Description
The paper aims to analyse audit service quality attributes that were perceived to be
important in compulsory audit tendering (CAT) in local councils in New South Wales (NSW). It focuses
principally on whether CAT leads to an impairment of auditor independence and audit quality.
Accounting Research Journal
Audit service quality in compulsory audit tendering: Preparer perceptions and
satisfaction
Kym Boon J ill McKinnon Philip Ross
Article information:
To cite this document:
Kym Boon J ill McKinnon Philip Ross, (2008),"Audit service quality in compulsory audit tendering",
Accounting Research J ournal, Vol. 21 Iss 2 pp. 93 - 122
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Kym Butcher, Graeme Harrison, J ill McKinnon, Philip Ross, (2011),"Auditor appointment in
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dx.doi.org/10.1108/10309611111163682
Rani Hoitash, Ariel Markelevich, Charles A. Barragato, (2007),"Auditor fees and audit quality", Managerial
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Diana Mostafa Mohamed, Magda Hussien Habib, (2013),"Auditor independence, audit quality and the
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Audit service quality
in compulsory audit tendering
Preparer perceptions and satisfaction
Kym Boon and Jill McKinnon
Department of Accounting and Finance, Macquarie University,
Sydney, Australia, and
Philip Ross
School of Accounting, University of Western Sydney, Sydney, Australia
Abstract
Purpose – The paper aims to analyse audit service quality attributes that were perceived to be
important in compulsory audit tendering (CAT) in local councils in NewSouth Wales (NSW). It focuses
principally on whether CAT leads to an impairment of auditor independence and audit quality.
Design/methodology/approach – A questionnaire survey was conducted of 235 NSW local council
?nance professionals and 35 local council internal auditors in May 2006.
Findings – The most important attributes in evaluating audit service quality were industry
expertise, audit ?rm experience with a council, technical competence, independence, ethical standards
and due care. The least important attributes were scepticism, freshness of perspective, audit ?rm size,
and non-audit services. There is considerable consistency in the ?ndings with those in non-CAT
contexts.
Research limitations/implications – The paper is subject to the general limitations of the survey
questionnaire method. A further limitation is that audit quality was assessed using perceptions of
audit service quality by preparers of local council ?nancial statements, rather than by users of those
statements.
Practical implications – Audit ?rms will be better able to understand the audit service quality
attributes valued by local council clients, to differentiate their promotional and service-provision
strategies, improve their audit quality, and better satisfy local council clients. Concerns that CAT may
impair audit independence and audit quality do not appear to be founded.
Originality/value – Because the results are generally consistent with ?ndings in non-CAT contexts,
there can be more con?dence in CAT as a regulatory form of audit procurement.
Keywords Auditing, Auditors, Tendering, Quality, Local authorities, Australia
Paper type Research paper
1. Introduction
This study examines the audit service quality attributes that are perceived to be
important in evaluating the quality of audit services and in determining satisfaction
with audit service quality in the context of compulsory audit tendering (CAT). Audit
quality is an increasingly important area of examination. Recent audit regulation has
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors acknowledge the helpful comments of Neil Fargher, Graeme Harrison and
Alicia Jiang, participants at conferences of the Accounting and Finance Association of Australia
and New Zealand, the Asian Academic Accounting Association, the Financial Executives of
Local Government Departments in Australia, and the NSW Local Government Internal Auditors
Association of NSW.
Audit service
quality in CAT
93
Accounting Research Journal
Vol. 21 No. 2, 2008
pp. 93-122
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610810905917
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focused on improving audit quality in order to enhance public con?dence in the
credibility of the audit process and opinion following the alleged audit failures that
surrounded the collapse of major international and national corporations (e.g. Enron,
WorldCom), and the criminal indictment and collapse of former Big 5 audit ?rm Arthur
Andersen. Bell et al. (2005, p. iii) note that “. . . the emergence of new institutions,
regulations and authoritative guidance clearly raises the bar with respect to minimum
standards of audit quality”.
Audit is a service and audit service quality is de?ned as the “quality of the input
provided by the audit ?rm while performing the audit services” (Pandit, 1999, p. 173).
