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

Dong Drew Li, Zheng Cheng (), Wenguang Lin (), Wentao Wu () and Yunshu Tang ()
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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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2025, vol. 28, issue 03, 1-45

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.

Keywords: Risk-based approach; checklist-based approach; audit effectiveness and efficiency; integrated audit; partial mediation analysis; auditor industry specialization (search for similar items in EconPapers)
JEL-codes: M40 M41 M42 M48 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0219091524500334

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