Abstract

To improve the usefulness of audit opinions, on 23 March 2021, the China Securities Regulatory Commission mandated that auditors disclose overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions. This paper selects Chinese A-share companies issued with modified audit opinions for the period of 2020–2022 as the research sample and analyzes the assessment of materiality in audit practice and the informativeness of audit materiality. Our findings are as follows. (1) The most commonly used bases for materiality by auditors are profit and income, with considerable differences in the percentages applied to the different bases and variations even within the same base. (2) The higher the materiality amount, the poorer the audit quality. This negative correlation is mainly observed in scenarios where the audited companies engage in downward earnings management and where the competency of audit firms or auditors is relatively low. (3) Companies that disclose quantitative materiality in the special explanations of modified audit opinions have a lower earnings response coefficient than companies that do not disclose audit materiality. This research sheds light on the “black box” of the audit process and verifies the information value of audit materiality. The conclusions are of significant value to auditing standard-setters, investors and regulators.

Introduction

Materiality is the magnitude of the impact of audit errors on the audit client’s decision making, which is one of the fundamental concepts of auditing and is utilized throughout the audit process ( Christensen et al., 2020 ). In planning and performing an audit, an auditor is required to make judgments about materiality to provide a basis for assessing the risks of material misstatement and preparing for further audit procedures. They must also apply materiality when evaluating the impacts of identified audit misstatements and uncorrected misstatements on financial statements. Therefore, materiality directly determines the quality of the audit. However, due to data limitations, how auditors in China establish materiality has remained a “black box.”

On 9 March 2021, the China Securities Regulatory Commission (CSRC) issued its “Guidelines for the Application of Supervisory Rules—Audit Category No. 1,” explicitly mandating that “an auditor should disclose the overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions, including materiality bases and percentages, calculation results (the amount) and the basis for selection.” This guideline took effect on 23 March 2021, following which auditors began to disclose the overall materiality of consolidated financial statements in special explanations of modified audit opinions. 1

Conclusions and implications

We take Chinese A-share listed companies issued with modified audit opinions during the period from 2020 to 2022 as a research sample to analyze materiality assessments in auditing practice, the relationship between materiality and audit quality and the impact of materiality disclosure on investor decision-making. We present four key results. First, the Big 10 audit firms are more likely to disclose audit materiality than peers. Second, the most common bases for materiality used by auditors are profit and income, the percentages applied to the different bases vary greatly and, even for the same base, the percentages vary to some extent. Third, the higher the materiality, the poorer is the quality of the audit. This negative correlation occurs mainly when the client firms engage in downward earnings management and among audit firms and auditors of lower competence than peers, indicating that materiality predicts the audit quality and has a certain level of informativeness. Fourth, disclosing audit materiality reduces investors’ perceptions of the reliability of financial reports.

The research in this paper assists in understanding how auditors establish materiality in auditing practice, thus opening the “black box” of the auditing process to an extent. In addition, our findings have important implications. First, for the auditing standard-setters, although the relevant rules emphasize that the bases and percentages contained in the questions and answers are examples, not regulations, auditors rely heavily on the examples in auditing standards, application guides and questions and answers in practice. Therefore, standard-setters should pay attention to this phenomenon and treat the examples provided with caution. Second, materiality itself is informative, and this enables investors, analysts and regulators to judge the quality of audits or audited financial statements based on materiality and make better investment decisions or enhance the efficiency of regulation.

Abstract

Making use of a unique administrative data set consisting of the universe of administrative filings in Rwanda, this paper investigates the impact of tax audits on businesses’ reporting behaviour. The evidence suggests that tax audits have a positive impact on corporate income and corporate tax liabilities reported for three years after the start of the audit process. The results also suggest that the type of audit matters. While ‘comprehensive’ tax audits have a significant positive effect on compliance, ‘narrow-scope’ tax audits exhibit both a positive and a negative effect during a three-year period after the audit, with the net impact being negative. The implication of this, from a tax compliance perspective, is that ‘narrow-scope’ audits are ineffective and that doing more of those and less of comprehensive ones might have a negative impact on tax compliance. Effective tax compliance strategy therefore requires the careful evaluation of all types of audits.

Introduction

Recent estimates have it that achieving the Millennium Development Goals requires increasing domestic revenues in low-income countries by around 15 percentage points of GDP, a target which requires the implementation of key policy reforms ( Gaspar et al., 2019 ). While the effort to boost domestic revenue mobilisation in developing countries continues, it is now even more challenging, and pressing, given the recent and much needed relief measures implemented to ease the impact of the COVID-19 pandemic. 1 Amongst the policy reforms for improving revenue mobilisation is strengthening tax administration capacity, an issue which has come to the fore for many countries around the world during the last two decades.

An integral part of tax compliance is operational audits, and the extent to which they are conducive to future compliance. There is a growing literature on audit assessment providing mixed evidence regarding the impact of tax audits on future compliance. 2 Surprisingly, however, little attention has been paid to the compliance impact of the types of audit, which are broadly categorised as ‘comprehensive’ and ‘narrow-scope’ (with the latter further categorised as desk-based or issue-oriented). Comprehensive audits are in-depth and in-person examinations conducted across different tax bases and fiscal years, whereas narrow-scope audits focus on a limited number of fields in a tax return. This distinction in audit types, and their impact on tax compliance, is at the heart of the contribution of this paper.

Results

This section presents the results, starting with the aggregate ATT, followed by the audit-type-specific aggregate ATT, and concludes with a back-of-the-envelope calculation of the return on investment (ROI) of audits. In Appendix B we present further sensitivity analysis which validates the results presented in the main text and the methodology used. 37

6.1. Aggregate ATT

A crucial assumption behind any DID analysis is the existence of a common previous trend in the outcome variable at the time of the treatment ( Meyer, 1995 ) which, in the present context, means that one should observe a similar pattern (trend) in reporting behaviour of audited and unaudited taxpayers before treatment. To test for this, as well as estimate the period-specific audit effects on the outcome variables, we rely on Weighted Fixed Effect regressions based on panel data from 2013 through 2018 and weights obtained from our CEM stratification. In the regressions we also include both individual and year fixed effects. The excluded category is the last year before the treatment is applied (2015). Fig. 5 , Fig. 6 present the results of this analysis for taxable income and tax liability, respectively, largely confirming that there is no statistically significant difference in trends between audited and matched controls before audits take place. After treatment, the estimates indicate a positive and increasing effect of audits on subsequent tax reporting behaviour of audited taxpayers for the three years after the treatment and the two outcome variables.

