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The purpose of this paper is to describe, illustrate and provide a deeper understanding of team composition and labor allocation in audit teams by quantifying the exact value of resources at different levels of the audit production. Audit teams have been considered as a black box in audit research. Therefore, this paper reports descriptive statistics on (levels and proportions of) hours and costs allocated to auditor ranks (and the number and value, i.e. billing rates, of auditors for different ranks and the entire team) to shed new light on audit teams.

This study uses a proprietary data set containing disaggregated information on hours, costs and billing rates for each team member in each of 908 audit engagements. The data are provided by a Swedish Big 4 audit firm. The study uses a purely descriptive approach and categorizes auditors into seven ranks. As size and the publicly listed status are crucial determinants of audit production, the paper splits engagements in public and private companies and reports statistics for size quartiles of both public and private clients.

The paper provides descriptive statistics for (1) client size, (2) audit team members, (3) audit hours, (4) audit costs, (5) proportion of audit hours, (6) proportion of audit costs, (7) billing rates and (8) variation of billing rates. Results show that compared to private clients, the audit firm allocates higher effort from auditors in higher ranks and lower effort from auditors in lower ranks to public clients. Another finding is that allocation varies with client size for private clients, but less so for public clients.

In an area with sparse literature, this descriptive study serves as a first step to improve our understanding and guide future research. It provides concrete support for previously known theory.

This paper aims to examine the association between economic policy uncertainty (EPU) and audit effort by focusing on audit hours. This paper also explores whether significant political uncertainty might amplify the positive association between EPU and audit effort by focusing on Korea.

This study uses 21,543 Korean firm-year observations from 2005 to 2018 in an audit hour determinant model, as well as EPU following Baker et al. (2016) and audit hour to proxy audit effort.

EPU is positively associated with audit hours, indicating that auditors work more audit hours in response to firms’ high EPU resulting from higher earnings manipulation risk. Further, whether this positive association between EPU and audit effort might be altered by significant political uncertainty is investigated using a presidential election dummy. The empirical results show that auditors work additional audit hours during fiscal years in which presidential elections occur, given high EPU.

To the best of the authors’ knowledge, this paper might be the first empirical attempt to use audit hour data with EPU to provide practical implications to academia or auditors.

Audit hour reporting is rare internationally. Thus, to what extent shareholders have the power to influence audit effort/hour demand is a question left unanswered. This study aims to use unique South Korean data to determine whether the increasing power of the largest foreign/domestic shareholders and blockholders can influence audit hour demand.

In this study ordinary least squares (OLS) regression analysis is conducted using a sample of Korean listed firms over the 2004–2018 sample period.

The results show: as the percentage equity holding of the largest foreign shareholder and blockholder (>5%) increases, audit hour demand increases. As the shareholding of the largest domestic shareholder increases, audit hour demanded decreases. The association between audit fees/hours is not qualitatively indifferent, after controlling for the audit fee premium effect. Furthermore, the largest foreign shareholder is shown to demand increasingly higher levels of audit hours from Big4 auditors, relative to NonBig4. All results are consistent with audit demand theory.

Whilst previous studies offer audit fee/risk interpretations, this study extends the literature by developing a framework to explain why audit hour demands differ for specific groups. Because audit hour information is rare internationally, the study has important policy implications.

This study aims to investigate whether mandated disclosure of engagement quality review hours provides new information that affects investors’ decision-making.

In 2014, Korean authorities mandated that audit engagement quality review hours must be disclosed in their audit reports. Using this unique field setting in Korea, this study presents empirical evidence of the policy initiative’s effect on earnings reliability by examining both pre- and post-implementation periods.

Following the initial disclosure of engagement quality review hours in 2014, the authors observe that the capital market’s valuation of quarterly earnings surprises, measured by earnings response coefficients (ERCs), was significantly lower for firms with high levels of abnormal engagement quality review hours than for other firms. This paper also finds that the observed association between engagement quality review hours and ERCs in the postregulation period hinges on the probability of earnings management, proxied by discretionary accruals and just meeting or beating analyst earnings forecast.

This paper suggests that the policy mandating disclosure of engagement quality review hours provides original information that the market considers relevant for appraising the reliability of reported earnings.

This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.

Using proprietary data of partners’ names and audit hours in the year-round context, the authors build a model testing input factors related to audit production and new partner assignment in 1,209 Korean listed firms during the period of 2015–2018.

The results show that in the partner rotation, the more audit hours spent, the more audit hours are allocated to the year-round audit, or more nonpartners’ audit hours are allocated to the year-round audit, the higher the audit quality. Subsample analyses show that these findings are concentrated in firms with longer audit tenure or low audit risk.

The findings may provide regulatory authorities with practical guidelines concerning partner rotation and how to allocate audit hours to different audit stages and ranks (partner vs staff).

To the best of the authors’ knowledge, this study provides the first evidence of the joint effects of partner rotation and audit hour allocation on audit quality.

