As a result of the potential for learning over time

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Unformatted text preview: .’’ Where RMM is the dependent variable, we expect the coefficient on MI to be negative, indicating that higher integrity assessments contribute to a lower preliminary risk assessment. We include several controls to mitigate the potential for a correlated omitted variable problem. We focus on known determinants of RMM. Prior literature has noted that the length of the auditor-client relationship may affect risk assessments due to learning over time (O’Keefe et al. 1994; Ashton 1991). We control for this by including the number of years the auditor has been auditing the client (TENURE). As a result of the potential for learning over time, we expect the coefficient on TENURE to obtain a negative coefficient. There is no obvious association between TENURE and MI although we expect that the auditor’s assessment of MI to be more accurate as TENURE increases. To control for client size, we include the natural log of total client revenue (REVENUE) for the year under audit. Risk and audit effort measures used in this study are revenue cycle-specific, rendering the inclusion of REVENUE to be a fitting size control. While larger firms may have greater oversight leading to potentially lower control risk assessments, they may have more complex control structures and greater decentralization, potentially increasing CR. Prior literature has shown that the relationship between auditor effort and client size is nonlinear (O’Keefe et al. 1994). To address this issue, we utilize the natural log of revenue. It is unclear how these effects will aggregate and affect the RMM-REVENUE relationship or how size would influence MI. Accordingly, we do not have an expectation of the sign on REVENUE. Prior research documents a strong association between the discovery of prior-year errors and current period errors (Kinney 1979), and between prior-year errors and current year risk assessments (Mock and Wright 1999). We include a dummy variable labeled PYERR that is coded as 1 if there was a documented prior year audit difference. PYERR also can impact the assessment of management integrity (MI). This variable is a very simple risk meas...
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