Abstract Auditing standards prescribe a risk‐based approach where auditors assess the risk of material misstatement and then design and perform audit procedures to reduce audit risk to an appropriately low level. Prior research suggests that auditors are responsive to high control‐risk assessment ( CRA ), but that this response is, perhaps, only partially effective at reducing audit risk, with relatively little insight into where and why this occurs. By refining analyses to more detailed levels of the audit, I extend this research by providing further insight into auditors’ response to high CRA . I examine and find that audit fees are significantly higher for high CRA in revenue relative to high CRA in other accounts, suggesting that auditor effort in response to high CRA is more pronounced in audit areas of particular interest and concern to investors and regulators. Despite this, I find evidence suggesting that revenue is the only audit area examined where auditor effort in response to high CRA does not attenuate the likelihood of misstatement. Finally, because auditors face time constraints, I examine whether increased effort in response to high CRA in certain audit areas diverts auditors’ attention from other areas with lower risk, thus contributing to the overall association between misstatements and internal control deficiencies documented in prior research. I find a greater likelihood of misstatement in non‐core operating accounts with lower CRA as audit effort increases in response to high CRA in revenue, consistent with the explanation that high CRA in revenue may divert auditors’ attention from other areas of the audit with lower CRA .

ABSTRACT This study examines whether the ideological orientation of the audit partner and audit committee members—defined as their personal belief systems and inclinations, including their attitude toward risk, ambiguity, and novelty—has an impact on engagement partner selection and the effectiveness of oversight in the financial reporting process. Drawing on prior evidence that the two main US political parties reflect different ideologies, we hand‐collect political donation data to construct ideological scores for audit partners and audit committee members. Our findings highlight several intriguing relationships. First, audit committees are more likely to select an ideologically dissimilar partner. Second, greater ideological dissimilarity between these two key monitors is associated with higher financial reporting quality. The effects of financial reporting quality are most pronounced among more effective audit committees and when audit partners have longer tenure with the client. These effects are incremental to both social connections between the audit partner and audit committee and to ideological differences between these parties and the CEO and CFO. Overall, the results support the notion that ideological dissimilarity between audit partners and audit committees can foster effective oversight of the financial reporting process. Moreover, ideological dissimilarity appears to be a useful and rational cue in audit partner selection decisions.

ABSTRACT The engagement quality review is a key component of an audit firm's quality control system. This study leverages unique data on individual engagement quality reviewers (EQRs) to examine how previous shared working experience between EQRs and engagement partners affects audit quality. While prior research suggests that within‐firm network ties between predecessor and successor partners facilitate knowledge transfer, we find that prior shared working experience between EQRs and engagement partners is associated with lower audit quality. Mechanism tests indicate that such experience is associated with a higher likelihood of regulatory enforcement actions related to deficiencies in audit procedures, insufficient evidence, and a lack of professional skepticism. We also find that such experience corresponds with higher materiality thresholds, suggesting reduced scrutiny during audit planning and execution. Additional analyses reveal that these adverse effects primarily arise when previous shared working relationships did not produce adverse outcomes, when EQRs are not audit industry leaders, and when they face lower reputational risk. These findings are especially salient given that EQRs’ previous shared working experience with engagement partners appears to weigh heavily in EQR assignments. Overall, our study provides important insights into the implications of EQR independence and the determinants of engagement quality review effectiveness.

ABSTRACT We examine whether firms with managers that have prior internal audit experience are less likely to manage earnings. This examination is important because the internal audit function (IAF) is uniquely positioned to provide experiences that could influence future managerial behavior, including limiting the potential negative repercussions of earnings management. We find that firms with managers that have internal audit experience are associated with lower real earnings management (REM) but not accruals‐based earnings management. Effects are strongest when managers with internal audit experience have greater power or currently hold financial roles, or when there are a greater number of managers with internal audit experience. The results are robust to including firm fixed effects, using entropy‐balancing and performance‐matching approaches, using a subsample of firm‐years required to have an IAF, using a subsample of firms for which we can measure IAF quality, and measuring internal audit experience at a previous employer. These results point to an important benefit of manager internal audit experience, as research suggests that REM is common, difficult to detect, not always within the scope of financial reporting regulators, and detrimental to future performance.