It is a challenge to measure quality. How would one apply this in the auditing perspective?
adehrance to the audit standards. non repetitive queries, no room for manipulation, new audit team as far as possible to avoid over looking etc
Ghosh and Moon (2005), Carcello(1992) could be referentes for tour research about perceived audit quality:
http://www.aaajournals.org/doi/abs/10.2308/accr.2005.80.2.585
Aditionally, the IFAC and the PCAOB have published studies about audit quality, exploring some proxies used by diferent stakeholders to measure the audit quality.
The suggestions focus on if there is no subsequent litigation against the auditors,this reflects upon quality. By the time an auditor is being charged in courts, it is too late. I wonder there is any literature on how quality is being measured.
Take a look in this PhD thesis, about audit quality in Brasil:
http://www.teses.usp.br/teses/disponiveis/12/12136/tde-04112010-161444/pt-br.php
Article about audit quality in banks, with a high level discussion about audit quality, real and perceived:
http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1519-70772015005000030
Crucial because compliance is more related to conformity (conformism) than anything else
I agree with you.
Compliance is only part of the (auditors' part) equation but the profession needs to do more on the other part of the equation by continuing education and holding dialogues with the third parties and other stakeholders on the extent of responsibilities and liabilities.
Perceived audit quality is often measured by capital market reactions, i.e. earnings response coefficients. However, respective studies often do not focus on cases of auditor litigation but e.g., on auditor choice and auditor remuneration decisions. Depending on the investigated country, data on auditor litigation might not be available. IFAC's framework for audit quality provides various additional approaches - though, they are not always easy to operationalize.
I would also suggest to consider capital market measures. An audit should decrease the information asymmetry between the user of a financial report and the manager. If the users of the financial report perceives the audit statement helpful in determining the credibility of the information provided, than information asymmetry should decrease. Prior literature suggest several measures for information asymmetry with bid-ask spreads being the most prominent proxy. Other proxies include trading volume and volatility.
This is interesting. It may mean that the auditors may not know the extent of its quality not until the post event era (stock price, hopefully there is no litigation against the firm the etc). The key question is how to ensure quality before issuing the audit reports to maintain its quality.
Interesting question, Gin. The words 'perceived' and 'measure' are themselves open to a number of interpretations. Audit quality can be considered from the perspective of the PROCESS and the OUTCOME of an audit. These would depend on a number of factors. Let's look at the PROCESS of carrying out the audit. Firstly, like with any product or service, we have to consider the service provider. It is often presumed that the the quality of audit produced by the Big 4 is much superior than those produced by the non-Big 4, although studies have proved that this is not necessarily the case. Accordingly, therefore, the market has been willing to pay more for audit services provided by this group of auditors. This therefore suggests that the premium paid is a signal of quality of the audit provided. It is also presumed that because of the reputational risks associated with poor quality audits, these firms have rigorous processes in place, in addition to complying with all appropriate standards, to ensure that good quality audits are carried out. From the perspective of the market forces, better credit ratings and lower risk forecasts are often proxies for perceived audit quality. And the proxy measures for audit quality are higher degree of earnings conservatism and lower abnormal accruals. This leads to the second factor, which is the OUTCOME of an audit. The quality of an audit is measured by the outcome, the audit opinion issued. As we all know, if the opinion issued is 'clean', and something subsequently goes wrong, then it is presumed that the quality of the audit carried out is sub-standard.
To make aware the importance of continuing improving the audit quality, should regulators and professional bodies publicize audit failure?
The US generally accepted auditing standards (GAAS) talk about audit quality in terms of independence, competence, due professional care, standards of field work, standards of reporting, etc. I think audit quality can be assessed using such relevant measures.
Take a look at our Scale of AQ in this article :
Kaawaase, T. K., Assad, M. J., Kitindi, E. G., & Nkundabanyanga, S. K. (2016). Audit quality differences amongst audit firms in a developing economy: The case of Uganda. Journal of Accounting in Emerging Economies, 6(3), 269-290.
Is there any standard questionnaire to measure the audit quality all over the globe?