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Assessment of Audit Quality:An Investigation into Proxies


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1 Institute of Management, Nirma University, Ahmedabad, India
     

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Auditors play an important role in financial reporting process as they provide independent assurance about the credibility of financial reporting information. The agency costs and use of financial reporting information for investment and credit decisions, has aggravated the assurance role an auditor has to play. There has been a flurry of research with respect to audit quality in western countries. The extant literature has identified proxies like size, audit fees etc. to measure audit quality. However, the cross country differences in the legal environment prevents the researchers from using the same proxies in Indian context. The litigation risk for auditors is lower in India in comparison to the USA. Thus, there is a probability of leniency on the part of auditors in issuing qualified opinions. Moreover, the listed companies in India are more or less equally distributed among Big 4 auditors and Non-Big 4 auditors, which casts a doubt on the use of size as proxy for audit quality. The further research can look at newer dimensions or a modification of existing dimensions to measure audit quality. Parameters like year-on-year percentage change in audit fees, comparison of audit fees paid by a company with audit fees paid by other industry players, amount of penalty and big pockets of auditors, number of branches of audit firm, international presence of audit firm and the number of partners in audit firm can be considered for empirical research on audit quality.

Keywords

Agency Costs, Audit Fees, Audit Quality, Big 4, Financial Reporting.
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  • Assessment of Audit Quality:An Investigation into Proxies

Abstract Views: 67  |  PDF Views: 0

Authors

Parag Rijwani
Institute of Management, Nirma University, Ahmedabad, India
Punita Rajpurohit
Institute of Management, Nirma University, Ahmedabad, India

Abstract


Auditors play an important role in financial reporting process as they provide independent assurance about the credibility of financial reporting information. The agency costs and use of financial reporting information for investment and credit decisions, has aggravated the assurance role an auditor has to play. There has been a flurry of research with respect to audit quality in western countries. The extant literature has identified proxies like size, audit fees etc. to measure audit quality. However, the cross country differences in the legal environment prevents the researchers from using the same proxies in Indian context. The litigation risk for auditors is lower in India in comparison to the USA. Thus, there is a probability of leniency on the part of auditors in issuing qualified opinions. Moreover, the listed companies in India are more or less equally distributed among Big 4 auditors and Non-Big 4 auditors, which casts a doubt on the use of size as proxy for audit quality. The further research can look at newer dimensions or a modification of existing dimensions to measure audit quality. Parameters like year-on-year percentage change in audit fees, comparison of audit fees paid by a company with audit fees paid by other industry players, amount of penalty and big pockets of auditors, number of branches of audit firm, international presence of audit firm and the number of partners in audit firm can be considered for empirical research on audit quality.

Keywords


Agency Costs, Audit Fees, Audit Quality, Big 4, Financial Reporting.