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Journal Article•DOI•

Audit Quality: Insights from the Academic Literature

W. Robert Knechel1, Gopal V. Krishnan2, Mikhail Pevzner3, Lori Shefchik Bhaskar4, Uma Velury5 •
University of Florida1, Bentley University2, University of Baltimore3, Indiana University4, University of Delaware5
01 Jan 2013-Social Science Research Network-
TL;DR: A review of academic research on audit quality can be found in this paper, where the authors present a review of existing definitions of audit quality and describe general frameworks for establishing audit quality.
Abstract: This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality. Next, we summarize research on indicators of audit quality, such as inputs, process, and outcomes. Finally, we offer some suggestions for future research. The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.

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AuditQuality:InsightsfromtheAcademic
Literature
ArticleinAuditingAJournalofPractice&Theory·October2012
DOI:10.2139/ssrn.2040754
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Electronic copy available at: http://ssrn.com/abstract=2040754
Electronic copy available at: http://ssrn.com/abstract=2040754
Audit Quality: Insights from the Academic Literature
W. Robert Knechel
Frederick E. Fisher Eminent Scholar in Accounting
Fisher School of Accounting
University of Florida
Gainesville, FL 32611
Phone: 352-273-0215
Email: w.knechel@warrington.ufl.edu
Gopal V. Krishnan
Professor
Department of Accounting & Taxation
Kogod School of Business
American University
Washington, DC 20016
Phone: 202-885-6460
Email: krishnan@american.edu
Mikhail Pevzner
Assistant Professor
George Mason University
School of Management
4400 University Drive, MS 5F4
Fairfax, VA 22030
Phone: (703) 993-1755
E-mail: mpevzner@gmu.edu
Lori Shefchik
PhD Candidate
College of Management
Georgia Tech
800 West Peachtree Street NW
Atlanta, GA 30308
Phone: 404-385-1388
E-mail: lori.shefchik@mgt.gatech.edu
Uma Velury
Professor
University of Delaware
Department of Accounting and Management Information Systems
Newark, Delaware 19716
Phone: (302) 831-1764
E-mail: veluryu@lerner.udel.edu
October 31, 2012
Electronic copy available at: http://ssrn.com/abstract=2040754
Electronic copy available at: http://ssrn.com/abstract=2040754
AUDIT QUALITY: INSIGHTS FROM THE ACADEMIC LITERATURE
Summary
This study presents a review of academic research on audit quality. We begin with a review of
existing definitions of audit quality and describe general frameworks for establishing audit
quality. Next, we summarize research on indicators of audit quality, such as inputs, process, and
outcomes. Finally, we offer some suggestions for future research. The study should be useful to
academics interested in audit quality as well as to the Public Company Accounting Oversight
Board (PCAOB) and other regulators.
Keywords: Audit quality; audit quality indicators; auditor judgment; PCAOB synthesis
1
AUDIT QUALITY: INSIGHTS FROM THE ACADEMIC LITERATURE
INTRODUCTION
Audit quality is much debated but little understood. Despite more than two decades of
research, there remains little consensus about how to define, let alone measure, audit quality. The
objective of this study is to review and synthesize the academic literature on audit quality and
propose ideas for future research. To start, it is important to note that the perception of audit
quality can depend very much on whose eyes one looks through. Users, auditors, regulators and
society—all stakeholders in the financial reporting process—may have very different views as to
what constitutes audit quality, which will influence the type of indicators one might use to assess
audit quality. The user of financial reports may believe that high audit quality means the absence
of material misstatements. The auditor conducting the audit may define high audit quality as
satisfactorily completing all tasks required by the firm’s audit methodology. The audit firm may
evaluate a high audit quality as one for which the work can be defended against challenge in an
inspection or court of law. Regulators may view a high quality audit as one that is in compliance
with professional standards. Finally, society may consider a high quality audit to be one that
avoids economic problems for a company or the market. In the end, different views suggest
different metrics.
Much like the Hindu parable of the four blind men identifying an elephant from narrow
but diverse viewpoints, all these perspectives are correct … to an extent. But all views are also
incomplete.
1
Audit quality reflects a similar challenge, with a significant exception: the observers
can see just fine but the focus of attention is hard to define. While it would be ideal to define
1
The most famous version of this parable in English is captured in the 19th century poem "The Blind Men and the
Elephant" by John Godfrey Saxe (1816–1887). One man believed he was touching a tree (leg), another a wall
(chest), a third a snake (trunk), and a fourth a spear (tusk). The story appears in different forms in many cultures
from the Mideast through Asia with variations in the number of blind men involved.
2
audit quality for what it “is,” the reality is that researchers, regulators and professionals can often
do no more than describe what high audit quality “is not,” i.e., in terms of errors or deficiencies
that reduce audit quality.
2
To reconcile different viewpoints, and to begin to understand what the absence of high
quality may look like, we first adopt a theoretical frame through which we can view the notion of
audit quality. This framework will help to identify the fundamental characteristics against which
the quality of an audit can be discussed. For the purpose of this paper, we shall start with a
general observation: An audit is a professional service delivered by experts in response to
economic and regulatory demand. Expanding on this rather obvious statement, we can identify a
number of characteristics that could influence audit quality (refer to Knechel 2010):
An audit is an economically motivated response to risk, i.e., incentives matter.
The output of an audit is a report but the outcome is uncertain and
unobservable. While audit quality might be generally believed to be high or
low, it is not possible to “know” the residual risk of an engagement (achieved
assurance level), i.e., uncertainty matters.
3
Each engagement is different. The idiosyncratic nature of an audit arises due
to variations in client characteristics, audit teams, timing of work, and
assessed risk and procedures used, i.e., uniqueness matters.
The audit is a systematic activity, i.e., process matters.
The execution of the audit process depends on appropriately leveraging the
knowledge and skills of experts, i.e., professional judgment matters.
As we will show below, audit quality depends on how these fundamental characteristics manifest
in any given engagement. For example, if the outcome of an audit is considered to be
2
In this sense, the difficulties encountered in trying to define audit quality are similar to those related to defining
auditor independence. While there is a general “understanding” of what independence means, many definitions
adopt a negative perspective by focusing on a lack of independence, rather than a positive focus which would
emphasize what independence is. The problem arises because it is much easier to observe when independence is
lacking and very difficult to observe when independence is present, i.e., an absence of impairments to independence
is not the same as actually being independent.
3
The audit risk model embeds the assumption that the outcome of the audit is not zero risk (or perfect assurance).
Citations
More filters
Journal Article•DOI•
A Review of Archival Auditing Research