Abstract

We examine auditor responses to the voluntary resignation of independent directors. We show that auditors respond by increasing audit fees or rescinding engagement with their clients, but not by increasing their audit effort. Mechanism tests reveal that independent directors’ voluntary resignation leads to increased regulatory sanctions and negative media coverage, these relationships are more pronounced after the New Securities Law. Auditor response strategies follow an order of priority: at an acceptable level of perceived risk, auditors increase audit fees; when perceived risk exceeds this level, auditors will discontinue the client relationship. Auditors associate greater risk with firms that have (vs. have not) experienced consecutive voluntary resignations by independent directors. Mandatory resignation has no such effect.

Introduction

The board of directors plays a crucial role in corporate governance. The proportion of independent directors on the board is an important metric of the effectiveness of board supervision, which is emphasized by regulatory authorities (Zhu et al., 2016). The independent director system was initially established to mitigate agency problems between shareholders and management (Fama and Jensen, 1983, Dai et al., 2014). Independent directors also supervise, advise and provide support in the form of resources for listed companies (Fama and Jensen, 1983, Liu et al., 2018a, Liu et al., 2018b, Zhou et al., 2021). What signals are sent by the voluntary resignation events of independent directors? Can auditors identify the risks involved? How do auditors respond? We explore this series of questions.

Typically, the resignation events of independent directors are categorized as mandatory or voluntary. Mandatory resignation occurs when independent directors are required to step down from their roles under regulatory pressure; voluntary resignation occurs when independent directors proactively relinquish their positions, judging that the benefits of those positions do not compensate for the risks incurred. According to signaling theory, the voluntary resignation of independent directors signals company risk to external parties (Gupta and Fields, 2009, Lin et al., 2012, Bar-Hava et al., 2021, Cao et al., 2023), such as poor company performance (Arthaud-Day et al., 2006), high levels of earnings management (Zhi and Tong, 2005) or elevated legal risks (Yang and Huang, 2015). This paper focuses on the responses of auditors, as stakeholders in listed companies, to the voluntary resignation of independent directors.

Conclusion

This paper presents an in-depth exploration of auditors’ responses to the voluntary resignation of independent directors. The findings reveal that the voluntary resignation of independent directors of a listed company transmits risk signals to auditors that elevate their perception of the risk associated with that company. In response, auditors seek to mitigate this risk by charging higher audit fees or terminating their engagement with the client company. Interestingly, we find no evidence that auditors also increase their audit effort following the voluntary resignation of independent directors, indicating that the higher audit fees charged are due primarily to an increased risk premium, rather than to cost compensation. Mechanism analysis indicates that companies with voluntary resignations by independent directors face an increased risk of regulatory penalties in both the current and subsequent periods, and such companies also receive more negative media coverage.

Further analysis reveals that since the implementation of the New Securities Law, the positive relationship between the voluntary resignation of independent directors and abnormal audit fees has become more pronounced. This suggests that the new law has a deterrent effect on auditors, increasing their perception of risk and leading them to raise audit fees. Moreover, we discover that auditors follow an order of priority in responding to the risk signals conveyed by the voluntary resignation of independent directors: when they perceive the level of corporate risk to be acceptable, they prefer to increase audit fees, but when the risk exceeds their tolerance level, they are likely to terminate the engagement, leading to an auditor change.

Abstract

This article systematically reviews 94 accounting and finance studies that address the real effects of financial reporting. Whereas the effects of financial reporting on capital suppliers’ decisions traditionally have received much attention, recent research has generated important new insights into the feedback effects of financial reporting on the reporting firms’ real activities (e.g., investments or allocation and use of resources). We identify the consequences of financial reporting for (1) the reporting firm, (2) its peer firms, and (3) the input and output markets. We also highlight the effects of firms’ internal controls over financial reporting and consider how accounting and auditing regulations influence and contribute to real effects. The studies we review are consistent in their findings that high-quality financial reporting is positively associated with the efficiency of the reporting firm’s resource allocation. Many studies also suggest a positive association between high-quality financial reporting and an efficient allocation of resources in the real sector, which can also benefit other market participants like consumers or employees. The article concludes with an outlook on fruitful research opportunities.

Introduction

Most accounting research focuses on the capital market effects of financial reporting. Financial reporting informs investors, creditors, and the public about firms’ activities, net assets, financial position, and results of operations. It thus decreases information frictions when firms need to fund (new) projects and activities. A large portion of the literature on the effects of financial reporting addresses efficiency problems in the capital market by investigating the decisions taken by capital suppliers (e.g., Ball and Sadka, 2015, Ball et al., 2009, Botosan, 2006, Dye and Sridhar, 2002, Verrecchia, 2001). However, the relevance of financial reporting for the real sector, which includes firms’ decisions on investments and the production and consumption of goods and services, has received considerably less attention. Nevertheless, a small but fast-growing strand of the accounting and finance literature investigates the effects of financial reporting on the real sector. These effects are also referred to as real effects.

Most real effects studies investigate the economic effects of financial reporting on the investments and operations of the reporting firm (e.g., Biddle et al., 2009, García Lara et al., 2016, Kanodia and Sapra, 2016, McNichols and Stubben, 2008). An increasing number of studies also address the effects of a firm’s financial reporting on its peer firms. Examples of such studies are Badertscher et al., 2013, Beatty et al., 2013, Durnev and Mangen, 2009, and Li (2016), who find that misreporting can distort the peer firms’ investment and operational efficiency. The reason is that the peers seem to rely on misleading economic prospects. In contrast, peer firms might benefit from learning about market uncertainties from another firm’s financial report (Badertscher et al., 2013, Bernard et al., 2020, Durnev and Mangen, 2020). Finally, a few studies investigate the real effects of finanical reporting for the aggregate input or output market. These studies are consistent in their finding that financial reporting can facilitate the efficient allocation of resources across firms, for example, by reducing differences in productivity within an industry (Breuer, 2021, Francis et al., 2009, Hann et al., 2020). However, there is scarce research on the real consequences of financial reporting for other market participants in the input or output market. Yet real effects for consumers can exist in the output market, if, for example, firms change their pricing policies (Li, 2016, Sadka, 2006) or differentiate their products (Bernard et al., 2020) in response to their competitors’ financial reports. Furthermore, in the labor input market, financial reporting relates to firms’ labor investment efficiency (Choi, 2021, Jung et al., 2014, Kedia and Philippon, 2009), and this ultimately has implications for employees.

