Measures Of Audit Quality Research Articles

Impacts of corporate governance attributes on audit quality in emerging economies: The case of India

Purpose The present study examines the impact of corporate governance attributes on audit quality in the context of an emerging market, India. The study is based on data from 100 non-financial firms listed on the Bombay Stock Exchange randomly selected from the list of BSE 500 firms on 31 March 2021 for 2017–2021. Aim To measure audit quality using two input-based measures – audit fee and audit firm size (Big-4 or non-Big-4). Design/Methodology/Approach This study uses logistic regression and panel data regression models to investigate the impact of corporate governance variables on audit quality after controlling for some firm-specific variables. Furthermore, a generalised estimating equation model is used to check the robustness of the logistic regression model results. Main findings The results indicate that board independence, board gender diversity, multiple directorships, and audit committee independence positively correlate with audit quality. However, the board size, role duality, and promoter shareholding are negatively associated with the audit quality. Further, the quantile regression results indicate heterogeneous impacts of role duality and promoters’ shareholding on audit quality. Practical implications First, firms with the concentration of power in the hands of promoters directly or indirectly may engage Big-4 auditors to enhance AQ. Second, policymakers should take appropriate steps to enhance the gender quota as per international norms to improve the quality of financial reporting. Third, firms' should capitalise on the enhanced advisory capability of the directors having exposure and association with other companies. Novelty/Contribution The study enriches the existing literature by providing empirical evidence from an emerging nation characterised by the dominance of promoters’ shareholding, busy boards, and role duality.

Study of the Relationship between the Rotation of External Auditors and Audit Quality

Purpose - The objective of this research is to study the relationship between external auditor turnover and audit quality. To do this, we chose two measures of audit quality, namely discretionary accruals and the auditor's opinion. Design/methodology/approach - Using a sample of 37 Tunisian companies listed during the period from 2015 to 2021, the paper uses a logistic regression to investigate the association between the quality of the audit and the rotation of the auditors. Findings - The results obtained based on linear and logistic regression invalidate the two hypotheses which assume on the one hand that a long-term mandate negatively influences the quality of the audit, on the other hand the assumption that the rotation of the auditors has a positive impact on the quality of the audit. Contrary to what was expected in our research, the results of the logistic regression show that a long-term audit mandate has a positive effect on audit quality. Research limitations/implications – This research may be of interest to many developing countries that has not a lot of studies on the audit turnover. Future research should focus on the link between audit turnover consequences to overcome the gap which might exist in the literature. Practical implications – Previous studies has shown how it is important to focus on audit opinion to reduce asymmetric information between managers and stockholders. And, this study offers some insights about audit shipping that should be analyzed to understand audit turnover. Originality/value – This research highlights the role of audit opinion in the rotation of auditors in emerging markets. Consideration of this relationship may contribute to the understanding of the auditor turnover in developing countries.

Signing auditors’ experience gap and audit quality

This study investigates how interactions between signing auditors with different levels of experience affect audit outcomes. Using the unique data from China, we find that a higher experience gap between signing auditors is associated with higher audit quality, as indicated by lower absolute discretionary accruals and a smaller likelihood of restatements. Further analyses suggest that the positive association between signing auditors' experience gap and audit quality is more pronounced for client firms that are more complex, have weaker corporate governance and higher information asymmetry, are audited by smaller audit firms, and are more economically important to auditors. Our results are robust to alternative research designs, alternative measures of auditor experience and audit quality, and other sensitivity tests. We contribute to the literature on auditor experience and audit team diversity with implications for audit firms’ personnel assignment.

The Big 4 effect for new audit services: The case of the Danish COVID‐19 fixed‐cost business‐support scheme

This study investigates the Big 4 effect for a new‐to‐the‐world audit service. Based on unique data from the Danish COVID‐19 fixed cost support scheme we analyse differences in audit fees and two measures of audit quality across Big 4 and non‐Big 4 engagements. Our findings suggest that firms engaging with Big 4 auditors experience more successful outcomes in the application process and are willing to pay a Big 4 premium for comparable assurance services. Clients of Big 4 auditors are, on average, more likely to receive full compensation, and experience fewer rejections during the application process than clients of non‐Big 4 auditors. This research has implications for policymakers and companies.

Measuring Audit Quality with Surprise Scores: Evidence from China and the U.S.