[...]

Mark L. DeFond1, Jieying Zhang2•
University of Southern California1, University of Texas at Dallas2
01 Aug 2014-Social Science Research Network
TL;DR: In this article, the authors define higher audit quality as greater assurance of high financial reporting quality, and they provide a framework for systematically evaluating their unique strengths and weaknesses, including the role of auditor and client competency in driving audit quality.
Abstract: We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.

1,553 citations

Cites background from "Audit Quality: Insights from the Ac..."

  • ...For reviews of the audit quality research from a different perspective than ours, see Francis (2004, 2011) and Knechel et al. (2013)....

    [...]

Journal Article•DOI•
Auditor Reporting on Going-Concern Uncertainty: A Research Synthesis

[...]

Elizabeth Carson1, Neil Fargher2, Marshall A. Geiger3, Clive S. Lennox4, Kannan Raghunandan5, Marleen Willekens6 •
University of New South Wales1, Australian National University2, University of Richmond3, University of Southern California4, Florida International University5, Katholieke Universiteit Leuven6
30 Jan 2012-Social Science Research Network
TL;DR: In this paper, an extensive synthesis of the academic literature broadly related to reporting by auditors with respect to the issue of going-concern is provided, with an intent to provide information to the Public Company Oversight Board (PCAOB) that may prove to be useful in their standard-setting efforts.
Abstract: In the following document we provide an extensive synthesis of the academic literature broadly related to reporting by auditors with respect to the issue of going-concern. Our intent is to provide information to the Public Company Oversight Board (PCAOB) that may prove to be useful in their standard-setting efforts.

241 citations

Journal Article•DOI•
Audit Reporting for Going-Concern Uncertainty: A Research Synthesis

[...]

