Effects of audit engagement system and accounting firm type on auditors’ consensus

The lack of clear practical guidance in IFRS may result in differences in the interpretation of accounting standards among preparers, auditors and regulators for the same accounting situation. This study analyzes auditors' consensus under IFRS and whether auditors' consensus is influenced by audit engagement system (mandatory auditor designation system (MADS) vs. voluntary auditor selection system (VASS)) and accounting firm type (Big 4 vs. non-Big 4). To do so, this study adopts a hypothetical lease classification case to conduct an experiment with 302 Korean certified public accountants. Accounting standards for lease classification changed from rules-based to principles-based under IFRS implementation. No significant difference in auditors' consensus was found depending on audit engagement system and accounting firm type. By contrast, a previous study using a hypothetical case on the recognition of impairment losses on intangible assets showed significant differences in auditors’ consensus depending on audit engagement system and accounting firm type. These results may reflect the clear practical guidance in lease accounting standards (K-GAAP) prior to IFRS and the fact that K-GAAP still apply to non-listed companies. The findings suggest that measures are needed to improve audit quality under IFRS. For example, an expert committee for interpreting IFRS could be assembled, or a public reply system for questions on IFRS could be implemented.