That is, “quality occurs during service delivery, usually in an interaction between the
client and the contact person from the service ?rm” (Parasuraman et al., 1985, p. 42,
cited in Pandit, 1999, p. 173). Audit quality, however, is dif?cult to observe directly
(Shockley, 1982; Francis, 2004); consequently one approach to assessing quality is to
examine the perceptions of audit service quality held by clients and customers as users
of ?nancial statements and the audit opinion (Schroeder et al., 1986; Carcello et al., 1992;
Davis, 1995; Behn et al., 1997; Warming-Rasmussen and Jensen, 1998). Zeithaml and
Bitner (2000, p. 81) state that service quality is “a critical component of customer
perceptions”, while Warming-Rasmussen and Jensen (1998, p. 65) argue that “there is
an increasing recognition in audit research that the only de?nition of quality is the
customers”[1].
Examining the CAT context is important because CAT is a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit ?rms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005,
p. 30). However, as a form of competitive bidding, there are concerns that CAT has the
potential to lead to a decrease in audit quality because:
.
competitive pressure is likely to shift the balance of power in auditor-client
relationships towards the client which potentially impairs auditor independence;
and
.
place pressure on fees which leads to reduced audit procedures (Copley and
Doucet, 1993; Aldhizer and Lampe, 1997; Beattie and Fearnley, 1998).
Examining whether CAT leads to the impairment of auditor independence and audit
quality is dif?cult because CAT is a relatively rare phenomenon, providing limited
opportunities to observe and examine its operation. Local government in the
Australian state of New South Wales (NSW) provides such an opportunity as it is one
of the few contexts where CAT operates, and has operated since 1993. The NSW Local
Government Act (1993) requires that local councils tender their audits every six years
and make a decision on each occasion whether to re-appoint the incumbent auditor or
appoint a new auditor.
This study provides evidence on the question of whether CAT leads to impaired
auditor independence and audit quality. This is achieved by examining the perceptions
of audit quality by NSW local council ?nance professionals and internal auditors as
clients of audit service in a CAT environment. We use the perceptions of audit quality
approach of Carcello et al. (1992) and Behn et al. (1997) to address two, related research
questions. First, what audit quality attributes are perceived to be important to NSW
local council ?nance professionals and internal auditors when evaluating the quality of
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audit services provided by the incumbent auditor? And second, what audit quality
attributes are related to, or associated with, overall satisfaction with the quality of
audit services provided by the incumbent auditor?
Understanding what audit quality attributes are perceived to be important to clients
in evaluating audit service quality and satisfaction in a CATcontext is also important to
regulators and audit ?rms. Regulators are able to use such information to identify what
is likely to make an audit substandard in a CATcontext (Aldhizer et al., 1995, p. 61), and
to formulate auditing standards aimed at improving actual and perceived audit quality
(Chang and Monroe, 1995, p. 20). Audit ?rms are able to use this information to
differentiate themselves better on service quality, to improve their own audit quality,
and to deliver more satisfaction to clients (Carcello et al., 1992; Behn et al., 1997, 1999).
The paper is organized as follows. Section 2 provides an overview of the literature
on multi-attribute perceptions of audit quality that is drawn on to determine the audit
service quality attributes used in this study. Section 3 develops the hypothesis while
Section 4 discusses the research method. The results are presented in Section 5, while
Section 6 presents the conclusions, limitations and suggestions for further research.
2. Literature review
2.1 The multi-attribute perceptions of audit quality literature
The literature on multi-attribute perceptions of audit quality examines a number of
attributes perceived to be associated with audit quality by ?nancial statement
preparers, users and other interest groups in different proximity to the audit process.
These studies typically examine two main issues:
(1) the impact of the audit quality attributes on overall audit quality (Schroeder
et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Warming-Rasmussen and
Jensen, 1998; Chen et al., 2001); and
(2) evaluating the performance of, or satisfaction with, the incumbent auditor
against the attributes of audit quality (Davis, 1995; Behn et al., 1997; Sucher
et al., 1998; Pandit, 1999).
