Audit completion phase: determinants and implications for audit quality

Abstract

This study provides evidence on the audit completion phase, the period between the end of the auditor's fieldwork for a client and the release of the audit report. The audit completion phase has generally been unexplored by the existing literature. Using a unique setting that arises from the enforcement of a recent auditing standard on audit documentation, I infer the time that auditors spend during the completion phase and investigate the determinants and the implications for audit quality of this last audit phase. First, I explore the determinants of audit completion phase. I find that operational complexity, financial or mining industry membership, litigation risk, financial risk, auditor size, and client importance influence audit completion time. Of particular note is that completion time spent on financial firms increases in recent years, causing an increase in total audit lag. Similarly, control risk and having a December fiscal year-end increase completion time as well as lengthen overall audit lag. There is also some evidence, mostly for non-accelerated filers, that completion time increases with the magnitude of impairment expense. For accelerated filers, audit completion times are shorter if the audit office has fewer clients. Second, I explore whether the audit completion phase adds value to the audit. Results generally indicate that longer completion time increases for problematic clients, as reflected in future restatements. I also find in an additional test, however, that longer completion time is associated with lower likelihood of restatements in some accelerated filers. This suggests that a longer time spent during the last phase of audit may actually be beneficial for large firms with tight reporting deadlines.