Investment efficiency as a determinant of audit effort: Evidence from U.S. Public Companies

Abstract

Audit effort varies systematically with client characteristics, yet the role of capital allocation quality in engagement planning has received little attention in the auditing literature. This study examines whether firm level investment efficiency is associated with audit report delay, a validated proxy for audit effort, using 65,656 U.S. public company firm year observations spanning 2000 to 2024. Grounded in agency theory and PCAOB risk assessment standards, we predict that investment inefficiency elevates inherent and control risk, prompting auditors to extend their reporting timelines. Consistent with this prediction, we find a positive and statistically significant association between investment inefficiency and audit report delay (coefficient = 0.0267, t = 2.99), indicating that auditors expend greater effort when clients exhibit larger deviations from predicted capital investment levels. The results hold after controlling for firm size, financial distress, auditor type, leverage, and return volatility, and are robust to alternative variable transformations and the inclusion of industry and year fixed effects. These findings contribute to the audit production literature by identifying investment efficiency as a previously unexamined client level determinant of audit effort, and they challenge prior evidence suggesting that reliance on strong internal controls does not reduce audit hours. The evidence also extends bidirectional research on auditing and investment behavior by demonstrating that auditors recognize and respond to capital allocation quality when calibrating engagement procedures, complementing prior work showing that auditor characteristics shape client investment outcomes.