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Misstatement Direction, Litigation Risk, and Planned Audit Investment
Author(s) -
Barron Orie,
Pratt Jamie,
Stice James D.
Publication year - 2001
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00022
Subject(s) - audit , business , audit risk , accounting , litigation risk analysis , actuarial science , investment (military) , inherent risk (accounting) , financial risk , finance , joint audit , internal audit , politics , political science , law
This study reports the results of an experiment showing that auditor assessments of litigation risk and planned audit investments are higher when potential errors overstate financial performance than when those errors understate performance. This result is much stronger in the presence of high levels of litigation risk in the client’s industry. These results suggest that in industries where litigation risk is high audited financial statements may contain more unintentional material understatement errors than overstatement errors. Thus, litigation risk—through its effect on auditors—may encourage financial statements that understate firm performance