ABSTRACT This study constructs a measure of audit quality that captures the effect of potential factors that are generally unobservable to people outside of the audit firm or client company. Using machine learning and a wide range of data describing audit firm characteristics, audit partners, and public companies in China, this paper constructs the “surprise score,” a new measure of audit quality, calculated as the difference between the predicted probability and the actual value of an audit quality-related event (i.e., the existence of material misstatements, audit adjustments, and nonclean audit opinions). The effectiveness of the surprise score is validated by testing the association between the surprise score and penalties or audit firm changes. The proposed approach is applied to U.S. data to generalize its application. The surprise score adds value to existing audit quality measures and can help regulators to make better-informed decisions about audit quality. Data Availability: Except for the data privately provided by CICPA and MFC, other datasets are available from the public sources cited in the text. JEL Classifications: M41; M42.

Does audit quality affect the probability that a female auditor has chaired the audit team? Empirical evidence from Italian public HEIs

Purpose: Focusing on Italian public higher education institutions (HEIs), this study examines whether an increase in remarks in unqualified audit reports increases the likelihood that a female auditor has chaired the audit team issuing such reports. Design/methodology/approach: To answer its research question, the paper re-gresses the gender of the audit team chair with, among other factors, the number of remarks in the unqualified audit reports that are assumed to be a measure of audit quality. Findings: The results show that in Italian public HEIs, it is more probable that au-dit reports characterised by high audit quality (i.e., those with more remarks) are issued by audit teams chaired by female auditors. Originality/value: These findings contribute to existing knowledge and have im-plications for practice. They might be explained by the innate qualities of women as well as by environmental factors such as limited litigation risk characterising both the country and the sector investigated. So, they do not contradict either the Institutional Logic perspective or the Ethics of Care Theory, according to which the environment and the aptitude to manage conflict differ between men and women.

THE ASSOCIATION BETWEEN AUDIT FEE AND AUDIT QUALITY: A META-ANALYSIS STUDY

Introduction: This study aims to reconcile conflicting empirical results from previous studies on the relationship between audit fees and audit quality. In addition, it investigated whether the contradictory findings were moderated by different types of audit fees and audit quality measures. The study also makes cross-country comparisons of empirical evidence to provide more insights. Methods: This study utilized meta-analysis to integrate the findings of previous studies on the relationship between audit fees and audit quality and further investigated moderators of the association. Results: The findings revealed that audit fees had a positive effect on audit quality. These results were observable for both developed and developing countries, indicating the beneficial consequences of audit fees on audit quality should not be overlooked. Furthermore, this study also found that the size of audit fees and quality moderated the positive influence of audit fees on the quality. Conclusion and suggestion: This study contributes to the stream of research investigating the relationship between audit fees and audit quality. To the best of our knowledge, this study represents one of the pioneering efforts to apply statistical meta-analysis to the issue addressed.

Implications of Divided Responsibility in Audits Involving Component Auditors

SUMMARY This article summarizes and reflects on the practical implications of the published study “Are Referred-To Auditors Associated with Lower Quality and Efficiency?” (Krishnan and Li 2023). Audits of companies frequently involve the participation of auditors (who audit components of clients) other than the lead auditor that signs the audit report. In general, the work of these component auditors is assimilated in the lead auditor’s report. However, uniquely in the United States, the lead auditor sometimes formally divides responsibility with the component auditor and refers to the component auditor’s work in its audit report. These component auditors are “referred-to” auditors. Krishnan and Li (2023) examine factors associated with the use of referred-to auditors as well as the associations between the use of referred-to auditors and measures of audit quality and audit efficiency.

Foreign labor and audit quality: Evidence from newly hired H‐1B visa holders

AbstractForeign workers have been an important part of the labor force in public accounting firms over the past two decades. In this paper, we investigate whether and why foreign workers influence audit quality. We find that audit offices with more newly hired foreign labor have a lower mean absolute value of discretionary accruals and a smaller rate of restatements for their clients. The effect is more pronounced for audit offices that face more resource constraints or require greater foreign expertise. The results of improved audit quality are robust to alternative measures of immigrant intensity and audit quality, alternative samples, and using different ways to address endogeneity concerns. Overall, our paper contributes to the literature by showing the impact of foreign labor in the auditing profession and provides public policy implications for the recent H‐1B visa debate.

Nexus between Public Audit Dimensions and Audit Quality

This study attempts to examine the dimensions of public audit in the context of audit quality to investigate the association in public sector. SPSS model starts with likert scales consisting of five dimensional structures: trust and confidence, integrity and credibility, independence and impartiality, conflict of interest and professional secrecy & competence and objectivity to measure audit quality. 251 auditors are the respondents of Pakistan Military Accounts Department (PMAD) varying different demographics. The majority of the auditors were satisfied with the values and principle set up by DAGP regarding code of ethics for public auditors in line with the INTOSAI Code of ethics and auditing standards. The findings suggest that the standard model of public audit dimensions consist of the five dimensions and provides good determinants of satisfaction. Trust and confidence, Integrity and credibility, independence and impartiality and competence and objectivity have significant influence on audit quality and showing positive association while conflicts of interest and professional secrecy is the only variable is insignificant and negative association.