Firm management has an incentive to improve credit ratings to enjoy the reputational and financial benefits associated with higher credit ratings. In this study, the authors question whether audit effort in hours can be considered incrementally increasing with credit ratings. Based on legitimacy theory, the authors conjecture that firms with higher credit ratings will demand higher levels of audit effort to signal audit and financial quality compared to firms with higher levels of credit risk.

The authors conduct empirical tests using a sample of Korean-listed firms using a sample period covering 2001–2015.

The results show that firms with higher credit ratings demand higher audit effort in hours compared to client firms with lower credit ratings. The authors interpret that firms with higher ratings (lower risk) demand higher levels of audit effort in hours to reduce information asymmetry and to demonstrate that financial reporting systems are robust based on audit effort signaling audit quality. The authors also interpret that firms with lower credit ratings do not have incentives to signal similar audit quality. The authors also capture the “Big4 auditor expertise” effect by demonstrating that client firms audited by nonBig4 auditors demand additional audit effort with increasing credit rating compared to Big4 clients.

Audit effort is considered a signal of firm risk in the literature. This study’s results show evidence that audit effort is inversely related to firm risk.

The results show that audit hour information is informative and likely managed by firm stakeholders. Internationally, it is not possible to capture the audit demand of clients because listing audit hours on financial statements is not a rule. Given that audit hours can be considered informative, the authors believe that legislators could consider implementing a policy to mandate that audit hours be recorded on international annual reports to enhance transparency.

South Korea is one of few countries to list audit effort on annual reports. Therefore, the link between audit effort and credit ratings is unique in South Korea because it is one of few countries in which market participants likely monitor audit effort.

Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of external audit hours as a proxy for audit efficiency.

This study is motivated by the International Standard on Auditing No. 610: “Using the work of internal auditors”. This auditing standard guides external auditors in using the work of internal auditors to obtain audit evidence and consult internal auditors for direct assistance. The authors expect that external audit efficiency will increase when the work of competent internal auditors is used.

The authors find that the number of internal auditors relative to the number of employees is associated with the number of external audit hours. This result suggests that the greater the availability of internal auditors, the greater their contribution will be to the financial statement audit and the more efficient the audit. The authors find evidence that external auditors use the work of internal auditors with accounting and legal expertise to improve audit efficiency. They also find some evidence that the work of internal auditors with greater availability is more effective during initial external audit engagements.

This study adds to the extant literature on the contributions of internal auditors to external audits by using archival data and by measuring audit effort using a large database of audit hours. In addition, our findings have practical implications for firms and external auditors who are evaluating the role and value of using the work of internal auditors. The authors also believe that the findings will be of interest to regulators or auditing standards boards.

The purpose of this study is to examine the association between additional audit efforts and clients’ future equity value. The study hypothesizes that auditors’ additional audit efforts directly increase clients’ stock return performance. Additionally, this study expects that the additional audit effort lowers the likelihood of audit failure and improves accounting information quality, thereby indirectly increasing clients’ future equity return performance.

The regression and portfolio return tests are conducted using observations from 2003 to 2016. This study uses the abnormal audit hours as a proxy for additional audit effort using mandatorily disclosed audit hour data from Korean listed firms. The study also conducts mediation analyses to examine the causal intermediate steps that link audit effort to client equity return performance.

The paper documents a significant and positive association between abnormal audit hours and clients’ subsequent years’ stock return performance and Tobin’s Q. This finding is accentuated for clients audited by Big N auditors or with greater demand for superior audit service. This finding is robust after controlling for various proxies of accounting quality. The portfolio return tests also find evidence that investors cannot fully perceive the value of audit efforts. A battery of additional tests does not alter the main findings.

The results provide implications for investors and policymakers by emphasizing the importance of audit efforts in value-creation. Moreover, this study’s findings suggest that auditors’ assurance, insurance and information roles are all the important drivers of this value-creation.

This study highlights a prominent feature of audit effort that enhances the value of auditees.

This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.

Using a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.

The initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.

To the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.

In this paper, the authors examine the association between the amount of continuing professional education (CPE) hours per staff and audit quality in terms of discretionary accruals and audit opinion.

Several methodologies are adopted to test the hypotheses, including the ordinary least square (OLS) and logistic regression (Logistic). The authors also employ instrument variables regression with two least square (IVREG with 2SLS) and instrument variables probit model (IVProbit) to address the possible endogeneity and strengthen the validity of the main estimation results.

The main results show that there is a positive and significant relationship between CPE hours per staff and audit quality. As the authors grouped CPE into four areas (finance, auditing and accounting, tax, law and regulations and others) the results are more robust for the sub-sample “accounting and audit” and “others”. Moreover, the findings of this study suggest that CPE hours per staff do not affect audit quality significantly for Big4 audit firms compared to non-Big4 firms.

The sample size of the present study is quite small because the transparency reports of the audit firms in Turkey have been available since 2013 and the authors could not reach some auditor demographics at the individual level and some attributes at the audit firm level. Besides, some alternative audit quality measures, such as audit effort, audit fees are not employed because they are not disclosed.

This study contributes to the audit literature using Turkish audit firms. The authors believe that the setting of Turkey may yield interesting results because of the data it provides.