Group audits: Are audit quality and price associated with the Lead auditor’s decision to accept responsibility?

Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 600 (ED 600)

“…We further note research suggesting that potential adverse effects of disclosing component auditor usage may not materialise. While disclosing component auditor use could unintentionally reduce audit quality as auditors feel less accountable, research in the US on lead auditor decisions to accept or decline responsibility for component auditor work finds no evidence that audit quality falls when the lead auditor declines responsibility (Mao et al, 2020). Responding to concerns of the PCAOB that disclosing component auditor use may increase liability of the lead auditor, Demek et al (2020) find that voluntary disclosure of component auditor use in the auditor's report does not increase investor perceptions of blame and liability to the group auditor following a restatement.…”

Do Lenders Care Who Did the Audit?

“…Much of the prior literature focuses on whether use of component auditors impairs audit quality and the conclusions on this issue are far from consistent. In the U.S., before Form AP was required, researchers used Form 2 10 to identify group audits where lead auditors typically accept the responsibility for the work of component auditors who play substantial roles in a group audit (Dee et al 2015;Adams and Zhou 2018;Mao et al 2020) or use audit reports to identify group audits where lead auditors divide responsibility with component auditors (Lyubimov 2011;Krishnan and Li 2018;Mao et al 2020) or proprietary data from the PCAOB (Downey and Bedard 2019). In Australia, public companies need to report audit fees paid to (1) the lead auditor, (2) to component auditors that are in the same network as the lead auditor, (3) to component auditors that are not in the same network as the lead auditor.…”

“…Adams and Zhou (2018) identify group audits using Form 2 filings from 2010 to 2016 and document that the participation of component auditors is associated with greater internal information asymmetry (the difference between insider trading profits of top managers and divisional managers) and poorer internal capital allocation decisions. Mao et al (2020) examine whether audit fees and audit quality differ if lead auditors accept responsibility for the work of other auditors using group audit information identified from Form 2 and audit reports. They document that even though lead auditors charge higher audit fees when they accept such responsibility, they do not provide a higher-quality audit, consistent with inspection findings from the PCAOB which finds that lead auditors do not always perform sufficient additional procedures as required by the auditing standards when using the work of component auditors and assuming that responsibility (PCAOB 2010, 2011b) 11 .…”

“…The lead auditor may decide to divide responsibility when it is impractical to perform necessary audit procedures in order to assume responsibility. For example, the component is acquired by the lead auditor's client at the end of the fiscal year and audited by another auditor Mao et al (2020). also note that in those divided audits, the audit reports of those component auditors are typically included in the client's SEC filings and thus the component auditors may perceive higher litigation risks and be more accountable.…”

Involvement of Component Auditors in Multinational Group Audits: Determinants, Audit Quality, and Audit Fees

“…4 Third, we observe more variation in the type of component auditors 2 The division of responsibility for U.S. multinational group audits is not uncommon. For example, Mao et al [2020] report that almost 30% of U.S. group audits refer to other auditors and decline responsibility for the work undertaken by other auditors. Their results suggest that lead auditors who accept responsibility for work done by other auditors charge higher audit fees but that these audits are not of higher quality, and in some cases are of lower quality.…”