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How Do Market Agents Assess Audit Quality?

56 Pages Posted: 10 Aug 2014 Last revised: 18 Nov 2015

Adam M. Esplin

University of Texas at El Paso; University of Alberta - Department of Accounting

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: November 17, 2015

Abstract

The Public Company Accounting Oversight Board (PCAOB) in the U.S. regulates auditing and seeks to promote its quality, a difficult-to-define concept. To understand how agents involved in private companies think of audit quality, we interview their CFOs, auditors, bankers, board members, bonding agencies, and some private equity investors. We find that a variety of agents demand an audit while retaining their scepticism and seeking independent corroboration of what they learn from the audited financial statements. Management selects the auditor. Audit Quality is assessed based on the degree to which the audit plan (inputs and risk assessment processes) aligns with the views of management and directors. In addition, output measures such as number of errors and the time when they are adjusted, tax advice, controls/governance advice and auditor candor are used to assess audit quality. As judged by users, quality depends on a combination of inputs, processes and outcomes of audits.

Keywords: Sources of demand for audits, regulation of audits, private firms, auditor selection, audit quality, accounting accruals, cash flows, functional fixation

JEL Classification: M41, M42, M48

Suggested Citation

Esplin, Adam M. and Jamal, Karim and Sunder, Shyam, How Do Market Agents Assess Audit Quality? (November 17, 2015). Available at SSRN: https://ssrn.com/abstract=2477962

Adam M. Esplin (Contact Author)

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

University of Alberta - Department of Accounting ( email )

Edmonton, Alberta T6G 2R6
Canada

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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