Audit Quality and Measurement: Towards a Comprehensive Understanding

Abstract

ABSTRACTThe financial crisis of 2008 and recurrent audit failure scandals have highlighted the importance of audit quality, with regulators and academicians presenting their suggestions one after another. This paper discusses such suggestions and proposes a classification for the elements of audit under three elements-inputs, outputs, and context. The author selected 12 measures supported by strong and consistent empirical research for the study. Using the three-category classification of audit proposed in this paper, I classify the 12 measures into three groups, and discusses the advantages and shortcomings of these measures as proxy variables of audit quality.INTRODUCTIONThe importance of highly reliable financial reports and external audits was recognized again after the 2005 Kanebo scandal, the 2008 financial crisis, and the 2011 Olympus scandal. High-quality financial-reporting supply chains are essential for the creation of reliable financial reports. In particular, external audits play an important role in enhancing the of financial reports. It is well known that the of financial reports is determined and supported by the of the external audit, in which multiple parties are interested.The importance of audit is well recognized, but until recently, researchers believed that Audit is much debated but little understood. Knechel et al.'s (2013, 385) paper presented a consensus between academicians and regulators. This paper attempts to synthesize academic and regulator perspectives and to propose a framework of audit with comprehensive categories of classification under it. Next, using the proposed framework and previous insights from academic literature, this paper discusses the measures of audit quality.The strongest authority on audit quality, as recognized by academics, is Linda E. DeAngelo. In 1981, she wrote the paper Audit size and audit quality in the Journal of Accounting and Economics, in which she proposed the notion of audit quality. During the last two decades, Jere R. Francis's empirical research on audit was widely cited in the academic world. In 2011, Francis published a paper titled framework for understanding and researching audit quality in Auditing: A Journal of Practice & Theory, in which he proposed a framework to summarize academic and mentioned the notion of audit quality. Later, in 2013, the senior editor of Auditing: A Journal of Practice & Theory, W. Robert Knechel, and others wrote an article titled Audit quality: Insights from the academic literature in the same journal. Here, they attempted to add to the work of Francis (2011) with not only empirical data, but also experimental data. I expect to gain a new perspective on the notion of audit from the work of Knechel et al. (2013) also.However, after analyzing the paper, I find that audit is a complex and multi-faceted (also see IAASB, 2011, 3). This paper attempts to collate the viewpoints of FRC (2008), Francis (2011), Knechel et al. (2013), and IAASB (2013), to propose a simple classification for audit quality, while listing measures of audit quality.This paper contributes to the in two ways. First, it discusses popular frameworks of audit presented by academicians and regulators, and attempts to derive one common framework for a comprehensive understanding of audit quality. Second, it attempts to select measures of audit that are supported by consistent empirical results and creates a comprehensive understanding of these measures, using the framework proposed in this paper.AUDIT QUALITY AS A SIMPLE CONCEPTVarious stakeholders, such as users, auditors (audit firms), regulators and the society, have different understandings of the concept of audit (IOSCO, 2009; IAASB, 2011 ; Knechel et al., 2013). As Knechel et al. (2013) have pointed out, for example, users of financial statements might believe that if these statements do not contain any significant inaccuracies, audit is high. …