Conclusion

This review article summarizes 94 studies on the role of financial reporting for the real sector, focusing on (1) the reporting firm, (2) its peer firms, and (3) the input and output market. First, we find that most of the studies investigate real effects for the reporting firm. The findings of these studies suggest that high-quality financial reporting is positively associated with firms’ investments and operations efficiency. The reporting of (in)efficient internal controls can be interpreted as a moderating factor in firms’ efficiency in real decisions. Second, an increasing number of studies investigate the real effects of financial reporting for the reporting firm’s peers. These studies suggest that high-quality financial reporting can improve the efficiency of peer firms’ real decisions through learning. Low-quality reporting, on the other hand, can be misleading and result in inefficient real decisions by peer firms. Third, we find that only a few studies focus on the real consequences of financial reporting at the aggregate level. The findings suggest a positive association between industry- or country-level measures of financial reporting quality and the efficient allocation of resources across firms (e.g., by increasing product market competition). However, the economic implications of financial reporting for other market participants (e.g., consumers or employees) remain insufficiently explored. For example, consumers might benefit from an increase in product market competition resulting from high-quality financial reporting. Moreover, financial reporting quality positively relates to firms’ labor investment efficiency, which can affect employees. Finally, we observe that an increasing number of studies investigate the real effects of accounting and auditing regulations. These studies suggest that financial reporting regulations addressing the needs of capital market participants can have unintended economic consequences for firms and other market participants in the real sector.

Abstract

This research contributes to understanding the spillover effect of customer digital transformation along the supply chain. We take a supply chain relationship perspective to explore the influence of customers’ digital transformation on suppliers’ audit fees and find a significant reduction in such fees when customers undergo digital transformation. An economic mechanism analysis reveals that this transformation reduces audit fees by lowering the risks and costs encountered by auditors. This is achieved by mitigating suppliers’ business risks and improving earnings quality. Heterogeneity analysis reveals that the impact of customers’ digital transformation on suppliers’ audit fees is more pronounced when the supply chain is geographically distant, suppliers with more specific investments and with high levels of market competition.

Introduction

Digital transformation involves shifting from a traditional “industrialized” management model to a digital management model ( Verhoef et al., 2021 ). This transition goes beyond simply applying digital technologies to technical aspects of a business and involves a complete restructuring of business models and operational management. Research on the economic consequences of digital transformation emphasizes its potential influence on the quality of corporate disclosures and business risks. For example, digital technologies can improve operational management, promote networked and flattened organizational structures ( Nambisan et al., 2019 ), increase corporate disclosure transparency and the quality of accounting information and enhance communication, production and operational efficiency ( Wu et al., 2021 , Chen et al., 2022a ). By digitally collecting and analyzing data, firms can effectively visualize information, enhance interdepartmental coordination, refine risk control processes, mitigate operational risks and reduce management fraud and decision-making errors that lead to losses, thereby enhancing their market reputation ( Manita et al., 2020 , Zhou and Li, 2023 ). Most studies focus on the direct effects of digital transformation on firms’ risk responses and information transfer capabilities, while its broader effects on the supply chain have not been sufficiently investigated ( Guo et al., 2023 ).

The production operations of suppliers and their financial decisions are influenced and informed by their customers, who therefore play a vital role in the supply chain ( Ak and Patatoukas, 2016 ). Investing in supply chain relationships promotes the economic interdependence of suppliers and customers. The value of such investment depends on customers’ growth prospects, and ensuring the stability of their businesses can lead to higher expected returns from supply chain collaboration. Conversely, if customers face business challenges or go bankrupt, they can jeopardize the value of the assets allocated by suppliers ( Raman and Shahrur, 2008 ). This increases suppliers’ cash flow and operational risk ( Itzkowitz, 2013 ). Thus, suppliers are highly sensitive to the operations and activities of their customers. The risks and information associated with customers can generate a spillover effect in the supply chain, which can then trigger cascading changes in suppliers’ operational risks and influence their investments and financial decisions ( Hertzel et al., 2008 , Jacobson and von Schedvin, 2015 , Chiu et al., 2019 ). By gaining access to more transparent customer information, suppliers can better forecast customer demand, reduce transaction costs, alleviate shortages and losses and enhance production efficiency and inventory management ( Yang et al., 2020 ). Digital transformation can have positive effects on business risks and disclosure quality, in addition to the supply chain, but does the digital transformation of customer businesses also lead to additional spillover effects on suppliers?

Conclusion and discussion

Amid increased economic uncertainty, businesses are increasingly turning to digital transformation to enhance their resilience and optimize their resource allocation. The supply chain is a critical component of business operations that integrates logistics, information flow and capital flow. Microenterprises aiming to gain a competitive advantage can enhance their collaborations within supply chains. We investigated the spillover effect of customer digital transformation on suppliers through assessing its impact on audit fees. This extends research on the economic consequences of digital transformation beyond the boundaries of supply chain relationships. Our empirical findings indicate that customers’ digital transformation can reduce suppliers’ audit fees. Our heterogeneity analysis shows that this effect is more evident when there is a greater geographic distance between suppliers and customers, higher levels of dedicated investment and increased competitiveness in the supplier market. Through the economic mechanism of mitigating supply chain risk and facilitating collaboration and information transfer in supply chains, customers’ digital transformation reduces suppliers’ audit risks and costs, thus leading to lower audit fees.

Based on previous research findings, we offer the following conclusions. First, the implementation of digital transformation by suppliers’ customers can potentially cause a spillover effect across the supply chain, thereby affecting the economic interests and decisions of suppliers. Consequently, when faced with fierce market competition, firms should fully realize the beneficial effects of digital transformation on information transfer efficiency and collaboration within the supply chain. Such transformation should therefore be actively promoted, because through it firms can facilitate a seamless connection of resources, information and knowledge within the supply chain, thus fostering sustainable economic growth through enhanced coordination and cooperation.

