Advanced auditing week 1 en 2

Input - Knechel, 2013 AQ

1. Motivated reasoning

2. Professional skepticism

3. Knowledge en expertise

4. Within form pressure

Process - Knechel, 2013 AQ

During the audit

1. Cognitive biases: anchoring, confirmation, hindsight and dilution bias

2. Risk assessment is weak

3. Accountability bias bc of review processes

4. Time pressure

Output/ outcomes - Knechel, 2013 AQ

Proxies for a good audit

1. Restatements

2. Discretionary accruals

3. Going concern opinions

==> binary vs continued

Context - Knechel, 2013 AQ

Surrounding factors

1. Audit fees

2. Non audit services

3. Auditor tenure

4. Partner compensation

5. Regulation and inspection

AQ definition DeAngelo = Knechel, 2013 AQ

The market-assessed joint probability that a given auditor will both discover a breach in a client’s accounting system and report the breach

• two compenents: Competence and independence

Independence in fact - Gramling, 2010

The auditor is actually unbiased

==> affects audit quality

Independence in appearance - Gramling, 2010

A normal, informed person would think that the auditor is unbiased

==> affects public trust

Threats to independence - Gramling, 2010

1. Self interest

2. Self review

3. Advocacy

4. Familiarity

5. Intimidation

SEC independence rule areas - Gramling, 2010

1. Financial, business and employment relationships

2. Non audit services (NAS)

3. Fees

4. Rotation

5. The audit committee

Financial, business and employment relationships - Gramling, 2010

Independence in fact ==> limited effect

Independence in appearance ==> negative effect

Non audit services - Gramling, 2010

Independence in fact ==> mixed

Independence in appearance ==> negative

Fees - Gramling, 2010

Independence in fact ==> mixed

Independence in appearance ==> negative

Rotation - Gramling, 2010

Partner and firm rotation

Independence in fact ==> mixed

Independence in appearance ==> positive

The audit committee - Gramling, 2010

Independence in fact ==> mixed

Independence in appearance ==> positive

Structural factors that influence auditors - Bazerman, 2002 (unconscious bias)

1. Ambiguity

2. Attachment

3. Approval

=> accounting

4. Familiarity

5. Discounting

6. Escalating

==> human nature

SOX - Fiolleau, 2013

Sorbonne’s Oxley act ==> Audit committee have formal authority over auditor selection and oversight

Dominant vs alternative

Dominant view: Audit committee lead to expertise and more independence

Alternative view: Audit committee is more a ceremonial role, management is still in charge.

Financial reporting supply chain - Knechel, 2020 (service perspective)

Auditor-client relationship is crucial ==> co creation of value

traditional view vs service view ==> Ironic conundrum

Ironic conundrum - Knechel, 2020 (service perspective)

regulation that tries to maximize independence by reducing cooperation may actually reduce audit quality,

because it destroys the collaborative relationship that makes a good audit possible

Unintended consequences of regulation - Knechel, 2016 (regulation)

1. Boilerplate document

2. Shadow standards

3. Over auditing

4. Less tailoring

Consequences high empolyee turnover - Khavis & Szervo, 2025 (human capital)

1. Increase audit fees

2. Reduces audit delivery quality

3. Lower audit quality

   1. Higher restatements and discretionary accruals

   2. Lower going concern options

2 Theories

Human capital theory => loss of expertise

Social capital theory => loss op relationships