Understanding Audit Quality: Insights from Audit Professionals and Investors

TLDR

Audit quality is a priority for standards setters and audit firms, with the PCAOB currently reporting inspection findings and planning to publish audit quality indicators. The study seeks to gather auditors’ and investors’ perspectives, definitions, and indicators of audit quality. The authors surveyed auditors and investors to collect their views, definitions, and indicators of audit quality. Investors emphasize audit inputs and PCAOB deficiencies as quality indicators, while auditors view auditor characteristics and restatements as key determinants; the study confirms these perspectives, supports archival research, evaluates PCAOB indicators, and proposes additional disclosures and research directions.

Abstract

Abstract Projects seeking to define, measure, and evaluate audit quality are on the agendas of auditing standards setters as well as audit firms. The Public Company Accounting Oversight Board ( PCAOB ) currently provides information regarding audit quality through the release of inspection reports, and the Board intends to establish and report audit quality indicators. To provide additional perspective on audit quality, we obtain auditors' and investors' views, definitions, and indicators of audit quality. We find that investors' definitions of audit quality focus more on inputs to the audit process than do auditors', and that investors view the number of PCAOB deficiencies as an indicator of overall firm quality. We find a consensus that auditor characteristics may be the most important determinants of audit quality, and that restatements may be the most readily available signal of low audit quality. We relate responses to a general audit quality framework, provide support for archival audit research, and identify additional disclosures that participants suggest could signal audit quality. Taken together, we provide evidence regarding the construct of audit quality in the post‐ SOX environment, evaluate many of the audit quality indicators proposed by the PCAOB , and suggest avenues for future research.