The Impact of Account-Level Inspection Risk On Audit Program Planning Judgments

Recent research suggests inspections by auditing oversight bodies may lead to unintended consequences by incentivizing auditors to anticipate and manage inspection risk at the engagement level. Our study focuses on the account level, where detailed planning judgments are made, and provides evidence of the impact of a misalignment between inspection and misstatement risks on audit effectiveness and efficiency. Employing a two-stage experiment with 175 experienced auditors, we manipulate inspection risk between participants (high versus low) in the initial program planning stage and then within subjects provide fieldwork findings indicating an increase in misstatement risk (low to high) in the second stage. As hypothesized, auditors increase planned hours in response to an account with higher inspection risk and correspondingly assign fewer audit hours to accounts with lower inspection risk. This shifting of hours can reduce audit quality since despite lower inspection risk the underlying misstatement risks remain constant. Also, in the fieldwork stage participants allocate fewer additional hours the more hours they initially planned for the high inspection risk account. Additional analyses further reveal that auditors with inspection experience are particularly susceptible to this dampened response. In all, our findings suggest inspection risks potentially harm audit efficiency and effectiveness.