Title: China-Related Research in Auditing: A Review and Directions for Future Research
Abstract: Academic research concerning independent audits of financial statements, including the economic incentives and relations surrounding audit contracts and audit processes, is relatively new. Prior to the mid-1970’s, auditing was viewed as a purely practical activity, governed by technical rules largely set by the profession itself. But of course, auditing is a professional business practiced in the broader economy. As such, auditors are subject to economic incentives and the discipline of markets and regulations in which they operate. Moreover, the incentives facing auditors are unusually complex. An independent audit of financial statements is valuable to both existing and potential shareholders and to creditors who do not contract directly with the auditor. Rather, an auditor usually transacts with the legal entity (the company) and interacts extensively with the entity’s management whose assertions in the financial statements are the task of the auditor to verify. In addition, neither the quality of an audit nor the auditor’s work effort involving complex judgments concerning the nature, extent, and timing of evidence to be collected are directly observable, even to the company’s management. Finally, auditors are subject to a considerable amount of professional and government regulation, and these regulations vary by country. Despite such complexities, auditing is a thriving business world-wide and high quality audits are widely recognized to be critically important to the proper functioning of capital markets. These characteristics and complexities contribute to making auditing an interesting and important research area.