How Do Audit Firm Quality Indicators Relate to Engagement-Level Audit Quality?

Abstract

This study investigates how audit firm quality indicators relate to audit quality at the engagement-level. Specifically, eight input and two output audit firm quality measures are constructed and related to a broad range of engagement-level input and output audit quality measures. We find that audit firm quality generally relates positively to audit hours and audit fees (engagement-level input audit quality measures), and negatively to discretionary accruals and error corrections (engagement-level output audit quality measures); however, the relationship is stronger in the former. Our findings provide support to the position of regulators in that audit firm quality indicators will be useful information to client firms and investors when evaluating audit quality.

Keywords: Audit quality indicators, Audit firm characteristics, Transparency report, Human capital leverage, Engagement-level audit quality

JEL Classification: M4, M42