Audit Engagement Review: Evidence from Audit Report Errors

Abstract

Reviewing the work of the engagement team is a critical aspect of financial statement auditing but is generally unobservable to external stakeholders. This can create challenges for assessing audit quality for individual audit engagements. This study's objective is to introduce and investigate an archival measure that proxies for audit engagement review: audit reports containing errors. We examine audit report errors because the audit report represents the auditor's primary communication with financial statement users and is subject to a rigorous review process. We first provide evidence that typical factors that influence audit engagement review are associated with audit report errors. Specifically, we find that errors are more likely to be present in audit reports when time pressure exists and less likely for clients that are of greater importance. Next, we examine whether our measure for review is associated with audit quality. Results suggest that errors in audit reports are positively associated with financial reporting misstatements (as measured by subsequent out-of-period adjustments). Collectively, our evidence suggests that audit reports containing an error is a suitable archival proxy for (ineffective) audit engagement review.