The Effects of Accounts with High Audit Risk on Auditor–Client Disagreement: Evidence from Korea

This study examines the association between account-level inherent risk and auditor–client disagreement. To measure disagreement directly, we introduce a novel proxy: the absolute magnitude of the gap between pre-audit and post-audit net income, constructed from unique disclosure data available through the Korean KIND system. We specifically focus on accounts characterized by elevated inherent risk, including accounts receivable, inventory, investments in subsidiaries, defined benefit obligations, and derivatives. Our empirical results reveal heterogeneous associations that reflect competing theoretical tensions. The relative magnitudes of traditional operational accounts–specifically accounts receivable and inventory–as well as defined benefit obligations are significantly and negatively associated with auditor–client disagreement. In contrast, the magnitude of complex valuation accounts, particularly investments in subsidiaries, is positively associated with disagreement. We interpret these divergent findings as follows. The negative associations likely reflect the constraining effect of modern audit technologies on traditional high-risk accounts, which standardize audit procedures and thereby limit managerial discretion. The positive association, conversely, underscores the inherently subjective nature of complex fair-value estimates, which remain susceptible to auditor–client friction. Taken together, this study shifts the analytical focus from firm-level determinants to account-level risk, demonstrating that the underlying economic nature of an account systematically shapes the extent of audit negotiations.