Abstract

Audit practice is a team effort led by signing auditors. We examine the impact of the heterogeneity of signing auditors’ audit-firm serving experiences on the disclosure of key audit matters (KAMs). Auditors with more heterogeneous serving experiences demonstrate more adequate KAM disclosure, as evidenced by more KAMs, longer texts and clearer attributions in their disclosures. This effect is influenced by the quality of audit knowledge that auditors accumulate from different serving experiences and the team- and audit-firm-level knowledge integration environment. Furthermore, signing auditors with more diverse service experience tend to improve audit quality, reduce the incidence of restatement or misconduct and enhance the informativeness of financial reports. Our findings enrich the KAM disclosure research and provide insights into audit firms’ human resource allocation and internal management.

Introduction

In 2016, China’s Ministry of Finance mandated new audit report standards, introducing Key Audit Matters sections in listed companies’ audit reports to bolster transparency and highlight financial statement risks through auditors’ judgment ( Chen et al., 2021 ). Studying the disclosure of key audit matters (KAMs) is pivotal for enriching the content of audit report information and nurturing capital market health ( Reid et al., 2015 , Wang et al., 2018 , Li et al., 2019 ). Research predominantly examines the economic consequences of KAM disclosure ( Wang and Li, 2019 , Liu and Lei, 2020 , Zhou et al., 2020b ). Only a few studies investigate the determinants of KAM disclosure, with major focuses on client characteristics ( Pinto and Morais, 2019 ; Li et al., 2020; Qian et al., 2022 ), individual auditor attributes ( Cao, 2021 , Chen et al., 2021 ), client–auditor relationships ( Hu and Hu, 2021 ) and abnormal audit fees ( Chen et al., 2022 ). Audit practice is inherently team work, with the leading signing auditors critically influencing team efficiency ( Jiang and Tang, 2016 , Yan et al., 2017 ). In the context of integrated management within accounting firms, exploring effective personnel allocation for audit teams is important for promoting the integration of internal resources within organizations and driving the audit market toward intrinsic, high-quality development. We investigate how the heterogeneity of signing auditors’ audit-firm serving experience affects KAM disclosure from a team theory perspective. 1

Auditing is a profession characterized by a relatively high turnover rate, with auditors often transitioning between audit firms ( Hermanson et al., 2016 ). For instance, the Shanghai Institute of Certified Public Accountants announced that in September 2022, 122 certified public accountants in Shanghai handled issues related to transferring to other firms. The professional experiences gained in various firms have a profound impact on individual auditors’ knowledge acquisition and cognitive processes ( Che et al., 2020 , Tian et al., 2021 ). Furthermore, the diversity in the audit-firm serving experiences of signing auditor pairs may influence their knowledge integration, which has implications for their audit judgments ( Carpenter, 2007 , Bonner et al., 2022 ).

Conclusions

In this study, we provide novel empirical evidence on the factors influencing KAM disclosure. We find that signing auditors with more heterogeneous audit-firm serving experiences exhibit more adequate KAM disclosure. Mechanism analysis reveals that the quality of knowledge accumulated from heterogeneous serving experiences and the knowledge integration environment at both the team and firm levels significantly influence the impact of serving experience heterogeneity. Specifically, the increase in KAM disclosure adequacy is more salient when auditors accumulate higher-quality knowledge through heterogeneous serving experiences, when audit teams exhibit educational gaps between members, when review partners have heterogeneous experiences and when audit firms are smaller. Economic consequence tests indicate that signing auditors with greater serving experience heterogeneity can enhance audit quality through more audit input, significantly reduce the probability of restatements and financial misconducts and ultimately enhance the informativeness of accounting information. In other words, such audit teams can improve accounting information quality by thoroughly identifying and addressing potential risks in financial reporting.

We extend the literature on KAM disclosure through a novel investigation of how audit team composition affects the adequacy of such disclosure. Our findings offer valuable implications for practice. In the realm of integrated audit firm management, human resource management is pivotal for audit firms’ internal governance. Managers need to consider the proper allocation of human resources from the perspective of auditor team composition. By leveraging differentiated serving experiences within audit teams, they can adjust member configurations, enhance communication and cooperation among team members, better harness their teams’ collective intelligence and improve internal governance mechanisms and quality management systems. Regulatory bodies are encouraged to encourage audit teams to embrace diverse decision-making frameworks. This shift will aid audit firms in transitioning from a growth-centric to a strength-based approach and promote the healthy development of capital markets.

Abstract

This paper delves into the integration of Intelligent Process Automation within the domain of business continuity auditing, with a focus on the Portuguese banking sector. In an era marked by rapid technological advancement, organizations are increasingly leveraging automation to reinforce operational efficiency and realize substantial cost savings. Concurrently, auditors play a pivotal role in ensuring seamless transitions amid technological transformations to safeguard business continuity. This research endeavors to bridge the realms of business continuity and intelligent automation, culminating in a comprehensive application that streamlines the audit process. The implemented solution encompasses the automation of critical audit activities, including communication, information requests, and final report submissions, liberating auditors from the chains of repetitive tasks. The incorporation of business intelligence augments this automation framework, enabling a meticulous analysis of key performance indicators within the audit department. This ensures a continuous evaluation of the efficacy of the Annual Audit Plan. Empirical validation of this initiative was achieved through surveys conducted with audit teams from four prominent Portuguese banks. The results unequivocally affirm the potential benefits of this implementation, extending invaluable support to management in the decision-making process, while concurrently alleviating auditors of routine tasks inherent to the audit process. This study not only underscores the transformative potential of intelligent process automation in the audit domain but also offers a replicable framework for organizations seeking to fortify their business continuity efforts through technological integration. The findings hold implications for businesses navigating the dynamic intersection of technology and audit practices, providing a blueprint for harnessing automation for enhanced operational resilience.

Introduction

Technological advancements have greatly increased information accessibility and are continuously reshaping information systems to meet future demands This dynamic environment compels organizations to adopt open innovation strategies to streamline operations, enhance efficiencies, and fortify fraud prevention measures. The COVID-19 pandemic has accelerated the shift towards remote work, emphasizing the importance of process automation. In auditing, technology has become essential in ensuring compliance, assessing risks, and improving operational efficiencies, promoting transparency and accountability. The shift from manual to automated and continuous auditing is driven by emerging technologies like Artificial Intelligence (AI) and blockchain, significantly affecting the banking sector. Despite these advances, the transition to fully digital auditing practices remains gradual, with many institutions still reliant on traditional methods.

