Do Audit Teams Affect Audit Production and Quality? Evidence from Audit Teams’ Industry Knowledge* Steven F. Cahan†University of Auckland s.cahan@auckland.ac.nzLimei Che Peking University, HSBC Business School Limei.Che@phbs.pku.edu.cn W. Robert Knechel University of Florida, Warrington College of Business w.knechel@warrington.ufl.eduTobias Svanström Umeå School of Business, Economics and Statistics BI Norwegian Business School tobias.svanstrom@umu.se*Accepted by Miguel Minutti-Meza. We thank Miguel Minutti-Meza (editor), two anonymous reviewers, Mike Bradbury, Agnes Cheng, Neil Fargher, David Hay, Gary Monroe, Debra Jeter, Vic Naiker, James Ohlson, Gabriel Saucedo, Greg Shailer, Stefan Sundgren, Mark Wilson, Anne Wyatt, Yang Xu, and seminar participants at Australian National University, Hong Kong Polytechnic University, BI Norwegian Business School, University of Queensland, Tsinghua University, Shanghai University of Finance and Economics, 7th Workshop on Audit Quality, Asia Pacific Conference on International Accounting Issues, Auckland Region Accounting Conference, Western Region AAA Meeting, and National Accounting Conference in Linköping, Sweden, for their helpful comments. We also thank an anonymous Big 4 audit firm for providing the data and responding to our questions. Tobias Svanström acknowledges financial support from Jan Wallanders och Tom Hedelius Stiftelse (Grant P2014-0088:1 and P2018-0029).† Corresponding author.This article has been accepted for publication and undergone full peer review but has not been through the copyediting, typesetting, pagination and proofreading process which may lead to differences between this version and the Version of Record. Please cite this article as doi: 10.1111/1911-3846.12807Accepted ArticleThis article is protected by copyright. All rights reserved.
Do Audit Teams Affect Audit Production and Quality? Evidence from Audit Teams’ Industry Knowledge ABSTRACT We examine how the extent and distribution of industry knowledge within an audit team affect audit outcomes. While prior research examining the role of auditors’ industry knowledge focuses mainly on audit firms, audit offices, and audit partners, audits are conducted by audit teams. Using an audit framework and proprietary data from a Big 4 firm that includes audit hours for each team member, we find that Big 4 audit teams with higher average industry knowledge are associated with more audit effort. In contrast, we find mixed evidence on the relation between the average hourly internal cost rate and team knowledge. Further, we find that balanced teams, which have at least one team member who qualifies as an industry specialist at both the senior rank and junior rank, produce higher quality audits than teams that have no specialists. In contrast, the audit quality of unbalanced teams, which have a specialist at the senior rank but not the junior rank or vice versa, is not statistically different than teams with no specialists. Overall, our evidence suggests that both the extent and distribution of industry knowledge within a team matter for audit production and that industry knowledge is utilized more effectively when it is spread throughout the team. The findings have useful implications for audit firms and regulators regarding how team composition and industry knowledge affect audit outcomes. Keywords: audit teams, audit production, audit quality, industry knowledge, team composition, team dynamics Accepted ArticleThis article is protected by copyright. All rights reserved.