The groups that have been studied for their perceptions on audit quality include
auditors (Schroeder et al., 1986; Carcello et al., 1992; Davis, 1995; Chen et al., 2001), audit
committee chairpersons (Schroeder et al., 1986), preparers (Carcello et al., 1992;
Warming-Rasmussen and Jensen, 1998), clients (Davis, 1995), federal inspectors
general (Aldhizer et al., 1995), shareholders (Warming-Rasmussen and Jensen, 1998),
?nancial journalists (Warming-Rasmussen and Jensen, 1998), and ?nancial statement
users generally (Carcello et al., 1992).
Two main observations are made from this literature. The ?rst is that audit quality
attributes are often broadly referred to as audit ?rm and audit team attributes[2]. Audit
?rm attributes are those that relate to the audit ?rm as an entity (e.g. location and size
of audit ?rm of?ces, litigation the ?rm has been involved in). Audit team attributes are
those concerned with the speci?c audit team assigned to the engagement (e.g.
communication between the audit team and client management, level of partner/audit
manager attention given to the audit) (Schroeder et al., 1986, p. 87). The majority of
studies have found audit team attributes to be more important than ?rm attributes in
evaluating audit service quality (Schroeder et al., 1986; Carcello et al., 1992), and overall
client satisfaction with quality (Behn et al., 1997). While, overall client satisfaction
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quality in CAT
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encompasses satisfaction with attributes of both the audit ?rm and the audit team
(Behn et al., 1997, 1999), the team attributes are more important because the audit team
is a sub-set of the audit ?rm, and, as Behn et al. (1999, p. 594) note, “management’s
primary impressions of the audit ?rm likely come from its interactions with the
members of the audit team”.
The second observation from the literature is that the attributes of audit quality
derived by Carcello et al. (1992) have been used to underpin a number of subsequent
studies of audit quality and satisfaction with quality. Carcello et al. (1992) surveyed 264
controllers (representing ?nancial statement preparers), 245 audit partners and 120
investors and creditors (representing ?nancial statement users) to identify the attributes
that were perceived to be associated with audit service quality both overall and among
the three groups of preparers, auditors and users. Carcello et al. (1992) identi?ed 41
attributes from the literature and from the authors’ audit partner experience, and then
used exploratory factor analysis to extract 12 audit quality factors. The factors were:
(1) audit team and ?rm experience with the client;
(2) industry expertise;
(3) audit ?rm responsiveness to client needs;
(4) audit ?rm compliance with general audit standards;
(5) audit ?rm commitment to quality;
(6) audit ?rm executive involvement;
(7) conduct of audit ?eld work;
(8) involvement of audit committee;
(9) individual team member characteristics;
(10) audit ?rm maintains a skeptical attitude;
(11) audit ?rm freshness of perspective; and
(12) degree of individual responsibility.
Subsequent studies using the Carcello et al. (1992) attributes include Behn et al. (1997)
and Pandit (1999). Behn et al. (1997) surveyed 434 ?nancial controllers of Fortune 1000
companies to ascertain which of the attributes were associated with satisfaction with
the audit ?rm and the audit team, and with overall client satisfaction. Behn et al. (1997)
found six of the attributes to be positively associated with overall client satisfaction:
(1) responsiveness to client needs;
(2) active involvement of the audit ?rm;
(3) effective involvement of audit committee;
(4) appropriate conduct of ?eld work;
(5) industry expertise; and
(6) prior audit ?rm and team experience with the client.
Skepticism was negatively associated with client satisfaction.
Pandit (1999) surveyed 359 senior executives of US corporations to examine the
effect of client satisfaction with audit service quality, and auditor ef?ciency and
credibility, on the intention to retain or switch auditors. Pandit (1999) used those
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attributes from Carcello et al. (1992) that were expected to be important to client
management as preparers of ?nancial statements; speci?cally:
.
audit ?rm responsiveness to client needs;
.
industry expertise;
.
executive involvement in the audit; and
.
conduct of the audit ?eld work.
Pandit (1999) hypothesized positive associations between each of these attributes and
intention to retain the audit ?rm, but found support only for responsiveness and
executive involvement.
