Journal of Accounting, Auditing & Finance
Volume 32, Issue 3, Page : 372-400, October 19, 2015
 

Myojung Cho1, Eunsun Ki2, Soo Young Kwon3sykwon@korea.ac.kr
1Pace University, New York, NY, USA
2Kangwon National University, Chuncheon, Korea, Republic of
3Korea University, Seoul, Korea, Republic of
https://doi.org/10.1177/0148558X15611323

Abstract
We investigate whether auditors take into account accruals quality, a proxy for the cash flow risk associated with earnings, by adjusting audit hours and audit fees. Accruals quality tells investors about the mapping of accounting earnings into cash flows. Poor accruals quality weakens this mapping and thus increases this cash flow risk. We find a negative relationship between accruals quality and audit hours/fees, indicating that auditors increase their audit efforts by modifying audit procedures and substantive tests and charge higher fees for the increased cash flow risk. In addition, we find that both innate accruals quality and discretionary accruals quality are negatively related to audit hours and fees but that innate accruals quality is more likely to influence audit hours and fees than discretionary accruals quality. The results indicate that auditors incorporate the cash flow risk associated with accruals quality but that their response varies according to the source of accruals quality.

Keywords
audit quality, audit effort, audit hours, audit fees, accruals quality, innate accruals, discretionary accruals, cash flow risk