Content area
Full Text
Numerous studies use discretionary accruals (DA) as a proxy of audit quality; yet, there is no conclusive evidence on whether DA are a good proxy for audit quality. To test whether DA are a good measure of audit quality, we examine the association between DA and five measures of audit quality, namely; the likelihood restatement, f4 audit, negative internal control report, going concern opinion, and auditor's industry specialization. The results show that while there is an association between DA and each of the first three audit quality measures, such an association is absent in the case of each of the last two. These mixed results indicate that DA are not necessarily a good measure of audit quality.
(ProQuest: ... denotes formulae omitted.)
INTRODUCTION
Knapp (1991) and Schroeder et al. (1986) indicate that despite the importance of the audit quality concept, it is not explicitly defined by technical standards nor, have researchers arrived at a consensual understanding of its meaning. Francis (2011) explains that audit quality is a complex concept and cannot be reduced to a simple definition; however, he indicates that "audit standards imply that audit quality is achieved by the issuance of the "appropriate audit report on the client's compliance with Generally Accepted Accounting Principles." He also states that a good audit is "one in which the auditor complies with auditing standards and issues the correct opinion regarding the client's financial statements at an appropriate level of audit risk." He indicates that audit quality is affected by factors included in a framework he has introduced that includes testing procedures, team personnel, audit processes, accounting firms, audit industry, and institutions that affect auditing, such as AICPA, PCAOB, FASB, etc.
DeAngelo (1981) defines audit quality as "the market assessed joint probability that a given auditor will both (a) discover a breach in the client's accounting system and (b) report the breach." She indicates that audit quality is positively associated with auditor independence. On the other hand, audit failure is defined as: "issuing an erroneous audit opinion as the result of an underlying failure to comply with the requirements of Generally Accepted Auditing Standards" (Arens et al., 2008). PCAOB Audit Standard No. 7 (AS7) addresses the issue of engagement quality review. The objective of this standard...