2.2 Audit quality attributes relevant to the CAT context of NSW local government
The literature on multi-attribute perceptions of audit quality was reviewed to identify
those audit quality attributes to be used in this study. A total of 14 attributes were
identi?ed based on Carcello et al. (1992) and Behn et al. (1997). The 14 attributes (with
abbreviated names in parentheses) are:
(1) audit team and ?rm experience with the council (Council Experience);
(2) industry expertise (Industry Expertise);
(3) audit ?rm responsiveness to council needs (Responsiveness);
(4) audit ?rm compliance with general audit standards – technical competence
(Technical Competence);
(5) audit ?rm compliance with general audit standards – independence
(Independence);
(6) audit ?rm compliance with general audit standards – due care (Due Care);
(7) audit ?rm commitment to quality (Quality Commitment);
(8) audit ?rm executive involvement (Executive Involvement);
(9) conduct of audit ?eld work (Field Work Conduct);
(10) involvement of audit committee (Audit Committee);
(11) individual team member characteristics (Ethical Standards);
(12) audit ?rm maintains skeptical attitude (Skepticism);
(13) maintain freshness of perspective (Freshness of Perspective); and
(14) degree of individual responsibility (Individual Responsibility).
These attributes comprise 11 of the 12 attributes originally identi?ed by Carcello et al.
(1992). These attributes were also used by Behn et al. (1997). Carcello et al.’s (1992) 12th
attribute, audit ?rm compliance with general audit standards, was decomposed by
Behn et al. (1997) into three components, technical competence, independence, and due
care. We use the three components as separate attributes. The abbreviated names for
the attributes are consistent with Behn et al. (1997).
3. Hypothesis development
An hypothesis is developed for the relation between each of the 14 audit quality
attributes and overall client satisfaction with the quality of audit services. Audit service
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quality and client satisfaction are related theoretically because perceptions of audit
service quality are in?uential in determining client satisfaction (Behn et al., 1997, 1999).
For 13 attributes, a positive association with satisfaction is predicted, while for one
attribute, a negative association is predicted. Each of the attributes is brie?y discussed
for its relationship with satisfaction, followed by a formal statement of the hypothesis.
3.1 Audit ?rm and team experience with the council (Council Experience)
Audit experience with the client at the ?rmand teamlevel is important to a quality audit.
Audit experience means that, as the auditor has conducted the audit previously, it is
likely to be planned and conducted with improved ef?ciency and effectiveness.
Experienced audit teams, familiar with the operations, information systems and speci?c
risks of the council, are able to direct attention to accounts where audit adjustments were
previously required, or where there are likely to be errors or irregularities given the risks
of the council. Therefore, if ?nance professionals and internal auditors perceive that the
audit ?rm and team are experienced with the council, they are likely to be satis?ed with
the overall quality of audit services.
3.2 Industry expertise (Industry Expertise)
Industry expertise is likely to be important to a quality audit because industry experts
(or specialists) have knowledge of the risks, opportunities and accounting practices of
the client industry arising from training and practical experience gained from auditing
within that industry (Craswell et al., 1995; Hogan and Jeter, 1999; Solomon et al., 1999;
Gramling and Stone, 2001; Velury et al., 2003). Finance professionals and internal
auditors who perceive the audit to be conducted by a local government expert or
specialist are likely to be satis?ed with the overall quality of the audit.
3.3 Audit ?rm responsiveness to council needs (Responsiveness)
Responsiveness of the audit ?rm to the needs of the client is likely to affect satisfaction
with the overall quality of audit services. A good working relationship is likely to
result in auditor-client cooperation, an effective and ef?cient audit process, and the
audit ?rm being proactive in suggesting improvements to the operations and ?nancial
reporting practices of the client[3].
3.4 Audit ?rm compliance with general audit standards – technical competence
(Technical Competence)
Technical competence is anauditor’s “knowledge” and “individual know-how” (Richard,
2006, p. 157) with a technically competent auditor being “a quali?ed auditor . . . (with) . . .
suf?cient knowledge, quali?cation and experience to conduct a ?nancial audit”
(Richard, 2006, p. 157). Audit staff members who are technically competent in terms of
being CA or CPA quali?ed, are likely to be more familiar with accounting and auditing
standards and are more likely to detect material misstatements. Finance professionals
and internal auditors who perceive the audit team members to be technically competent
are likely to be satis?ed with the overall quality of the audit services provided.
