Definitions and determinants of audit quality

Date01 October 2020
Published date01 October 2020
AuthorHana Dresdner,Dov Fischer
Definitions and determinants of audit quality
Hana Dresdner
| Dov Fischer
Ernst and Young LLP, New York,
New York
Murray Koppelman School of Business,
Brooklyn College, Brooklyn, New York
Dov Fischer, Murray Koppelman School
of Business, Brooklyn College, Brooklyn,
Based on a review of the academic literature, we define audit quality from the
perspectives of auditors and investors. We then discuss historical events that
have impacted audit quality, including the effects of SarbanesOxley; Public
Company Accounting Oversight Board's restriction on auditor-provided tax
services; mandatory audit partner rotation; and the merger of Price Water-
house and Coopers & Lybrand.
While the auditing standards set forth by the Public
Company Accounting Oversight Board (PCAOB) are
quite clear-cut, the composition of a quality audit is still
rather murky. Research conducted by Christensen,
Glover, Omer, and Shelley (2016) sought to define what
factors contribute to audit quality in the eyes of auditors
as well as investors. They surveyed 93 audit profes-
sionals from the Big Four accounting firms and two
other international firms aswellas102knowledgeable,
nonprofessional-investors in an attempt to define audit
quality. While many of the characteristics of a quality
audit between the two groups overlap, there are some
Auditors defined a quality audit as one that adheres
to Generally Accepted Auditing Standards (GAAS); that
results in accurate and reliable financial statements; is
well planned; is conducted by well-trained and compe-
tent auditors; lacks error in subsequent review; is con-
ducted by independent, skeptical auditors and relies on
transparent financial statements. Investors defined a
quality audit as one that is conducted by well-trained,
competent auditors; is well planned; is conducted by
independent, skeptical auditors; adheres to GAAS; results
in accurate and reliable financial statements; relies on
transparent financial statements and that involves an
organization with strong internal control. These defini-
tions are listed in descending order of frequency. Thus,
the most important metrics of audit quality for auditors
are GAAS compliance, accurate and reliable financial
statements and proper planning. The most important
metrics for investors are well-trained, competent audi-
tors, well-planned audits, and skeptical and independent
auditors (Christensen et al., 2016).
These definitions lend themselves to different factors
and signals affecting the inputs, processes, outputs and
opinions, and postopinions that comprise the audit qual-
ity framework. Research conducted indicates that both
auditors and investors view larger firm size, accurate and
conservative opinions, fewer audit deficiencies, timely
completion of audit planning and procedures, and ade-
quate audit fees as indicators of a higher quality audit.
What differed between the two groups, was the strength
of these relationships. Research also indicates that both
auditors and investors view audit team characteristics
such as appropriate staffing, training and expertise as
contributing to a higher quality audit. Auditors also view
consulting outside of the core audit team as a factor con-
tributing to auditor quality. Preference is placed on con-
sultations made with members within the firm as
opposed to outside the firm. These metrics relate to the
inputs and processes of the audit quality framework. In
respect to processes and outputs and opinions of the
audit quality framework, research suggests that discre-
tionary accruals, lack of restatements and lack of SEC
enforcement action is viewed as an indicator of higher
audit quality by both auditors and investors (Christensen
et al., 2016).
As the research of Christensen et al. suggests, there
are many ways to define and measure audit quality. The
metrics used to evaluate the quality of an audit differs
Received: 13 December 2019 Revised: 29 January 2020 Accepted: 1 February 2020
DOI: 10.1002/jcaf.22441
J Corp Acct Fin. 2020;31:197201. © 2020 Wiley Periodicals, Inc. 197

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