Definitions and determinants of audit quality

• Date: 01 October 2020
• Published date: 01 October 2020
• Author: Hana Dresdner,Dov Fischer
• DOI: http://doi.org/10.1002/jcaf.22441

BLIND PEER REVIEW

Definitions and determinants of audit quality

Hana Dresdner

1

| Dov Fischer

2

1

Ernst and Young LLP, New York,

New York

2

Murray Koppelman School of Business,

Brooklyn College, Brooklyn, New York

Correspondence

Dov Fischer, Murray Koppelman School

of Business, Brooklyn College, Brooklyn,

NY.

Email: dfischer@brooklyn.cuny.edu

Abstract

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 Sarbanes–Oxley; 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.

1|INTRODUCTION

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

distinctions.

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;31:197–201. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals, Inc. 197