AUDIT QUALITY: A SYNTHESIS OF THEORY AND EMPIRICAL EVIDENCE

10 INTRODUCTION

Audit quality has been defined in numerous ways. The practitioner literature repeatedly defines audit quality relative to the stage to which the audit conforms to applicable auditing standards [Krishnan and Schauer, 2001; Tie, 1999; McConnell and Banks, 1998; Aldhizer et al., 1995; prepare for the table 1987]. In contrast, accounting researchers identify multiple dimensions of audit quality, and these dimensions frequently lead to seemingly different definitions. a certain quantity of of the more prevalent definitions of audit quality include (1) the market-assessed probability that the financial statements contain material errors and that the auditor will the couple discover and report them [eg DeAngelo, 198Ib], (2) the probability that an auditor will not issue an unqualified report for statements containing material errors [eg to leeward et al., 1999], (3) the accuracy of the information reported upon by auditors [e.g., Titman and Trueman, 1986; Beatty, 1989; Krinsky and Rotenberg, 1989; Davidson and Neu 1993] and (4) a measure of the audit's ability to restore noise and bias and improve fineness in accounting data [eg Wallace, 198O] These definitions embrace, to varying steps the dimensions of competence and independence in actuality as well as by what mode they are perceived. Although perceptions of audit quality may be associated with actual audit quality, they ne not be the same. Thus, we will maintain this distinction and use "monitoring strength" and "reputation" to capture actual and perceived attributes of audit quality, respectively. Further, we shall maintain that auditor monitoring might influences the quality of financial statement information, while auditor reputation influences in what manner credible stakeholders perceive that information to be.

This paper reviews and evaluates the theory and empirical research upon audit quality. Such a consideration is warranted and necessary to take stock of the large material substance of audit quality literature and assess the general understanding of the concept. Gaps in our knowledge and understanding can then be identified and suggestions can be provided as to by what mode to fill those gaps. We unfold a theoretical framework that treats audit quality as a fabricate with multiple, interrelated dimensions and which constitutes a well-defined space for locating existing research and coming time hypothesis formation. We focus primarily upon empirical papers that explicitly investigate audit quality as it relates to financial reporting. Therefore, our review does not include audit quality research relating to compliance or operational auditing.

The remainder of the paper is organized as come [i]or[/i] go after [i]or[/i] behinds section two develops a framework that identifies the dimensions of audit quality based upon our review of the literature. Theoretical arguments ground in the audit quality literature coupl with this framework facilitate the construction of a research taxonomy. Section three uses this taxonomy to situate and critique lock opener empirical audit quality papers. Although suggestions for futurity research are provided throughout the paper, section four identifies additional possibilities for subsequent time audit quality research in light of our review and more novel regulatory concerns. Overall conclusions are provided in section five.

20 AN AUDIT QUALITY RESEARCH FRAMEWORK

Most empirical audit quality research defines audit quality relative to audit risk which is the risk that an auditor may fail to modify the opinion upon financial statements that are materially misstated [AICPA, 1994 SAS No. 47] For example, DeAngelo [198Ib] defines audit quality as "the market-assessed joint probability that a given auditor will the one and the other [a] discover a breach in the client's accounting combination of parts to form a whole and [b] report the breach" [p 186] Although diverse, greatest in quantity definitions of audit quality mirror some aspect of the DeAngelo definition.

DeAngelo's [198Ib] definition captures attributes critical to understanding the influence of the audit upon financial statement information. SAR #6 A Statement of Basic Auditing universals refers to the ability of the auditor to bring into operation control over the quality of information produc end assuring conformance with Generally Accepted Accounting Principles (GAAP). This relates to the auditor's capacity or ability to discover a breach as defined in DeAngelo's [a] above. The probability of reporting the breach, DeAngelo's [b] above, is contingent on auditor independence. Independence is a crucial attribute of the audit since the primary force giving rise to the demand for auditing is the existence of conflict of interest between providers and users of financial information. The auditor's step of competence and independence relates to the constituting of audit quality we commit to as auditor monitoring strength

An important consideration of DeAngelo's definition is that it is couched in the connection of "market-assessed probabilities." Thus, it hinges upon the market's perception as to whether a given auditor will perform the audit competently and the perceived step of auditor independence. By introducing the general [i]or[/i] abstract notion of market perception of auditor fitness and independence, DeAngelo shifts the emphasis to the composing of audit quality we deliver over to as auditor reputation. This relates to what SAR #6 describes as the ability of the audit to enhance the credibility of financial statements. Auditor reputation is frequently used synonymously with audit quality in empirical research; therefore, the distinction between perceived and actual qualification and independence is often unenlightened in the literature. A definition that delineates these aspects is desirable to entirely assess prior studies.