The impact of corporate governance on auditors' client acceptance, risk and plannning judgements

• Main Authors: Divesh S Sharma, Boo, Elfred Hian Yong, Vineeta D Sharma
• Other Authors: Nanyang Business School
• Format: Research Report
• Language: English
• Published: 2008
• Subjects: DRNTU::Business::Auditing::Client acceptance
• Online Access: http://hdl.handle.net/10356/14545
• Institution: Nanyang Technological University

This study explores the impact of corporate governance on auditors' client acceptance, risk and audit planning judgements. Specifically, we investigate the effect of the strength of the board of directors and audit committee on auditors' likelihood of accepting a client, assessment of risk, and the extent and timing of evidence testing. Sixty audit managers from three Big 4 audit firms are randomly assigned to one of three experimental conditions. The three experimental conditions represented weak, moderate and strong corporate governance. We make the following inferences from the analysis of our experimental data. We find that auditors are more likely to accept a client with strong corporate governance. Clients with strong corporate governance are assessed lower control and audit risks. After controlling for control risk, we find that strong corporate governance results in auditors increasing their reliance on the clients' internal controls, reducing the number of planned audit hours and extent of substantive tests. Finally, we find that auditors conduct a greater extent of substantive testing during the interim period compared to year-end, when the corporate governance of the client is stronger. Overall, our results suggest that audit strategies are responsive to the strength of a client's corporate governance.