Business Strategy, Audit Risk, and Auditor–Client Disagreement: Evidence from Korea

This study examines the extent to which a firm’s business strategy shapes its strategic and audit risk profiles, and whether these risk characteristics ultimately manifest as measurable auditor–client disagreements. Auditor–client disagreement is operationalized using a direct, disclosure-based measure constructed as the scaled difference between unaudited preliminary net income—manually collected from mandatory timely filings disclosed through the Korea Financial Supervisory Service’s Electronic Disclosure System (DART)—and final audited net income reported in the audited financial statements. Using a sample of 6504 firm-year observations drawn from firms listed on the Korea Exchange (KOSPI and KOSDAQ) over the period 2020–2024, I find that a higher strategic score, reflecting a more innovation-oriented, prospector-type strategic posture, is consistently and significantly positively associated with the likelihood of auditor–client disagreement. Conversely, firms pursuing a cost-efficiency-oriented, defender-type strategy exhibit a significantly lower likelihood and smaller magnitude of disagreement. These findings suggest that business strategy functions as a fundamental, ex-ante determinant of inherent risk and audit risk, directly shaping auditors’ effort allocation and financial reporting outcomes. Collectively, this study contributes to the auditing literature by providing empirical evidence that a client’s strategic positioning constitutes a material, firm-level risk factor—consistent with the risk assessment framework mandated by International Standard on Auditing (ISA) 315—and should therefore be explicitly incorporated into auditors’ engagement risk assessments and the design of risk-based audit procedures.