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The Effects of Industry Specialization on Auditors' Inherent Risk Assessments and Confidence Judgements

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  • MARK H. TAYLOR

Abstract

This study experimentally examines how industry specialization affects auditors' inherent risk assessments and their confidence in those risk assessments. Two groups of participants †experienced banking specialist auditors and equally experienced nonbanking auditors †provided inherent risk assessments for a hypothetical banking client for two financial statement accounts. They assessed inherent risk for an industry†specific account (loans receivable) and for a nonindustry†specific account (property and equipment). The results indicate that nonbanking auditors assessed inherent risk significantly higher than industry specialists for all but the valuation assertion for the loans receivable account. However, the difference between the nonbanking auditors' and banking specialists' inherent risk assessments was not as great for the property and equipment account. Further, nonspecialists were less confident about the appropriateness of their inherent risk assessments compared with industry specialists. Potential implications for research and practice are discussed in light of the study's findings.

Suggested Citation

  • Mark H. Taylor, 2000. "The Effects of Industry Specialization on Auditors' Inherent Risk Assessments and Confidence Judgements," Contemporary Accounting Research, John Wiley & Sons, vol. 17(4), pages 693-712, December.
    • Handle: RePEc:wly:coacre:v:17:y:2000:i:4:p:693-712
    DOI: 10.1506/3LDH-AV52-0F4W-H4BB
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    References listed on IDEAS

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    Cited by:

    1. Rowe, Stephen P., 2019. "Auditors’ comfort with uncertain estimates: More evidence is not always better," Accounting, Organizations and Society, Elsevier, vol. 76(C), pages 1-11.
    2. Jonathan H. Grenier, 2017. "Encouraging Professional Skepticism in the Industry Specialization Era," Journal of Business Ethics, Springer, vol. 142(2), pages 241-256, May.
    3. W. Robert Knechel & Justin Leiby, 2016. "If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 54(5), pages 1331-1364, December.
    4. Le Wang & Xiaoyan Chen & Xing Li & Gaoliang Tian, 2021. "MD&A readability, auditor characteristics, and audit fees," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5025-5050, December.
    5. Bi, XiaoGang & Tang, Judy & Tharyan, Rajesh, 2020. "Switching due diligence auditor in Chinese mergers and acquisitions," Research in International Business and Finance, Elsevier, vol. 54(C).
    6. Miguel Minutti‐Meza, 2013. "Does Auditor Industry Specialization Improve Audit Quality?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 51(4), pages 779-817, September.
    7. Yongliang Wu & Zihui Li & Min Zhang & Shengbao Zhai, 2023. "Auditor Assignments and Audit Quality," Australian Accounting Review, CPA Australia, vol. 33(2), pages 160-187, June.
    8. Paul N. Michas & Dan Russomanno & Meiling Zhao, 2025. "The opportunity for partner industry knowledge sharing within audit offices and audit quality," Review of Accounting Studies, Springer, vol. 30(3), pages 2555-2606, September.
    9. Roger Simnett & Arnold Wright, 2005. "The portfolio of knowledge required by industry specialist auditors," Accounting and Business Research, Taylor & Francis Journals, vol. 35(1), pages 87-101.
    10. Pacheco-Paredes, Angel Arturo & Wheatley, Clark M., 2021. "Do auditors react to real earnings management?," Advances in accounting, Elsevier, vol. 55(C).
    11. Gad Jacek, 2023. "Concentration on the market of audit services provided to publicly listed companies: Evidence from Poland," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 59(1), pages 32-45, March.
    12. Christopher Bleibtreu & Ulrike Stefani, 2024. "The interdependence between market structure and the quality of audited reports: the case of non-audit services," Review of Accounting Studies, Springer, vol. 29(2), pages 1524-1574, June.
    13. Bruynseels, Liesbeth & Willekens, Marleen, 2012. "The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies," Accounting, Organizations and Society, Elsevier, vol. 37(4), pages 223-241.
    14. Timothy B. Bell & David B. Bryan, 2021. "Effectiveness, efficiency, and fee premiums in audits led by industry specialist partners," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4513-4572, September.

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