Does high Audit Effort improve Audit Quality? : Evidence from unlisted firms and designated auditors
Byungchul Choi, Jungyoon Byun, Doocheol Moon · 한국회계학회 학술발표논문집 · 2019
With the revision of the External Audit Act, a major change is expected in Korea's external audit market. The major goal of the revision to the External Audit Act is to improve the audit quality and accounting transparency. It is expected that the revision of External Audit Act will have the biggest impact on the new system, which is the introduction of a regular designated audit system. This system is introduced on the premise that the quality of audit would be increased by higher independence when the Financial Supervisory Service designated auditors. However, the auditor designation system is also a special system in Korea, and prior research suggests conflicting results about the effect of enhancing audit quality of designated auditors. Caramanis and Lennox (2008) suggested that auditors’ high audit efforts improve audit quality. Therefore, audit quality may be reduced if the auditor does not secure sufficient and adequate audit hours to gathering audit evidence considering audit risks. This study is intended to investigate the auditors’ effort is an important component of audit quality, and that the designated auditor's high quality audit effect, known to provide high quality audit in the Korean audit market, would be due to high audit efforts. The results of this study showed that in all the samples of listed and unlisted firms, audit hours significantly reduces discretionary accruals used as a proxy for the audit quality. In particular, discretionary accruals of the sample performed by the designated auditor is not significantly different from the other samples. However, discretionary accruals of the sample performed by auditors under the auditor designation system was significantly low. But, when the auditors’ effort is controlled, discretionary accruals of all samples is not significantly different. It means that the auditors’ effort is a important factor in determining the quality of the financial reporting. Also, audit quality is not improved by the designated audit itself, but rather by the designated auditors’ high audit quality and audit effort registered in the designated audit system. This study suggests that the audit effort must be taken into account when measuring and substituting the audit quality by suggesting that audit hours are an important determinant of audit quality, and as a major variable for determining the audit quality. This result also suggests that high quality auditors effect is due to high audit effort.