Disentangling Overall Audit Inspection Risk: The Effects of Inspection Focus and Inspection Likelihood

We extend research examining how PCAOB inspections impact auditor behavior by identifying “inspection focus” (i.e., the PCAOB’s explicit identification of inspection focal areas) as a critical component of inspection risk and report the results of an experiment that demonstrates its effect on auditor behavior. We manipulate whether inspection focus is aligned or misaligned with areas that auditors assess as high risk, as the likelihood of defensive auditing increases when they are misaligned. Our results support our predictions, which are based on regulatory focus theory. Specifically, we observe that inspection focus leads to greater audit effort in the focal area, which is accompanied by significantly reduced effort in non-focal, higher risk areas. We also observe a decrease in engagement-level efficiency with no corresponding increase in engagement-level effectiveness. Our findings should be of interest to researchers, regulators, and practitioners, as they identify potential unintended consequences of the current inspection process.