The auditing process has evolved from traditional manual audits of paper documentation to computer-based auditing, progressing towards a paperless, electronic, real-time continuous auditing environment ( Rezaee et al., 2002 ). The banking sector has faced numerous challenges in recent years, responding to incentives and imperatives related to technological advances, market volatility, and increasing regulatory and public scrutiny. Since the 2007 financial crisis, known as the subprime crisis, the audit function in banking institutions has become significantly more crucial. Its primary mission is to mitigate the risk of potential or actual losses, thereby enhancing the institution’s risk profile ( Zinca, 2016 ). Internal Audit (IA) departments are under increasing pressure to leverage technology for automating the identification of exceptions and/or anomalies and for control testing ( The Institute of Internal Auditors, 2019 ).

Conclusions

This study aimed to integrate automation within the audit process, thereby streamlining manual and repetitive tasks to enhance the efficacy of business continuity management. This goal was pursued through the identification of optimal automation solutions and the mitigation of associated risks.

A multi-stage methodological approach was utilized, beginning with an extensive literature review to identify the risks, benefits, and challenges linked with the automation of audit processes. This was followed by the application of the DSRM to precisely define the core problem and develop an appropriate solution. Subsequent phases involved the detailed design and development of the proposed solution, culminating in a survey conducted among bank auditors to evaluate how well the solution met their needs.

The findings from this study highlight the pivotal role of IPA in the audit process. Significant advantages were observed, including the implementation of an alert system that notifies auditors of upcoming audits and the use of KPIs to provide a detailed overview of the progress within the audit plan. These tools help identify areas that require refinement in audit management.

Abstract

This study aims to investigate the influence of blockchain and artificial intelligence on the audit quality of firms from Turkey. Primary data from 300 respondents are collected through random sampling to attain the study’s objectives. PLS-SEM is used to investigate the relationship between exogenous and endogenous variables. Our findings show that blockchain technologies and artificial intelligence (AI) utilization in their financial system positively impact audit quality by assisting in the audit process and the detection of fraud, which also improves financial reporting. Blockchain and Artificial Intelligence in the financial system create confidence for investors, stakeholders, and legislators. Moreover, this study advocated significant implications for investors, government, firms, and policymakers. Investors can make investment decisions based on the accuracy of the financial accounts; the government and policymakers can improve the governance mechanism by using the study’s findings.

Introduction

Audits play a vital role in ensuring compliance with laws, regulations, and accounting standards. Companies are subject to various regulatory requirements and must adhere to accounting principles and reporting frameworks [1]. High-quality audits provide independent assurance that these compliance requirements are met, reducing the risk of penalties, legal consequences, or reputational damage [2]. Quality audits contribute to effective corporate governance by holding management accountable and independently assessing the company’s financial reporting [3]. By examining internal controls and risk management processes, audits help identify weaknesses and areas for improvement, enhancing organizational transparency and accountability. Audits protect the interests of various stakeholders, including employees, customers, suppliers, and lenders [4]. By assuring the accuracy and reliability of financial statements, audits help safeguard the investments, jobs, and contractual relationships associated with a company. This promotes trust and stability in the business environment.

Auditing quality is an interesting research problem and is influenced by many factors such as the blockchain, Artificial Intelligence, professional skepticism, auditor independence, audit firm size, regulatory environment, technological advancements, and the adoption of innovative audit tools. Professional skepticism plays a pivotal role in audit quality [5]. Auditor independence, ensuring auditors maintain an unbiased stance, is fundamental for objective and reliable audit outcomes [6]. The audit firm size has been identified as a factor, with larger firms often having more resources and expertise to deliver higher-quality audits [7]. The regulatory environment and oversight mechanisms significantly impact audit quality, as stringent regulations and effective oversight contribute to a more robust auditing process [8]. Technological advancements and the adoption of innovative audit tools have emerged as crucial factors shaping audit quality in the contemporary business landscape [9]. Understanding the intricate interplay of these factors is essential for advancing research and enhancing the overall quality and effectiveness of auditing practices. Therefore, these factors are widely discussed in the previous literature in different demographic contexts but lack the investigation on Artificial Intelligence (AI) and blockchain technology in relation to audit quality in the modern world.

Conclusion and recommendations

Our findings show that AI improves audit quality by providing assistance and timely fraud detection. AI’s data analysis capabilities, ability to identify complex fraud patterns, and real-time monitoring contribute to more effective and efficient audits. As AI advances, it holds tremendous potential to enhance auditing practices’ overall quality and effectiveness. This study provides specific insights into the implications of these technologies within Turkey and also other varieties of implications for investors, management, stakeholders, and policymakers. The study assessed the level of adoption and readiness of Turkish auditing firms to embrace blockchain and AI technologies. It identified the factors influencing the adoption process, including organizational culture, infrastructure, resources, and regulatory environment. Understanding the current state of technology adoption in Turkey sheds light on the potential implications for audit quality.

The implications of blockchain and AI on fraud detection and risk assessment practices in Turkish audits can be explored. The study assessed how these technologies improve the ability to detect and prevent fraud, including identifying unusual patterns, real-time monitoring of transactions, and using predictive analytics. It can also examine the impact of risk assessment methodologies and the ability to assess risks accurately. The investor can invest by seeing the audit quality of the firms within Turkey to protect their investment, and the government can make the legislation in the weakness and delayed audit without enjoying the blockchain technologies and the other factors. Future research should be conducted on the efficiency of blockchain technology that is effective in the accounting system and preparation of the financial system that makes it easier for the technologies to improve the audit quality. Some more Blockchain units should be included in further research. Due to the limitation, we included one economy in our investigation; future research should include more than one and compare each economy, the use, and the efficiency of the artificial intelligence system.

