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FAR Working Paper 2023/08 - 19: Internal Control Deficiencies and Audit Staffing

We analyze how engagement lead partners staff audits with types of internal control deficiencies (ICD). Previous literature suggests that audit teams react to the discovery of ICDs by increasing effort in order to keep audit quality constant. However, audit effort is a multifaceted construct due to the heterogeneity of auditor characteristics within an audit team. We argue that the hours worked by expert personnel, such as high-ranking auditors and specialists, represent a scarce resource for the audit firm. In the internal control setting, engagement lead partners are likely to use this resource when audit teams encounter wide-scope ICDs, such as entity wide and ITrelated ICDs. Using proprietary data on the audit processes of Big 4 audit firms in the Netherlands, we find evidence in line with this argument. When wide-scope ICDs are encountered during the audit, more audit hours are worked by expert auditors. In contrast, only non-expert auditors work more audit hours in engagements with narrow-scope ICDs, such as account level ICDs. In additional analyses, we find that the combination of expert audit effort and ICD scope is associated with audit outcomes and audit quality. Overall, we provide novel evidence on audit staffing in the presence of internal control deficiencies.


Prof. dr. Christian Hofmann
Sebastian Kuhn PhD student
Dr. Jeroen van Raak
Dr. Nina Schwaiger
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