Research On The Effect Of Risk - Oriented Auditing Standards

The concepts and methods of risk-oriented audit were fully introduced in China’s2006new auditing standards. This paper investigates whether the new auditing standards have effect on auditors’ sensitivity to audit risk. Specifically, this paper compares auditors’ sensitivity to company’s financial risk, earnings management risk and corporate governance risk before and after the implementation of the new auditing standards. This paper evaluates auditors’sensitivity changes from the following four aspects, audit opinion, audit fees, audit time and client portfolio.The main findings of this paper are as follows:Firstly, from the aspect of audit opinion, for same level of earnings management risk, the possibility of auditors’issuing a modified audit opinion increased significantly after the implementation of the new auditing standards. That is, the sensitivity of the possibility of issuing a modified audit opinion to earnings management risk increased significantly. However, there is no evidence that the possibility of auditors’issuing a modified audit opinion changed significantly after the implementation of the new auditing standards for same level of financial risk or corporate governance risk. That is, there is no evidence that the sensitivity of the possibility of issuing a modified audit opinion to financial risk or corporate governance risk changed significantly. Moreover, I find that the sensitivity of the domestic auditors (local auditors rather than Big4international auditors)’and small domestic auditors (non-Top10local auditors)’possibility of issuing a modified audit opinion to earnings management risk increased significantly. There is no evidence that the sensitivity of the local auditors’and small local auditors’ possibility of issuing a modified audit opinion to financial risk or corporate governance risk changed significantly. Additionally, there is no evidence that the sensitivity of international Big4auditors’ or Top10local auditors’issuing a modified audit opinion to financial risk, earnings management risk or corporate governance risk changed significantly.Secondly, from the aspect of audit fees, for same level of earnings management risk, small local auditors’audit fees increased significantly after the implementation of the new auditing standards. That is, the sensitivity of the small local auditors’ audit fees to earnings management risk increased significantly. For same level of financial risk or corporate governance risk, there is no evidence that the small local auditors’audit fees changed significantly after the implementation of the new auditing standards. Additionally, there is no evidence that the sensitivity of other auditors’ audit fees to financial risk, earnings management risk or corporate governance risk changed significantly.Thirdly, from the aspect of audit time (the number of date between audit report date and the financial year’s calendar date), for same level of financial risk, the small local auditors’ audit time increased significantly after the implementation of the new auditing standards. That is, the sensitivity of the small local auditors’ audit time to financial risk increased significantly. However, for same level of earnings management risk or corporate governance risk, there is no evidence that small local auditors’ audit time changed significantly after the implementation of the new auditing standards. Additionally, I find that for same level of corporate governance risk, Big4auditors’ and local Top10auditors’ audit time increased significantly after the implementation of the new auditing standards. That is, the sensitivity of Big4auditors’and local Top10auditors’audit time to corporate governance risk increased significantly. Morever, I find no evidence that the sensitivity of Big4auditors’or local Top10auditors’audit time to financial risk or earnings management risk changed significantly.Fourthly, from the aspect of client portfolio, I find that small local auditors had a significantly higher proportion of clients with financial risk or corporate governance risk than other auditors before the implementation of the new auditing standards. However, this proportion decreased significantly after the implementation of the new auditing standards.The findings of the study show that, after the implementation of the new risk-oriented auditing standards issued in2006, the small local auditors issued more modified audit opinions and increased audit fees significantly for the clients with earnings management risk, and increased audit time significantly for the clients with financial risk. I also find that the sensitivity of Big4auditors’or local Top10auditors’audit time to corporate governance risk increased significantly. However, there is no evidence that Big4auditors’or local Top10auditors’sensitivity of the possibility of issuing a modified audit opinion or audit fees to audit risk changed significantly. This might be due to Big4auditors’ or local Top10auditors’ better risk control and audit quality before the implementation of the new auditing standards. In general, the implementation of the new auditing standards, to some extent, improved auditors’ especially small local auditors’ sensitivity to audit risk.Compared to the prior study, the contributions of this paper are as follows:Firstly, this paper is the first empirical research on the effects of the implementation of new auditing standards (2006) on audtiors’sensitivity to audit risk. Givern that there is little empirical research on the effect of the implementation of auditing standards, this study fills the void in this field. Addtionally, based on the institutional background of the Chinese audit market, this paper investigates the effect of the implementation of new auditing standards substantially convergenced with International Standards on Auditing (ISA), provinding empirical evidence on ISA’s applicability in transitional economies.Secondly, the results in this paper are helpful for understanding the conditions for and effects of the implementation of the new auditing standards. For a long time, Chinese Ministry of Finance and the Chinese Institute of CPAs have been committed to the development of high-quality auditing standards. From the perspective of auditor’s sensitivity to audit risk, this study has implications for standard setters and regulators to assess the benefits and costs of the new auditing standards, and to improve standard setting and its enforcement. This study is also useful for shareholders, creditors, and other users of audit reports to evaluate auditors’ behavior and audit quality in the Chinese securities market.