We examine 316 Public Company Accounting Oversight Board (PCAOB) inspection reports issued to smaller CPA firms (100 or fewer issuer clients) through July 2006. We find that 60 percent of the inspected firms have audit deficiencies. Firms with audit deficiencies are smaller, have a larger number of issuer clients, and are growing more rapidly than firms without deficiencies, suggesting an over-extension into the issuer client market by some firms. Deficiencies are more likely for inspections conducted in 2004 than 2005, and the PCAOB appears to have targeted smaller, riskier, rapidly growing audit firms for its 2004 inspections. In addition, we find some evidence that clients of deficiency firms are smaller, less profitable, and more highly leveraged. We also summarize the most common audit deficiencies and offer implications and directions for future research.

In the current competitive and litigious audit environment, auditors must appropriately balance cost control and effectiveness when planning audits. This study experimentally examines the joint effects of fee pressure and client risk on audit seniors' planning judgments and decisions. Consistent with predictions, seniors' budgeted audit hours and inherent risk assessments suggest that seniors are less responsive to increased risk in the presence of fee pressure. Fewer budgeted audit hours in the presence of fee pressure may improve short-term profitability but may not be in accordance with professional standards and the firm's interest if audit effectiveness is compromised. Further analyses suggest that, in the presence of increased client risk, seniors planned fewer audit procedures when fee pressure was present than when it was absent, with decreases most likely for less reliable audit procedures and low-risk audit areas. Finally, in the presence of increased client risk, seniors expected to work more hours than budgeted, regardless of the level of fee pressure.

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SUMMARY The Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations (PCAOB 2007). We use post-SOX experimental data to compare the levels and effects of employer (client) identification on the control evaluations of internal (external) auditors. First, we find that internal auditors perceive a greater level of identification with the evaluated firm than do external auditors. We also find some evidence that, ceteris paribus, internal auditors are less lenient than external auditors when evaluating internal control deficiencies (i.e., tend to support management's preferred position to a lesser extent). Further, while we support Bamber and Iyer's (2007) results by finding that higher levels of external auditor client identification are associated with more lenient control evaluations, we demonstrate an opposite effect for internal auditors—higher levels of internal auditor employer identification are associated with less lenient control evaluations. Our results are important because we are the first to capture the relative levels of identification between internal and external auditors, as well as the first to compare directly internal and external auditor leniency, both of which are important in light of AS5. That is, we provide initial evidence that external auditors' increased reliance on internal auditors' work, while increasing audit efficiency, also could improve audit quality by resulting in less lenient internal control evaluations, due, at least in part, to the effects of employer and client identification. Data Availability: Contact the first author.

SYNOPSIS This study reports the results of a survey of 107 audit partners from large public accounting firms that investigates and compares partner perceptions of Public Company Accounting Oversight Board (PCAOB) inspections' and Internal Quality Reviews (IQRs): (1) predictability, (2) conduct, (3) reviewer qualifications and behavior, and (4) effects (i.e., on audits, partners, and firms). A majority of partners can or try to predict the year of both reviews and perceive that, relative to PCAOB inspections, IQR reviewers have a better understanding of firms' audit methodologies, IQRs focus more on whether firms follow their methodology, and IQRs examine more audit areas. In addition, partners believe that PCAOB inspectors are more focused on finding deficiencies than are IQR reviewers, and that IQR feedback is more timely and helpful for improving audit quality. Both reviews are perceived to impact professional reputation; however, partners perceive that PCAOB inspections increase their firms' litigation risk more so than do IQRs. Finally, less experienced partners perceive reviews as more invasive and as posing more consequences than do more experienced partners. We provide credible, informed perceptions of partners directly involved in both PCAOB inspections and IQRs (which heretofore have not been examined directly by practitioner or academic research) that should be beneficial to accounting researchers, practicing auditors, and regulatory bodies interested in understanding the perceived effects and effectiveness of PCAOB inspections and IQRs.