Related Party Transactions and Audit Quality: Evidence on the Efficacy of Auditing Standard No. 18

SUMMARY We provide evidence on the efficacy of Auditing Standard No. 18 (AS18) for auditing-related party transactions (RPTs). We measure audit quality using general restatements and RPT-related restatements. Using a sample of S&P 1500 firms from 2011 through 2018, we find that RPT firms are significantly less likely to report a general restatement compared with non-RPT firms after AS18. We also classify RPTs into business RPTs and nonbusiness RPTs based on the type of transactions and the transacting party. We find that business RPT firms are (1) less likely to have general restatements after AS18 relative to non-RPT firms and (2) less likely to have RPT-related restatements relative to nonbusiness RPT firms. AS18 does not have any effects on nonbusiness RPTs. Our results are driven by S&P MidCap 400 and S&P SmallCap 600 firms. Overall, our findings suggest that AS18 has enhanced the quality of business RPT auditing. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42.

Investment deviation from the optimal path: does the examination of audit quality services matter? A French study

Purpose The study of the relationship between external auditing services and investment deviation in a French setting has received relatively little research attention thus far. There are insufficient indicators to measure audit quality and then have a measurable link to investment efficiency. This study is motivated by such a research gap as well as the important role of auditing services in assuring investment efficiency. The purpose of this study is to test whether a good audit quality service improves corporate investment awareness in French-listed companies and contributes to establishing a comprehensive analysis framework for inefficient investment and how audit services have become an important tool to reduce the investment deviation of listed companies in France. Design/methodology/approach Based on a sample of 89 non-financial French firms listed on the Stoxx 600 Index from 2015 to 2021, this study uses feasible generalised least squares (FGLS) regressions to study the relationship between investment deviation and auditing service quality. Findings After running an FGLS regression model for two firm groups (overinvestment and overinvestment groups) and testing for a set of control variables, especially COVID-19, the findings show a non-linear correlation between audit service and corporate investment deviation. Both underinvestment and overinvestment decisions are negatively and statistically significantly impacted by audit indicators. Furthermore, involving a high-quality specialised auditor may enhance overall monitoring and lead to a lower investment deviation level. Overall, the empirical results show that a high-quality audit service enhances the investment efficiency of French-indexed companies. Practical implications This study offers crucial information that audit regulators can use to better appreciate the advantages of high audit quality and to take seriously the policy issues that affect it. Board members are urged to provide excellent audit quality that improves investment efficiency with careful consideration. Originality/value This study contributes to the existing audit literature by illuminating the effect of audit quality services on investment deviation to show a deeper understanding of the factors that contribute to the differences in prior studies’ findings in the field of audit quality impacts.

A comparative study of the relationship between audit quality and earnings management in the markets of Iraq and Oman

The present study investigates the relationship between audit quality and earnings management in banks listed on the Stock Exchange of Iraq and Oman. This paper used audit firm size, auditors’ industry expertise, audit report timeliness, auditor change, and auditors’ opinions to measure audit quality. Financial statements, notes attached to financial statements, and reports of independent auditors of 28 banks listed on the Iraqi Stock Exchange and 8 banks listed on the Oman Stock Exchange during the financial period of 7 years (2015 to 2021), and hypotheses were tested using EViews software and panel data. The results of the hypothesis testing showed no significant relationship between the firm size and the auditors’ change and earnings management for both countries (Iraq and Oman). This is while the relationship between the auditor’s industry expertise, the timely presentation of the audit report, and the auditor’s opinion and earnings management for both countries (Iraq and Oman) is negative.

A Suggested Mechanism to Measure External Audit Quality and Failure

This study reviews measures of external audit quality and failure cases through discussing many studies which present them as cases, definitions, and failure reasons. The differences between both cases of audit, as procedures, are theoretically tested by a set of requirements in a suggested designed mechanism titled Audit Quality and Failure Measurement Mechanism (AQFMM) that based on 10 assumptions and includes 5 stages to measure audit. The conclusions of the study point out that the best way to measure audit is by separating between both cases of audit quality and failure and finding their differences and boundaries by the suggested mechanism.

Gender Diversity and Audit Quality: Evidence from the Pairing of Audit Partners

SUMMARY Using the Chinese setting where two partners are assigned to lead each engagement, we find that gender-diverse partner pairs improve audit quality compared to same-gender partner pairs. We show that the positive effect of partner gender diversity is concentrated in the engagements led by two partners with similar seniority or collaborating as signatory partners for an engagement before or in clients with complex operations. We evaluate two potential factors that could drive the positive effect of partner gender diversity, namely, the perspective-broadening and the human capital factors, and show that perspective-broadening prevails, whereas the human capital factor does not. Our results are robust to controlling for endogeneity and using alternative measures of audit quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M14; M41.

