Competition among accounting firms and associated fee pressure results in tight audit time budgets, and could result in reduced audit quality if the audit effort ultimately applied in the engagement is accordingly reduced (e.g., AICPA 1978; NCFFR 1987; POB 1993). Thus, it is important to study factors associated with audit time budgets, and the extent to which expectations developed in engagement budgets are realized. The purpose of this study is to examine audit time budgeting in a dynamic sense, considering budgeted audit hours, reported audit hours, and associated time budget gaps (i.e., the difference between budgeted and reported audit hours) over a two-year period.
Gist and Davidson (1999) provide an exploratory analysis of time budget gaps, noting that client factors (e.g., size, complexity, and risk), audit firm factors (e.g., nature of audit technology used), environmental factors (e.g., state of the economy and interest rates), and individual auditor characteristics (e.g., experience and skill of engagement personnel) are likely to affect time budget gaps. Gist and Davidson (1999) focus their investigation on client factors, recommending that future research investigate other determinants of audit time budget gaps, employing longitudinal data. This study answers their call by considering how audit firm factors, individual auditor characteristics, and prior-year time budget gaps (squared) affect current-year budgeted hours, current-year reported audit hours, and current year time budget gaps (squared).
Prior studies investigating issues involving time budget gaps typically consider the role of time budget pressure as an exogenous feature of the individual audit environment, and focus on the response of audit team members (e.g., Malone and Roberts 1996; Otley and Pierce 1996; Willett and Page 1996; Kelley et al. 1999; Houston 1999; Coram et al. 2000). However, the evidence that time budget pressure can lead to reduced audit quality provides strong motivation for a study of time budget pressure as an endogenous feature of managing audit engagements.
When time budget pressure is viewed as a management tool rather than a fixed feature of engagements, the issue arises of how audit managers respond to differences between budgeted and reported hours when budgeting hours for subsequent period engagements. This issue is important because it determines whether audit managers use such information to ameliorate potential quality problems by adjusting time budgets for subsequent engagements.
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An Empirical Study of Audit Effort Budgeting Dynamics
