Abstract

The review procedures on the interim financial statements provide lower level of assurance than the audit procedures on the annual financial statements because the scope and characteristics of the review procedures are different from those of the audit procedures. Therefore, earnings of the interim financial statements are more likely to be manipulated than those of the annual financial statements. Many prior researches provide evidence that the degree of earnings management of annual financial statements audited by Big4 is lower than that audited by Non－Big4.. In this paper, we extend the test scope from the annual financial statements to the interim financial statements and analyse whether the degree of earnings management of the interim financial statements depends on the auditors' size. Our test covers the period from 2000 to 2004 and uses discretionary accruals as a proxy of earnings management. We find that the discretionary accruals of the interim financial statements are significantly higher than those of the annual financial statements, which indicates the limitations of the interim review procedures to control earnings management of the interim financial statements. And we find the evidence supporting the findings of prior researches that the auditors' size has the significantly negative correlation with annual discretionary accruals. However we cannot find the significantly negative correlation between auditors' size and interim discretionary accruals. This results show that the review procedures have limitation to control earnings management of the interim financial statements.

Keywords

• review procedures
• earnings management
• discretionary accrual

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