The Effects of Industry Specialization on Audit Risk Assessments and Audit‐Planning Decisions

This study investigates the effects of industry specialization on auditors' risk assessments and audit‐planning decisions. In an experiment, auditors from different industry specializations complete a hypothetical audit case set in a specific (bank) industry, which creates either a match or a mismatch between the auditors' industry specialization and the hypothetical client's industry. Furthermore, I manipulate the industry‐specific case information to achieve differential audit risk levels. I also provide the auditors with a set of preliminary audit procedures and a constrained time budget. I find that the auditors' knowledge of the client's industry improves their audit risk assessments and directly influences the nature and the perceived quality of their audit‐planning decisions. In addition, the auditors' knowledge of the client's industry moderates the sensitivity of the auditors' planning decisions to their audit risk assessments.