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Is Adopting the Risk-based Approach another Dimension of Auditor Industry Specialization? Evidence from a Partial Mediation Analysis in Integrated Audit Settings

Author

Listed:
  • Dong Drew Li

    (Department of Accounting, School of Business, Western Colorado University, Gunnison, CO 81231, USA)

  • Zheng Cheng

    (Department of Management, Wilson College of Business, University of Northern Iowa, Cedar Falls, IA 50614, USA)

  • Wenguang Lin

    (Department of Finance, Ancell School of Business, Western Connecticut State University, Danbury, CT 06810, USA)

  • Wentao Wu

    (Department of Finance, Sykes College of Business, The University of Tampa, Tampa, FL 33606, USA)

  • Yunshu Tang

    (Department of Accounting, School of Management, Hefei University of Technology Hefei, Anhui 230002, P. R. China)

Abstract

This research extends auditor industry specialization literature into the settings of an integrated audit of control audit-arm (CA) and financial audit-arm (FA) by creating an aggregate, four-dimensional specialization construct that encompasses the four established dimensions (industry knowledge, economies of scale, auditor size, and tenure). Four-dimensional specialists vary in their approach to performing direct effects (testing controls; testing accounts) and indirect effects (tracing risks interactively between audit-arms) and achieve varied equilibriums. Empirical analyses support that CA’s direct effect, CA’s indirect effect, FA’s direct effect, and FA’s indirect effect contribute 45-15-35-5 (44-24-26-6) percent, respectively, to the baseline-effectiveness (full-effectiveness) equilibrium. The 15-to-24 (35-to-26) percent increase (decrease) in CA’s indirect effect (FA’s direct effect) suggests that the four-dimensional specialists in the full-effectiveness equilibrium leverage risk tracing (eliminate substantive procedures) concurrently by nine percent. Accordingly, adopting the risk-based approach constitutes the fifth dimension that discerns the “specialists†who cannot achieve full effectiveness, let alone efficiency.

Suggested Citation

  • Dong Drew Li & Zheng Cheng & Wenguang Lin & Wentao Wu & Yunshu Tang, 2025. "Is Adopting the Risk-based Approach another Dimension of Auditor Industry Specialization? Evidence from a Partial Mediation Analysis in Integrated Audit Settings," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 28(03), pages 1-45, September.
    • Handle: RePEc:wsi:rpbfmp:v:28:y:2025:i:03:n:s0219091524500334
    DOI: 10.1142/S0219091524500334
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    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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