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 affectaudit outcomes. While prior research examining the role of auditors’industry knowledge focusesmainly on auditfirms, audit offices, and audit partners, audits are conducted by audit teams. Usingan audit framework and proprietary data from a Big 4firm that includes audit hours for each teammember, wefind that Big 4 audit teams with higher average industry knowledge are associatedwith more audit effort. In contrast, wefind mixed evidence on the relation between the averagehourly internal cost rate and team knowledge. Furthermore, wefind that balanced teams, whichhave at least one team member who qualifies as an industry specialist at both the senior rank andjunior rank, produce higher-quality audits than teams that have no specialists. In contrast, the auditquality of unbalanced teams, which have a specialist at the senior rank but not the junior rank orvice versa, is not statistically different than teams with no specialists. Overall, our evidence sug-gests that both the extent and distribution of industry knowledge within a team matter for auditproduction and that industry knowledge is utilized more effectively when it is spread throughoutthe team. Thefindings have useful implications for auditfirms and regulators regarding how teamcomposition and industry knowledge affect audit outcomes