Elizabeth Carson1, Neil Fargher1, Marshall A. Geiger1, Clive S. Lennox1, Kannan Raghunandan1, Marleen Willekens1 •
University of New South Wales1
01 May 2013-Auditing-a Journal of Practice & Theory
TL;DR: In this article, the authors present a review of the research in the area of modified audit opinions (GCOs) and develop a framework to categorize this research into three major areas of research: (1) determinants of GCOs that include client factors, auditor factors and auditor-client relationships, and other environmental factors; (2) accuracy of the GCO; and (3) consequences arising from GCO.
Abstract: SUMMARY: In this synthesis we review research on going-concern modified audit opinions (GCOs) and develop a framework to categorize this research. We identify three major areas of research: (1) determinants of GCOs that include client factors, auditor factors, auditor-client relationships, and other environmental factors; (2) accuracy of GCOs; and (3) consequences arising from GCOs. We identify method-related considerations for researchers working in the area and identify future research opportunities.

198 citations

Journal Article•DOI•
Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections

[...]

Daniel Aobdia1•
Northwestern University1
01 Feb 2019-Journal of Accounting and Economics
TL;DR: In this article, the degree of concordance between fifteen audit quality measures used in academia and two measures of audit process quality determined either by audit firms' internal inspections or by Public Company Accounting Oversight Board inspections of individual engagements was investigated.

184 citations

Journal Article•DOI•
Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality

[...]

Xianjie He1, Jeffrey Pittman2, Oliver M. Rui3, Donghui Wu4•
Shanghai University of Finance and Economics1, Memorial University of Newfoundland2, China Europe International Business School3, The Chinese University of Hong Kong4
01 Feb 2017-The Accounting Review
TL;DR: In this paper, the authors examine whether social ties between engagement auditors and audit committee members shape audit outcomes and find that close interpersonal relations can undermine auditors' monitoring of the financial reporting process.
Abstract: We examine whether social ties between engagement auditors and audit committee members shape audit outcomes. Although these social ties can facilitate information transfer and help auditors alleviate management pressure to waive correction of detected misstatements, close interpersonal relations can undermine auditors' monitoring of the financial reporting process. We measure social ties by alma mater connections, professor-student bonding, and employment affiliation, and audit quality by the propensity to render modified audit opinions, financial reporting irregularities, and firm valuation. Our evidence implies that social ties between engagement auditors and audit committee members impair audit quality. In additional results consistent with expectations, we generally find that this relation is concentrated where social ties are more salient, or firm governance is relatively poor and agency conflicts are more severe. Implying reciprocity stemming from social networks, we also report some sugge...

157 citations

Cites background from "Audit Quality: Insights from the Ac..."

  • ...…DeFond and Francis 2005; Nelson and Tan 2005; Church et al. 2008; Francis 2011), recent evidence implies that audit outcomes hinge on individual auditor characteristics (e.g., Carey and Simnett 2006; Chi et al. 2009; Zerni 2012; Carcello and Li 2013; Gul et al. 2013; Knechel et al. 2013a, 2013b)....

    [...]

  • ...…This evidence may benefit audit firms eager to improve their performance by, for example, reallocating their quality control resources to ensure that auditors with alma mater social ties to audit committee members are reassigned to other clients (Francis and Michas 2013; Knechel et al. 2013b)....

    [...]

References
More filters
Book•
Judgment Under Uncertainty: Heuristics and Biases

[...]

Amos Tversky1, Daniel Kahneman1•
Hebrew University of Jerusalem1
01 Jan 1974
TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
Abstract: This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.

31,082 citations

Journal Article•DOI•
The case for motivated reasoning.

[...]