Abstract

The digital transformation of enterprises is the key to conforming to the trends of the times and realizing reform and innovation. Digital transformation will change the enterprise risk and information environment, and also bring challenges to the audit business. This study takes China’s Shanghai and Shenzhen A-share listed companies from 2011 to 2021 as a sample, starting from the perspective of audit delay, and empirically tests the impact of enterprise digital transformation on audit efficiency. The results of the study found that the higher the degree of enterprise digital transformation, the more serious the audit delay and the lower the audit efficiency. Further research found that in non-high-tech enterprises and when audited by non-international “Big 4” and accounting firms without digital expertise, the effect of enterprise digital transformation on reducing audit efficiency is more obvious. This study expands the research field of enterprise digital transformation and auditing and provides empirical evidence for improving auditing efficiency.

Introduction

In recent years, the digital economy has developed rapidly and continuously integrated with the real economy, becoming a new driving force for global economic growth. International Data Corporation (IDC) predicts that global investment in digital transformation will grow at a compound rate of 17.1 % per year, with investments expected to reach $2.3 trillion in 2023. According to the survey, as of the end of 2022, the scale of China’s digital economy has reached RMB 50.2 trillion, a nominal increase of 11.3 % year-on-year, accounting for 41.5 % of the total GDP.1 Under the wave of the digital economy, most companies choose to actively influx, and some companies say they “will not transfer”, “don’t want to transfer” or “don’t dare to transfer” because of their weak capabilities, high transformation costs, and long “painful period” of transformation (Liu et al., 2021). Accenture pointed out in the “2022 China Enterprise Digital Transformation Index” that only 17 % of Chinese enterprises have achieved significant results in digital transformation.2 This indicates that most Chinese enterprises are still in the early stages of digital transformation, and the value brought by the transformation has not yet been fully reflected. Scholars at home and abroad have also done a lot of research on the impact of enterprise digital transformation, but the current research has not reached a consistent conclusion about whether digital transformation brings more positive or negative impacts to enterprises. Some scholars believe that digital transformation improves the accuracy and accessibility of enterprise financial data (Warren Jr et al., 2015), and enhances enterprise performance and value; Some scholars also believe that digital transformation makes enterprise business more complex, increases the uncertainty of enterprise recognition, measurement and reporting (Appelbaum et al., 2017), and brings more risks and challenges. Therefore, exploring how digital transformation will affect enterprises and their stakeholders is crucial to promoting the sustainable and healthy development of the digital economy.

Conclusions

This study takes audit delay as a measurement variable of audit efficiency and takes A-share listed companies in Shanghai and Shenzhen from 2011 to 2021 as samples to study the impact of enterprise digital transformation on audit efficiency. The results show that enterprise digital transformation will aggravate audit delay and reduce audit efficiency. On the one hand, it may be that most enterprises in China are still in the primary stage of digital transformation, and the challenges they meet in the process of transformation have not been overcome promptly. On the other hand, the digital competence of accounting firms may not be enough. Faced with the challenges of new technology and data complexity brought by the digital transformation of enterprises, auditors cannot complete the audit work efficiently and orderly. This study also further analyzes the moderating effect of accounting firm competence and high-tech enterprises in the study of digital transformation on audit efficiency. The research results show that when the transformation enterprises are non-high-tech enterprises and the audit units are “non-Big 4” and “accounting firms without digital expertise”, the effect of enterprise digital transformation on reducing audit efficiency is more obvious. This also shows that the mature degree of digital transformation of enterprises and the high competence of accounting firms can alleviate the negative effects of digital transformation of enterprises on audit efficiency.

Abstract

Inadequate information technology (IT) management can lead to system ineffectiveness and operational stagnation within enterprises. While the application of IT governance provides a means for companies to validate IT functionality, oversee IT operations, and mitigate IT-associated risks, there is a paucity of research examining its implications of IT governance on IT controls, particularly within the context of a firm’s Internal Audit Function (IAF). Addressing this gap in the literature, this research delves into the relationship between the characteristics of the IAF and IT governance within the IAF. It further probes the linkage between IT governance associated with the IAF and IT control activities. We analyze survey data from 414 internal auditors across various Taiwanese companies using partial least squares regression. The findings suggest that IT knowledge and internal auditing roles have a significantly positive relationship with the quality of the IAF-IT relationship and IT governance processes. Similarly, IT audit competencies exhibit a significantly positive relationship with IT governance processes. Furthermore, properly structured IT governance processes and a high-quality IAF-IT relationship demonstrate a positive association with the effectiveness of general controls. This research amalgamates and extends prior investigations into IT governance and internal auditing, underlining their critical role in successfully implementing superior IT controls.

Introduction

Post the Enron scandal in 2000, the enactment of the Sarbanes-Oxley Act in the U.S. necessitated companies to take measures that ensure the efficacy of their internal controls over financial reporting (section 404). As information technology (IT) plays a pivotal role in ensuring the precision of a company’s financial reports, IT controls have thus become an integral component of Sarbanes-Oxley compliance initiatives. To facilitate IT governance, which pertains to formalizing strategic IT decisions and essential IT oversight processes, the Information Systems Audit and Control Association (ISACA) introduced the Control Objectives for Information and Related Technology (COBIT) in 2019. However, despite these measures, public companies still report material weaknesses in IT controls. A 2021 analysis of business processes and material weaknesses among public companies registered with the U.S. Securities and Exchange Commission by the accounting firm KPMG found that IT control material weaknesses accounted for 35 % of all material weaknesses in 2020 (KPMG, 2021a).

Given their critical role in corporate and financial security, material weaknesses in IT controls pose a significant threat to the legitimacy of companies (Haislip et al., 2016). Furthermore, such weaknesses can negatively impact the quality of the information in systems, potentially misleading management and resulting in improper decisions (Li et al., 2012). Stoel and Muhanna (2011) observe that companies with material weaknesses in IT internal controls underperformed those without such issues. In an era characterized by big data and sophisticated digital technologies, material weaknesses in IT internal controls can lead to substantial losses, thus emphasizing the need for effective IT controls.

Conclusion and suggestions

5.1. Analyses and discussion
The potential for significant financial losses due to inadequate IT controls necessitates substantial attention to IT controls by businesses (Association of Certified Fraud Examiners, 2016; Stoel & Muhanna, 2011). The findings of this research illustrate a positive correlation between the involvement of Internal Audit Functions (IAFs) in IT governance and improvements in IT controls, thus offering contributions to scholarly discourse on IT governance. Our study broadens the conversation regarding the relationships among IAF quality, information security, and information security controls by integrating the dimension of IAF-IT relationship quality (Steinbart et al., 2013, 2018). Additionally, the results augment the research landscape on the interplay between IAF characteristics, their involvement in IT governance, and IT controls (Merhout and Havelka, 2008).

