prior archival and experimental studies provide conflicting results regarding the extent to which audit program plans are responsive to client risks, as prescribed by the Audit Risk Model. The purpose of this study is to corroborate and extend archival research on this issue by considering a broader set of client risks and incorporating a number of methodological improvements. Data were gathered on risk assessments and evidential plans in the accounts receivable area from the working papers of 74 randomly selected manufacturing clients (42 general manufacturing and 32 high-technology manufacturing). The results indicate a statistical association between the level of and changes in a limited number of assessed client risks (e.g., management aggressiveness and the inherent risk of an existence misstatement) and evidential plans. In addition, audit programs were found to change little over time with many tests done across a broad array of engagements. Overall, the responsiveness of evidential plans to risks, although limited, was found to be greater in the present study than prior research. These results, which generally replicate prior research, indicate the lack of a strong relationship between client risks and audit programs and thus raise a number of important questions for audit theory, practice and training.