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臺大管理論叢
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All countries mentioned above require companies to file audited annual financial
statements. Except for China where firms meeting specific requirements need to prepare
audited semi-reports, all other countries require only review for semi-annual financial
statements. Very few countries, that is India, Indonesia, and Philippines, mandate audit firm
rotation, whereas half (seven countries) require audit partners rotation. Eleven (78%)
countries require engagement partners to sign in the audit report. Most countries allow audit
firms to provide audit and non-audit services together, but require disclosure on the annual
report or need approval by the audit committee.
3. The Definitions and Proxies of Audit Quality
Audit quality is defined in different ways. For example, DeAngelo (1981) indicates that
audit quality is a function of the auditor’s ability to detect material misstatements and report
the errors. Wallace (1980) defines audit quality as the degree that the auditors decrease the
noise in the financial statement. Titman and Trueman (1986) define auditor quality as the
accuracy of the information she/he supplies to investors; the information provided by a
higher-quality auditor allows investors to make a more precise estimate of the firm’s value.
In Financial Reporting Council (2008) Audit Quality Framework, the key drivers of audit
quality include the audit firm, audit partners and staff, the effectiveness of the audit process,
the reliability and usefulness of audit reporting, and the factors outside the control of
auditors.
DeFond and Zhang (2014) separate the audit proxies into output and input measures.
Output measures include restatements, going concern (GC) opinion, financial reporting
quality (e.g., Discretionary accrual, meet/beat forecast, and conservatism), and market
reaction. Input measures include auditor size, specialist, audit fee, etc. We find different
proxies are used in Asia audit market research. For example, Chinese studies often use a
“non-standard opinion” instead of the GC opinion, and use Big 10 rather than Big 4 CPA
firms. Furthermore, some studies use small profit and below-the-line items as the proxies of
audit quality. Lennox et al. (2014) use a proprietary dataset of audit adjustments in China to
test the impact of mandatory partner rotation on audit quality. Auditors make adjustments
when they detect the misstatement and requires the client to correct the misstatement.