Geographically Distributed Auditors' Judgement Quality

Abstract

A substantial amount of audit work performed by public accounting firms involves geographically distributed auditors (Brady, Birkenbeuerl, Rahill, and Sharpe 2011; Doty 2011, Jones 2011; Hanes 2013; Downey and Bedard 2019). Two popular geographically distributed audit arrangements are group audits and audit offshoring. These arrangements allow audit firms to reduce labour costs, expand expertise coverage, and increase work efficiency (Barrett, Cooper, and Jamal 2005; Spilker, Stewart, Wilde, and Wood 2013). These geographically distributed work arrangements have become increasingly prevalent among large, mid-tier and small public accounting firms, and there have been debates about how these audit arrangements influence audit quality (CAQ 2015, 2017; PCAOB 2015a, 2019; IAASB 2020a).

Recent international inspection reports indicate that there are deficiencies in the audits where geographically distributed auditors are involved (CAQ 2015; IFIAR 2019; PCAOB 2015a, 2019). What is less understood is what has triggered such deficiencies and what interventions can help geographically distributed auditors to improve their judgement quality. This thesis examines whether offshore and component auditors tend to underperform in specific audit tasks under certain conditions and examines specific interventions that could enhance judgement quality.

My thesis contains two studies. To address concerns regarding the quality of work conducted offshore, Study 1 uses a quasi-experiment to examine the research question as to whether offshore auditors' judgement quality is lower than onshore auditors' judgment quality. The results from 42 offshore auditors located in India and 46 onshore auditors located in US and Australian Big 4 firms indicate that onshore auditors achieve higher judgement quality than offshore auditors for an analytical procedure task. Study 1 finds some evidence of an interaction between offshore location and type of thinking approach. The research provides support for continued concerns surrounding offshoring and is relevant to calls for maintenance of adequate quality control across both onshore auditors and offshore service centres (IAASB 2019, 2020a).

Study 2 examines the interpretation by component auditors of lead auditor instructions. Study 2 employs a 2*2 between-subjects experiment to investigate two factors that potentially influence the problem of insufficient collection of audit evidence by component auditors: how do construal interpretations of lead auditor instructions influence component auditors' extent of evidence collection, and (2) whether a responsibility prompt will increase component auditors' willingness to perform higher quality control testing and gather higher quality audit evidence. Study 2 gathered responses from 94 auditors in China. The results show that an intervention to prompt component auditors to adopt greater responsibilities for the group audit report can improve component auditors' quality of evidence collection. This ameliorating effect is greater for component auditors receiving low-level construal instructions compared with component auditors receiving high-level construal instructions. In particular, Study 2 extends prior research on construal interpretations by finding that the unfavourable effect of providing documentation instructions that prime low-level construals can be reduced with a responsibility prompt in the group audit setting. Show more