Abstract

     While prior studies have linked the relationship between resources, time pressure, and audit quality, prior empirical studies generally measure the notion of audit offices’ resources or capacity in relatively simplified, indirect, or context-specific ways. In this study, we use two measures of an audit office’s unused capacity pertaining to normal audit tasks in Yu (2018) to examine their associations with several proxies for audit quality (discretionary accruals, earnings benchmarks, and going concern audit opinions). Empirical results show some evidence that higher (lower) unused capacity can result in better (worse) audit quality; and if any, this seems to occur only in Big 4 audit offices.

Introduction

     Many experimental or survey-based auditing studies have attempted to verify the association between auditor’s resources, pressure, and audit quality (e.g., Agoglia et al., 2010; Bennett et al., 2015; Coram et al., 2004; Lambert et al., 2017; McDaniel, 1990; Mocadlo, 2021). On the one hand, audit engagements conducted in fiscal year-end months with high levels of unused resources or capacity may impose less pressure on auditors, and the resources available to deal with unexpected and difficult audit-related decisions may also be more sufficient, leading to better quality audits. On the other hand, audit engagements conducted in fiscal year-end months with tight capacity conditions may impose more pressure on auditors and limit their access to resources, possibly resulting in inferior audits. In empirical studies, although many prior papers have attempted to capture different aspects of resources or capacity to investigate the association between pressure and audit quality, their proxies, are somehow relatively simplified, indirect, or context-specific (e.g., Bills et al., 2016; Czerney et al., 2019; Francis et al., 2017; López & Peters, 2012). Therefore, in this study, we use the measures of an audit office’s “unused capacity pertaining to normal audit tasks” in Yu (2018), to examine their associations with audit quality.1 The first measure, UNUSCAP1, is calculated as one minus “the current year’s aggregate audit fees in a specific month for an audit city office, divided by the current year’s highest monthly aggregate audit fees for that audit city office.”۲ Alternatively, considering the potential entrance barriers among client firms from different industries, the second measure, UNUSCAP2, is calculated using office-industry (SIC division) as another calculation unit. The identification of “month” referenced above is based on the client firms’ fiscal year-end month.3

Conclusion

     Differentiating from prior empirical studies that measure the notion of audit offices’ resources or capacity in relatively simplified, indirect, or context-specific ways, we use audit office’s unused capacity pertaining to normal audit tasks in Yu (2018) to directly investigate whether time pressure caused by the level of an audit office’s capacity can influence audit quality. Although this study may contribute to the literature by measuring capacity of audit offices in a different way, readers must keep in mind the underlying assumptions and limitations regarding the calculation of UNUSCAP1 and UNUSCAP2 discussed throughout this paper. Finally, we urge more researchers to come up with measures that better capture the notion of resources or capacity, especially under some Asia-Pacific jurisdictions (e.g., Taiwan and China) where the data for practicing offices are not easily collected.