The IAF-IT relationship quality is significantly influenced by IT knowledge and internal audit roles. This aligns with the findings of Steinbart et al. (2013), who assert that a comprehensive understanding of information security can bolster the relationship quality between IAFs and information security. However, Steinbart et al. (2013) find no significant impact of the internal audit role on the relationship quality between IAFs and information security, which is a discrepancy with our findings. Our study further illustrates that IT knowledge, internal audit roles, and IT audit competencies significantly affect the IAF-IT governance process. This finding is in accordance with Merhout and Havelka (2008), who establish that the involvement of IAFs in IT governance is significantly associated with IT personnel and IT training or certification.

Abstract

The entire world is facing the issue of climate change. Due to rapid industrialization, enormous waste generation is aggravating the situation. In this study, we investigate the role of audit quality in promoting sustainable waste management in firms. Using a sample of 8100 firm-year observations for the period 2002–2017 from 34 countries, we provide novel empirical evidence that good audit quality significantly reduces total corporate waste production. Further, our results are robust to alternate proxies of audit quality, and waste management, and only appear with unqualified audit reports. To alleviate the endogeneity issue, we use two different identification strategies; namely, PSM and GMM. Altogether, these findings demonstrate that Big4 auditing firms ensure the credibility and reliability of the non-financial disclosures of their auditees as apparent by their rigorous auditing processes. Moreover, the main implication of our study is that firms are subject to a decrease in their overall waste production when their external assurer is one of the BIG4 auditing firms.

Introduction

The word ‘Sustainability’ has received immense global attention over the last decade, as obvious by its evident visibility in, corporate mission and vision statements (Meppem & Gill, 1998). Hereby, many internationally approved climate agreements, such as the Paris Agreement, and the Sustainable Development Goals (SDGs), etc., have been used as a source for embedding sustainable development in the core strategies of both developed and developing economies (Alam et al., 2019). According to these agreements, immense greenhouse gas (GHG) emissions are regarded as the prime reason for the present environmental degradation (Alam et al., 2019). Besides, these statistics by the World Bank (2012) state that the annual amount of solid waste produced by our global economy amounts to one billion tons, thus highlighting the increased contribution of the waste sector to the increase in global temperatures. Conversely, the United Nations Environmental Programme (2010) in its report on waste and climate change states that the waste sector can move its position from a minor contributor to a major saver of emissions, as it reports only a 3–5% contribution of the waste sector in GHG emission production. These statistics point toward the development of a circular economy through improvement in the waste management practices of firms in the last 40 years (Romero-Hernández & Romero, 2018).

Moving forward, these global environmental concerns have entailed primary pressure on corporates as they are subject to the generation of a massive amount of waste during the production of goods and services (Gull, Atif, & Hussain, 2022; Hirsch, 2019). Further, firms in response to the pressure entailed by certain internal and external stakeholders are moving towards more sustainable practices, like waste management, recycling, reusing, etc. (Alam et al., 2019). These sustainable business practices are costly to introduce and maintain and therefore depend on the strength of a firm’s governance structure, as strong governance structures predict the level of waste produced by firms (Gull, Atif, & Hussain, 2022; Shahab et al., 2022). For this reason, prior research has extensively highlighted the importance of a firm’s external and internal governance in the promotion of corporate sustainability (Bacha et al., 2020; Earnhart & Harrington, 2021; Hussain et al., 2018; Jo et al., 2015; Saeed et al., 2022).

Conclusion

The immense increase in global temperatures has become a substantial concern and emerged as a real-world phenomenon in recent years (Alam et al., 2019). The increase in global annual waste production further ruins the situation (World Bank, 2012). For this reason, firms have increased their attention toward sustainable development in the face of the pressure entailed by the governments, policymakers, stakeholders, and external assurers of a firm (Alam et al., 2019; Saeed et al., 2022). Prior research has extensively studied the impact of external stakeholders on a firm’s environmental sustainability (Dakhli, 2021; Dicu et al., 2020). As Braam et al. (2016) and Earnhart and Harrington (2021) also analyse the importance of audit quality in enhancing corporate environmental performance. While prior literature lacks to define the role of audit quality in improving several other dimensions of corporate social responsibility such as waste management. Therefore, concerning the importance of waste management, our study fills this void and provides robust empirical evidence on the impact of audit quality on waste management.

This study employs a panel data set of 8100 firm-year observations from 34 countries between 2002 and 2017 and finds a negative relationship between audit quality (BIG4) and total waste generation (T_WASTE) (Earnhart & Harrington, 2021). Our results are robust to the use of several alternate proxies of waste management and audit quality. Moreover, we found our relationship to be more pronounced in firms that constitute CSR committees, have strong governance structures, have low institutional ownership, and are with high CSR intensity. While, in addition, we drive that audit quality is subject to reducing a firm’s overall waste generation only in the case of non-natural industries. Furthermore, to the extent possible, we rule out certain endogeneity concerns through the propensity score matching (PSM) and generalized methods of moments (GMM) techniques and analyse consistent results. Ultimately, our findings indicate that high audit quality plays the role of external governance helps firms to reduce their waste production.

Abstract

This study examines whether there is a correspondence between auditor disclosures of key audit matters (KAMs) and management disclosures of significant accounting policies and estimates, following the introduction of the International Standard on Auditing (ISA) 701. In addition, we investigate how audit committees moderate the relationship. We employ a sample of Swedish listed firms (2016–2018), using measures that capture the extent and quality of management disclosures and how they relate to auditor KAM disclosures, including the number of accounting items disclosed, total number of words, and number of unique KAM-related words (via a “bag-of-word” technique). We find a positive correspondence between auditor and management disclosures, and the correlation is greater in firms with an audit committee. Additional analyses provide evidence that management disclosure quality increases after the introduction of ISA 701, but the positive effect is mostly found in firms with a separate audit committee on the board. The results are robust to alternative measures for disclosures and using a matched sample design. Our findings suggest that policymakers should consider the interplay between audit standards and audit committees.

