BOOK-TAX DIFFERENCES AND AUDIT RISK: EVIDENCE FROM THE UNITED STATES

Abstract

Empirical research suggests that book-tax differences (BTDs) are related to greater earnings management. Separately, there is evidence that auditors consider earnings management in their risk-assessment process. Together, these studies suggest that BTDs may be associated with audit risk; this assertion is tested herein by conducting a survey of U.S. auditors. We find that auditors, on average, perceive large BTDs to be related to an increase in audit risk. Auditors perceive large positive BTDs to have a greater impact on audit risk than large negative BTDs, while auditors do not perceive large permanent BTDs to have a different impact on audit risk, vis-à-vis large temporary BTDs. Approximately one-third of surveyed auditors use BTDs to assess audit risk, and an auditor’s perception of the relationship between BTDs and audit risk is a significant determinant of an auditor’s decision to use BTDs to assess audit risk.