Auditing standards, professional judgment, and audit quality

Pingyang Gao, Gaoqing Zhang

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We propose a model to study how auditing standards affect audit quality. We posit that both auditors’ incentives and expertise are relevant for audit effectiveness. Auditing standards are useful in mitigating the auditors’ possible misalignment of interest with investors. However, auditing standards also restrict auditors’ exercise of professional judgment, which, in turn, leads to compliance mentality and reduces auditors’ incentives to become competent in the first place. We identify the conditions under which stricter auditing standards increase or decrease audit quality. Moreover, stricter auditing standards always increase audit fees, but can benefit auditors at firms’ expense. The model also generates many testable empirical predictions.

Original languageEnglish (US)
Pages (from-to)201-225
Number of pages25
JournalAccounting Review
Volume94
Issue number6
DOIs
StatePublished - 2019

Bibliographical note

Funding Information:
We are grateful for comments from Ming Deng, Phil Dybvig, Jonathan C. Glover (editor), Zhiguo He, Volker Laux, Pierre Liang, Christian Leuz, Tong Lu, Haresh Sapra, Bharat Sarath (discussant), Minlei Ye, Yun Zhang, two anonymous reviewers, and participants in workshops at Columbia University, The George Washington University, Southwestern University of Economics and Finance, and the 2017 AAA Annual Meeting. We also thank Jinzhi Lu and Mengxia Xu for able research assistance. We also acknowledge the generous financial support from The University of Chicago Booth School of Business, University of Minnesota Carlson School of Management, and National Nature Science Foundation of China (project 71620107005, ‘‘Research of Capital Market Trading System and Stability’’). All errors are our own.

Funding Information:
We are grateful for comments from Ming Deng, Phil Dybvig, Jonathan C. Glover (editor), Zhiguo He, Volker Laux, Pierre Liang, Christian Leuz, Tong Lu, Haresh Sapra, Bharat Sarath (discussant), Minlei Ye, Yun Zhang, two anonymous reviewers, and participants in workshops at Columbia University, The George Washington University, Southwestern University of Economics and Finance, and the 2017 AAA Annual Meeting. We also thank Jinzhi Lu and Mengxia Xu for able research assistance. We also acknowledge the generous financial support from The University of Chicago Booth School of Business, University of Minnesota Carlson School of Management, and National Nature Science Foundation of China (project 71620107005, ??Research of Capital Market Trading System and Stability??). All errors are our own.

Publisher Copyright:
© 2019 American Accounting Association. All rights reserved.

Keywords

  • Audit fee
  • Audit quality
  • Auditing standards
  • Compliance mentality
  • Professional judgment

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