Ziva Kunda1•
Princeton University1
01 Nov 1990-Psychological Bulletin
TL;DR: It is proposed that motivation may affect reasoning through reliance on a biased set of cognitive processes--that is, strategies for accessing, constructing, and evaluating beliefs--that are considered most likely to yield the desired conclusion.
Abstract: It is proposed that motivation may affect reasoning through reliance on a biased set of cognitive processes—that is, strategies for accessing, constructing, and evaluating beliefs. The motivation to be accurate enhances use of those beliefs and strategies that are considered most appropriate, whereas the motivation to arrive at particular conclusions enhances use of those that are considered most likely to yield the desired conclusion. There is considerable evidence that people are more likely to arrive at conclusions that they want to arrive at, but their ability to do so is constrained by their ability to construct seemingly reasonable justifications for these conclusions. These ideas can account for a wide variety of research concerned with motivated reasoning. The notion that goals or motives affect reasoning has a long and controversial history in social psychology. The propositions that motives may affect perceptions (Erdelyi, 1974), attitudes (Festinger, 1957), and attributions (Heider, 1958) have been put forth by some psychologists and challenged by others. Although early researchers and theorists took it for granted that motivation may cause people to make self-serving attributions and permit them to believe what they want to believe because they want to believe it, this view, and the research used to uphold it, came under concentrated criticism in the 1970s. The major and most damaging criticism of the motivational view was that all research purported to demonstrate motivated reasoning could be reinterpreted in entirely cognitive, nonmotivational terms (Miller & Ross, 1975; Nisbett & Ross, 1980). Thus people could draw self-serving conclusions not because they wanted to but because these conclusions seemed more plausible, given their prior beliefs and expectancies. Because both cognitive and motivational accounts could be generated for any empirical study, some theorists argued that the hot versus cold cognition controversy could not be solved, at least in the attribution paradigm (Ross & Fletcher, 1985; Tetlock & Levi, 1982). One reason for the persistence of this controversy lies in the failure of researchers to explore the mechanisms underlying motivated reasoning. Recently, several authors have attempted to rectify this neglect (Kruglanski & Freund, 1983; Kunda, 1987; Pyszczynski & Greenberg, 1987; Sorrentino & Higgins, 1986). All these authors share a view of motivation as having its effects through cognitive processes: People rely on cognitive processes and representations to arrive at their desired conclusions, but motivation plays a role in determining which of these will be used on a given occasion.

6,643 citations

"Audit Quality: Insights from the Ac..." refers background in this paper

  • ...In general, it is believed that incentives lead to preferences for a desired outcome which unintentionally influence one’s decisions, in a selfserving manner (e.g., Kunda 1990; Russo et al. 2000)....

    [...]

Journal Article•DOI•
Auditor size and audit quality

[...]

Linda DeAngelo1•
University of Pennsylvania1
01 Dec 1981-Journal of Accounting and Economics
TL;DR: In this paper, the authors argue that audit quality is not independent of audit firm size, even when auditors initially possess identical technological capabilities, and when incumbent auditors earn client-specific quasi-rents, auditors with a greater number of clients have more to lose by failing to report a discovered breach in a particular client's records.

4,969 citations

"Audit Quality: Insights from the Ac..." refers background in this paper

  • ...Despite this limitation, the DeAngelo (1981) definition of audit quality identifies two important components of audit quality....

    [...]

Journal Article•DOI•
The pricing of discretionary accruals

[...]

K.R. Subramanyam1•
University of Southern California1
01 Aug 1996-Journal of Accounting and Economics
TL;DR: In this paper, the authors examined if the stock market prices discretionary accruals and found that, on average, the market attaches value to discretionary items and that discretionary items predict future profitability and dividend changes.

1,729 citations

"Audit Quality: Insights from the Ac..." refers background in this paper

  • ...archival evidence shows that the market reacts to discretionary accruals (Subramanyam 1996)...

    [...]

Journal Article•DOI•
Auditor brand name reputations and industry specializations

[...]

Allen T. Craswell1, Jere R. Francis2, Stephen L. Taylor1•
University of Sydney1, University of Missouri2
01 Dec 1995-Journal of Accounting and Economics
TL;DR: In this paper, the authors found that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation, and that on average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big Eight auditors.

1,546 citations

"Audit Quality: Insights from the Ac..." refers result in this paper

  • ...Similar results have been found with respect to fee premiums for auditors who are industry specialists (Craswell et al. 1995; Seethamaran et al. 2002; Balsam et al. 2003; Ferguson et al. 2003; Krishnan 2003b; Francis et al. 2005; Ferguson et al. 2006; Basioudis and Francis 2007; Carson and Fargher 2007; Choi et al. 2008; and Carson 2009)....

    [...]

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Frequently Asked Questions (3)
Q1. What have the authors contributed in "Audit quality: insights from the academic literature" ?

In this paper, the authors review and synthesize the academic literature on audit quality and propose ideas for future research, and identify the fundamental characteristics against which the quality of an audit can be discussed. 

Audit support systems and decision aids: current practice and opportunities for future research. An assessment and directions for future research. The efficacy of a red flags questionnaire for assessing the possibility of fraud. Concerns over auditing quality complicate the future of accounting. 

The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.