Date of Graduation

8-2017

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Accounting

Advisor

Cory A. Cassell

Committee Member

Linda A. Myers

Second Committee Member

Gary F. Peters

Third Committee Member

Jonathan E. Shipman

Keywords

Audit Quality, Industry Specialization, Risk Assessment

Abstract

This study investigates auditors’ consideration of industry-level information in their assessment of client-level risk. Auditing standards suggest that industry-level information is likely to be important in the assessment of client-level risk, but the standards provide few specifics about how auditors should use industry-level information in the risk assessment process. I argue that industry norms serve as a benchmark for evaluating the risk of the client and that deviations from industry norms could indicate increased audit risk. I create measures that capture the extent to which clients deviate from industry norms using proxies for client-level risk factors. In my primary tests, I investigate whether auditors respond to these measures of deviation from industry norms and whether these measures are associated with adverse audit outcomes. I find consistent evidence of a positive relation between these measures and audit fees, suggesting that auditors identify and respond to deviations from industry norms. I find limited evidence of a relation between these measures and the likelihood of misstatement, suggesting that auditors’ response to deviations from industry norms is generally appropriate. In subsequent tests, I consider whether auditors’ response to deviations from industry norms varies by auditor type. I find that Big Four auditors and industry specialist auditors are more responsive to deviations from industry norms than non-Big Four and non-specialist auditors. Consistent with this, I also find some evidence that deviations from industry norms for certain risk factors are more strongly associated with adverse outcomes for non-Big Four or non-specialist auditors relative to Big Four or specialist auditors. My findings should be of interest to auditors, regulators, and market participants because they suggest that identifying and responding to industry-level information when assessing client-level risk is an important component of effective audit risk assessment.

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