Auditing Literature Review - What Influence Audit Quality?

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Moreover, effect of Audit fee and low-balling (abnormal discounts) will influence the audit independence and audit quality. This effect will be determined by client’s size and ability. Magee and Tseng (1990) indicate that, without contingent audit fees and binding multi-period commitment, the value of incumbency can negatively affect auditor independence only if: (1) there is a disagreement on appropriate reporting policy and (2) the reporting disagreement between auditor and client cover more than one reporting period. On the other hand, positive value of incumbency will not lead to a compromise of independence but to the client-initiated changes, if the reporting disagreement is important for either the client or the auditor.

Furthermore, the high competition in the audit service market slightly reduces the perceived likelihood of auditors to resist client pressure in audit conflict and they will more likely give some benefit to the client depending on Knapp’s (1985) study. This will influence auditor independence and audit quality, but it may not a significant consideration in the Australian market.

In the table, I summarise literature to client importance and audit quality.

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Article

Journal

Audit Quality variable(s)

Test Variable(s)

Sample size

Method(s)

Related finding

Pany and Reckers (1980)

TAR

Stockholders’ perception of auditor independence

1.Client size

2.Gift, purchase discount

N=1126 CPAs in public accounting firms (America)

Survey

- Size of the client, defined as one percent and ten percent of the office revenue, is not perceived as impairing auditor independence.

- Even a small amount of gifts and purchase discounts are perceived as decreasing auditor independence.

Deis, Jr. and Giroux (1992)

TAR

Quality control review findings

Number of clients

Archival

Audit quality increases with the number of the audit firm’s client.

Craswell, Stokes and Laughton (2002)

JAE

Propensity to issue qualified audit opinion

Client’s relative size in office and national firm level

Archival

(Australia)

There is no significant association between auditor fee dependence and the propensity to issue qualified audit report.

Bing, Huang,

Li & Zhu (2014)

ANCAA

Likelihood of issuing going concern report

Audit fee

Archival and survey

(world-wide)

There is no significant association between auditor fee dependence and the propensity to issue qualified audit report. (p>0.05)

Hunt and Lulseged (2007)

JAPP

- Discretionary accruals

- Propensity to issue going-concern report

Client’s relative size in office and national firm level

N = 1680 firms (996 firms audited by Non-Big5 and 684 firms audited by Big5)

Archival

- There are some significant evidence of negative association between discretionary accruals and client economic influence on non-big5 auditors. However, the result is contingent upon sales-based measure but not fee-based measure.

- Non-big5 auditors are not less likely to compromise their independence with larger clients by issuing less going-concern opinions.

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According to the above findings, the audit fee will have no significant influence on the audit independence and audit quality. The reason why this will show in the data analysis may be that the large samples in the test are under fair audit fee. And this is also why the Pany and Reckers (1980) study shows that the discount and gift (abnormal audit fee) will affect audit quality and auditor independence. Moreover, the client’s importance will have more influence on Non-Big4. By developing my study, I will separate the client’s important in research depending on the whether the companies are audited by Big4 or Non-Big4. To exam the abnormal audit fee, I will use unusual discount or gift on audit fee.

- The relationship between auditor tenure and audit quality

H3: There is a significant influence of audit tenure on audit quality and auditor independence

There are two opposing views on the effects of auditor tenure on the audit quality. The first one suggests that as the auditor-client relationship lengthens, the auditor may develop a close relationship with the client and become more likely to act in favour of management, thus reducing the audit quality. Shockley (1981) report that auditors did not perceive tenure exceeding five years as reducing auditor independence

The other view, on the other hand, indicates that as the auditor tenure becomes longer, the auditor develops their understanding of the business and develops their expertise during the audit, resulting in higher audit quality. Knechel and Vanstraelen (2007) find that longer

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