Measuring audit structure and determining the sources of variation : an application of organizational science

Abstract

This study seeks to advance the audit structure literature by integrating concepts from the audit procedures and organizational structure literature. This study proposes that audit structure is a function of regulation and organizational traits such as management philosophy. Regulation dictates a minimum level of audit structure throughout the audit process. Organizational traits influence audit structure beyond the minimum levels invoked by regulation. The audit process is divided into two phases. The first phase involves engagement management (EM). This phase is not heavily influenced by regulation. The second phase is the Core of the audit where the audit product -- audit report is executed. This stage is heavily regulated. Management has the opportunity to distinguish their services at the EM phase. This is where differences in audit structure are expected. This study consists of both a field study and survey. The field study consists of an on-site review of the Big Six accounting firms' Houston offices. A contextual review of audit policies and procedures were conducted using generally accepted auditing standards and organiational structure criteria to measure the degree each firm's audit approach is structured. The contextual review is augmented with a perceptual review of key firm personnel. The field survey consists of a questionnaire mailed to 10 offices per firm. The survey sought to capture environmental, client and firm characteristics such as location, client size and firm management style. In addition, the survey includes a self-evaluation of audit structure by audit step. The Core audit stage was found to be heavily regulated by GAAS and thus, significant differences were not found among firms or across locations. The EM stage is less regulated by GAAS and varies significantly among firms. In addition, the EM stage varied within a firm as a function of client type, staff size, firm organizational design and management style. These findings should help explain inconsistencies noted in prior audit structure research and help refine future research designs. This will lead the literature toward development of a theory for why and where audit structure exists.