Can Audit Quality Predict Earnings Persistence?

Research on the impact of audit quality on earnings persistence is of interest to managers, investors, and researchers. However, the results have been inconsistent. Therefore, this study was undertaken to examine the link between audit quality and earnings persistence with audit firm size as a measure of audit quality. Quantitative analysis was adopted to analyse a sample of 228 listed firms in the Vietnamese stock market between 2014 and 2017. Findings suggested that audit quality has a positive effect on earnings persistence. This trend was also true for firm size and cash ratio, while debt ratio and firm age negatively impacted earnings persistence. The research contributes to current literature by proposing viable solutions for functional government agencies, audit companies, and enterprise managers in improving the quality of auditing and information disclosed.

Nexus Among Internal Audit Quality, Corporate Governance and Performance of Selected Banks in Africa

Using a quantitative data set of 213 banks selected from 11 African nations between 2015 and 2020 and ordered probit regression techniques, this study examines the relationship between internal audit quality, corporate governance, and the performance of banks in Africa. The study finds that corporate governance mechanisms (such as board size, board expertise, and corporate governance disclosures), and internal audit quality measures (such as audit experience and internal audit presence) are the critical drivers of bank’s performance in Africa. Findings imply that banks with board members experts in accounting and auditing with the support of experienced professional internal auditors and disclosed corporate governance mechanisms reduce the chances of bankruptcy. The study is one of the few studies that provide insights into internal audit quality and corporate governance mechanisms on the performance of banks in Africa, implying that the findings do not only add to the literature but also to policy and practice. Other implications for theory, regulators, shareholders, policymakers, management, global advocacy agencies, investors and other stakeholders are presented.

Audit adjustments and the discontinuity in earnings distribution around zero

Purpose Previous research in auditing has used the probability of small profits or losses as a measure of audit quality. The purpose of this paper is to investigate the validity of the underlying assumption in prior audit literature that auditing mitigates clients’ inclination towards loss avoidance and to shed light on the debate regarding earnings discontinuity. Design/methodology/approach This paper compares the discontinuity in earnings distribution around zero, both before and after auditing. Findings Using a unique data set that contains both recorded and waived adjustments, the authors find that audit adjustments do not reduce the discontinuity in earnings distribution around zero. Research limitations/implications The results advise caution in using the probability of small profits or losses as a measure of audit quality. The findings suggest the discontinuity in earnings around zero may not be caused by loss avoidance achieved through accounting misreporting, which falls under the purview of auditing. Originality/value This research makes unique contributions beyond those of prior studies. By incorporating waived adjustments, the authors are able to conduct more comprehensive tests and explore richer details of audit adjustments that were not available in previous studies. The proportion of losses in this study's sample aligns with that in prior US research, which enhances the generalisability of the authors’ findings and minimizes the influence of inherent discrepancies in auditors' motivations to curb loss avoidance.

BAGAIMANA UPAYA AUDIT, BIAYA AUDIT, DAN AUDIT TENURE MEMPENGARUHI KUALITAS AUDIT ?

This research aims to find how audit effort, audit fee, and audit tenure affect audit quality. The measurement of audit quality using modified audit opinion and absolute accruals discretionary. The object of this research is non-financial companies listed in Indonesia Stock Exchange (IDX) for 2017-2021. This research used purposive sampling in data collection and the data analysis using logistic regression and panel data regression. The result shows that audit effort, audit fee, and audit tenure have no significant effect on the issuance of modified audit opinion. This study also found a significant effect between audit effort and audit tenure on the quality of audited financial statements, while audit fees have no significant effect.

Impact of Joint Audit on Audit Quality – An Indian Scenario

Better audit quality gives stakeholders some reassurance that the auditee companies' financial statements accurately portray their current situation. This study examines the impact of joint audits on audit quality. It is inspired by the ongoing discussion where a government panel has recommended a mandatory joint audit regime for public interest companies in India. In April 2021, the Reserve Bank of India (RBI) mandated the use of joint audits for financial entities with assets size above INR 15,000 crore to improve the quality of audits. In this study, a new audit quality metric is evaluated, and it shows that joint audit enhances audit quality. Additionally, I find a negative impact of joint audits on audit quality using a common proxy for audit quality (ratio of audit fees to total fees). I, therefore, highlight those different measures of audit quality exhibit the opposite effects of a joint audit.