Understanding Audit Quality: Insights from Audit Partners and Investors

Abstract

Projects seeking to define, measure, and evaluate audit quality are on the agendas of auditing standards setters as well as audit firms. The PCAOB currently provides information regarding audit quality through the release of inspection reports, and the Board intends to establish and report audit quality indicators. To provide additional perspective on audit quality, we obtain auditors’ and investors’ views, definitions, and indicators of audit quality. We find that investors’ definitions of audit quality focus more on inputs to the audit process than do auditors’, and that the two groups have differing views on the relation between PCAOB inspections and audit firm quality. We find a consensus that auditor characteristics may be the most important determinants of audit quality, and that restatements may be the most readily available signal of low audit quality. We relate responses to a generally accepted audit quality framework, provide support for archival audit research, and identify additional disclosures that participants suggest could signal audit quality. Taken together, we provide evidence regarding the construct of audit quality in the post-SOX environment, add substance to theoretical frameworks, evaluate many of the audit quality indicators proposed by the PCAOB, and suggest avenues for future research.