Introduction

We study the correspondence between management disclosures of significant accounting policies and estimates in accordance with International Accounting Standard (IAS) 1 with the key audit matter (KAM) disclosures mandated by the International Standard on Auditing (ISA) 701.1 Auditors must consider “significant auditor judgments relating to areas in the financial statements that involved significant management judgment” (ISA 701, para. 9)—areas that contain risk-related information on significant accounting policies and estimates disclosed by managers under IAS 1 (para. 122 and 125).2 Though such disclosures inform financial statement users about management judgments, they are subject to managerial discretion in identifying significant accounting items and sources of uncertainty regarding key estimates (Christensen et al., 2012, Hodgdon and Hughes, 2016). Users can better assess managers’ accounting choices if managers provide additional information on how the choices are made. Managers disclose information depending on their incentives and the scrutiny level by which they make these choices. For instance, following changes in regulations to improve enforcement and firm governance, disclosures are documented to ensure more transparency (Hope, 2003, Cohen et al., 2007).

Enhanced auditor accountability, following ISA 701, increases the attention of auditors to management’s accounting choices (Gutierrez et al., 2018, Bédard et al., 2019, Reid et al., 2019, Gold et al., 2020). This increase affects how managers convey significant accounting policies and estimates. Increased auditor attention enhances managerial choice monitoring by auditors and investors (Gold et al., 2020), who can observe differences between auditor and management disclosures. Under the new standard, users become aware of previously undisclosed risks if auditors identify matters that management has not disclosed or considered. Increased monitoring induces managers to improve their disclosures out of concern for their standing in the job market (Hirshleifer and Teoh, 2003, Desai et al., 2006). Therefore, after the implementation of ISA 701 in 2016, the scrutiny of management disclosures of significant accounting policies and estimates by auditors and boards of directors should yield a positive correspondence between auditor and management disclosures.

Conclusion

We examine whether following the introduction of ISA 701 there is a correspondence between auditor disclosures of KAMs and management disclosures of significant accounting policies and estimates. Furthermore, we explore whether audit committees moderate the relationship between auditor and management disclosures. We show a correspondence between auditor and management disclosures and that disclosures significantly increased after the ISA 701 adoption in Sweden, especially among firms with an audit committee. Thus, the effectiveness of the audit regulation depends in part on the governance institutions in place as audit committees translate auditor inputs into actual accounting outputs. This conclusion is further supported by the fact that audit committees strengthen the noted correspondence after the implementation of ISA 701.

Our findings should have implications for policymakers in reviewing post-implementation effects of ISA 701 and when implementing new audit and accounting standards. Accordingly, they convey that the enhanced transparency in audit reports causes a second-order effect on the quality of management disclosures. The findings may interest policymakers focusing on improving the corporate governance of firms, as they suggest that having a separate audit committee enhances management disclosures and their correspondence with auditor disclosures.

Abstract

Authoritative standards encourage external auditors to coordinate their efforts with the client’s internal audit function (IAF) as part of a financial statement audit. Academic research on this relationship finds that it has the potential to improve audit quality and efficiency. The objective of this research is to better understand how coordination can impact the external auditor’s decision to rely on the IAF. Prior research has shown that the reliance decision is complex and involves several factors that must be considered simultaneously. In this study, we surveyed external auditors to better understand the benefits of coordinating efforts, the antecedents to successful coordination, and the elements that potentially inhibit external auditors from relying on the work of internal auditors. We find that external auditors are coordinating with the IAF to achieve more efficient and effective audits. The degree of this reliance, however, does vary between audits and is largely dependent upon the perceived competence and objectivity of the IAF as well as effective communication. Our findings are informative to external audit practitioners and their decision to rely on IAFs and work towards a successful arrangement where the integrated audit is applied more efficiently and effectively. This additional insight also helps inform and direct future research into external auditors’ coordination decisions.

Introduction

High-quality financial statement audits largely depend on practitioners reaching appropriate judgements and decisions based on their clients’ circumstances. Auditing standards issued by the Public Company Accounting Oversight Board (PCAOB), the American Institute of Certified Public Accountants (AICPA), and the Institute of Internal Auditors (IIA) all emphasize the significance of effective communication and coordination between external auditors and a company’s internal audit function (IAF) to achieve an efficient and effective financial statement audit (e.g., CIIA 2020; CAQ 2015; ECIIA 2019; PCAOB 2024). While none of these standards explicitly mandate any particular arrangement, they all recognize the importance of understanding and considering the work performed by internal auditors. Academic research on this coordination, which is largely derived from experiment-based research designs, finds involvement by external auditors in developing the IAF’s work plans increases reliance and influences the evidence-gathering choices of external auditors (Pike et al. 2016; Felix et al. 2005). What is less understood are the elements that affect the individual judgments of external auditors as they make IAF reliance decisions. These are critical decisions as reliance determinations can vary significantly between audits and directly affect audit quality. Therefore, the purpose of this paper is to examine the circumstances that influence external auditors’ involvement and reliance decisions related to the client’s IAF, as well as the critical antecedents and challenges to coordination. To provide a deeper understanding of auditor involvement and reliance decisions, we survey external auditors related to their experience with IAF coordination and the subsequent impact on audit judgements related to quality and efficiency. Our findings are informative to practice as auditors continue to work towards the optimal level of involvement and coordination with the client’s IAF, to achieve an efficient and effective audit. We also contribute to the extant academia by providing external validity to some of the findings of prior research, identifying additional elements that enhance the reliance relationship between external and internal auditors, and highlighting some of the impediments to successful coordination, paving the way for future research.

Results

Question 1: In your audit experience, please describe the extent of the coordination you have had with the internal audit department of your clients?

Participants describe extensive coordination with the IAF, with 70.7% of the respondents indicating a medium to high level of coordination on most audit engagements. This coordination includes significant involvement in the planning, review, and suggested improvements to the IAF’s testwork. The purpose of these efforts is to align testing approaches, establish sample sizes, and assess the competence and objectivity of IAF. Some respondents highlight challenges related to maintaining independence and encountering issues with the IAF’s competencies. For example, a participant mentioned the importance and challenges of coordination in a resource-limited scenario:

[I] worked with a mid-market public client that devoted limited resources to designing, testing, and monitoring their internal control environment. I worked closely with them [the IAF] to ensure they were compliant with the SOX 404 requirements. Independence was maintained, but at times we may have come close to the boundaries of those rules.