Risk Monitoring and Control in Audit Firms: A Research Synthesis

Abstract

This paper summarizes the research literature related to audit firm quality control, with a dual purpose: (1) to provide information on the current state of knowledge with regard to the ways in which audit firms monitor and control firm-level risk; and (2) to identify specific areas in which there is currently insufficient research. We review literature on a number of specific topics under the overall heading of firm-level risk monitoring and control, including: client acceptance / continuance procedures, auditor independence (partner and firm rotation, employing former auditors, nonaudit services, partner compensation), electronic decision aids, consultation units, procedures for communicating weaknesses and taking corrective action, and review of engagement activities (including engagement quality reviews, peer reviews, and regulatory inspections). We conclude with a discussion of research relevant to the issue of whether smaller audit firms should be subject to the same level of quality control regulation as larger firms.

The link between in- and external rotation of the auditor and the quality of financial accounting and external audit

“…Quality of financial accounting and audit is estimated by various proxies, which provide limited informational value (Bedard et al 2008). The extent of accounting policy is estimated by discretionary accruals (e.g.…”

Restricting Non-Audit Services in Europe – The Potential (Lack of) Impact of a Blacklist and a Fee Cap on Auditor Independence and Audit Quality

“…However, the results concerning auditor independence and, hence, audit quality are mixed and inconclusive. Thus, they do not support an independence-decreasing effect of non-audit services (Bedard, Deis, Curtis, & Jenkins, 2008). Research on independence of mind often yields no significant results while studies on independence in appearance predominantly show a negative effect of auditor-provided non-audit services.…”

Establishing and managing effective internal quality control measures in small service companies

“…Quality control relevant to audit firms (as evident in the case study section of the present research) are discussed by researchers Bedard et al (2008) as well as Kennedy and Widener (2008). Specifically, Bedard et al (2008) examined relevant research related to Audit Firm Quality Control (AFQC), which includes the audit firm's assessment and control of the risk that auditing standards, professional values, or the public interest, might be violated in some way.…”

“…Specifically, Bedard et al (2008) examined relevant research related to Audit Firm Quality Control (AFQC), which includes the audit firm's assessment and control of the risk that auditing standards, professional values, or the public interest, might be violated in some way. The authors distinguish between the pre-engagement risk management as well as the risk management mechanisms that are available during the engagement and after the engagement.…”

“…The risk management following an engagement, according to Bedard et al (2008), takes place for both internal and external inspections and reviews of completed audits. The internal engagement quality control review discusses how a firm reviews the quality and detail of the work performed during the audit compared to the pre-engagement stated risk level of the client; the more risk associated with a client, the more detail and increase in quality of work performed should be noted.…”