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Yin, H (2015)

Financial statement conformance to Benford's law and audit fees

Masters thesis,  Macquarie University, Sydney, Australia .

ISSN/ISBN: Not available at this time. DOI: Not available at this time.



Abstract: Auditors assure the fairness of financial statements for company stakeholders. Audit effort to minimise errors leads to higher audit fees. The reduced audit fees in the United State cause company stakeholdersí concern on audit quality. A reliable method used in other fields, Benfordís Law, may assist auditors to identify errors from data manipulation and accounting irregularities. This research investigates whether using Benfordís Law can reduce audit risk and improve audit outcomes, using a sample of U.S. companies between 2000 and 2014. I empirically examine whether the FSD_Score based on the Kolmogorov-Smirnoff statistic (maximum deviation between empirical digit distribution and Benfordís Law distribution) and the mean absolute deviation is an important determinant of audit fees. Validation tests are conducted to test the conformity with Benfordís Law in my samples. Audit fee models are used to investigate the association between FSD_Score and audit fees. Evidence from validation tests indicates that numbers in financial statements closely conform to Benfordís Law. I find a negative and significant association between FSD_Score and audit fees,inconsistent with the hypothesis that audit fees increase with FSD_Score because high FSD_Scores reflect high litigation risks. I also find that the association between FSD_Score is stronger in smaller firms than in larger firms. Results from audit fee models and additional tests suggest that FSD_Score can be used as a measure of audit quality instead of litigation risk.


Bibtex:
@thesis{, author = {Huan Yin}, year = {2015}, title = {Financial statement conformance to Benford's law and audit fees}, institution = {Macquarie University}, address = {Sydney, Australia}, url = {http://hdl.handle.net/1959.14/1089580}, }


Reference Type: Thesis

Subject Area(s): Accounting