3.5 Audit ?rm compliance with general audit standards – independence (Independence)
Audit independence is de?ned in terms of independence in fact and independence in
appearance (Richard, 2006). Independence in fact refers to the mental processes of the
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auditor, giving rise to an attitude of impartiality and objectivity (Richard, 2006, p. 156).
Independence in appearance refers to perceptions of independence by users and
whether, despite the (necessary) relationship with the client, third parties perceive the
auditor is capable of maintaining impartiality in judgment and resisting pressures
from client management (Richard, 2006, p. 156). Audit teams that are independent of
the client are more likely to provide a higher quality audit. Therefore, ?nance
professionals and internal auditors who perceive the audit ?rm to be independent of
the council, are likely to be satis?ed with the overall quality of audit services.
3.6 Audit ?rm compliance with general audit standards – due care (Due Care)
Audits conducted with “due care” in accordance with accounting and auditing
standards are likely to result in higher quality audits, a more credible audit opinion,
and a lower likelihood of the audit ?rm being involved in lawsuits alleging negligence.
As noted by Carcello et al. (1992, p. 8), “the audit ?rm rarely being found negligent in
lawsuits against it . . . provides a measure of due professional care”. Finance
professionals and internal auditors who perceive the audit ?rm to be conducting the
audit with due care are more likely to be satis?ed with the overall quality of audit
services.
3.7 Audit ?rm commitment to quality (Quality Commitment)
Quality control practices are the procedures used to ensure that the audit ?rm meets
quality standards consistently on every engagement (Arens et al., 2005). Audit ?rms
that have a strong quality culture are more likely to conduct higher quality audits as
the audit engagement teams are likely to adhere strictly to the quality control practices
of the ?rm. Finance professionals and internal auditors who perceive the audit ?rm to
have a strong commitment to quality are likely to be satis?ed with the overall quality
of audit services.
3.8 Audit ?rm executive involvement (Executive Involvement)
Audits that have a high degree of executive involvement are likely to be of a higher
quality because audit ?rm executives are the most quali?ed and experienced members
of the audit team and, hence, the most equipped to guide the audit process. Finance
professionals and internal auditors perceiving audit ?rm executives to be involved in
the conduct of the audit are likely to be satis?ed with the overall quality of audit
services provided.
3.9 Conduct of audit ?eld work (Field Work Conduct)
Audit ?rms that conduct the audit ?eld work thoroughly in accordance with
accounting and auditing standards are likely to provide high-quality audits. Therefore,
perceptions that the audit ?eld work is conducted thoroughly means that the council is
likely to be satis?ed with the overall quality of audit services.
3.10 Involvement of audit committee (Audit Committee)
Audit teams that communicate with the client’s audit committee are likely to conduct a
higher quality audit because audit committees oversee and strengthen the audit
process (Goodwin-Stewart and Kent, 2006, p. 388). Audit committees are likely to
demand a higher level of assurance (Francis, 2004), question the ?ndings of the auditor,
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direct audit attention to areas of concern and resolve con?icts between client
management and the auditor. Finance professionals and internal auditors who perceive
the council’s audit committee to be involved in the conduct of the audit, are likely to be
satis?ed with the overall quality of audit services.
3.11 Individual team member characteristics (Ethical Standards)
Audit ?rms whose team members have high-ethical standards are more likely to
conduct a higher quality audit because they are likely to detect and report discovered
errors and irregularities, and are less likely to engage in behaviour that compromises
the integrity of the audit process. Perceptions of high-ethical standards among audit
team members are likely to mean ?nance professionals and internal auditors are
satis?ed with the overall quality of audit services.
3.12 Audit ?rm maintains skeptical attitude (Skepticism)
Skepticism implies that audit team members do not accept the representations of the
client’s management, ?nance professionals or internal auditors at face value, but pursue
their owninvestigation to verify these representations. Perceived irregularities are likely
to be investigatedthoroughly, andcon?icts are likely to be resolved infavour of the audit
?rm. Behn et al. (1997, p. 15) argue that, while certain constituents, such as the regulatory
bodies and the community, expect auditors to bring the attitude of skepticism to the
conduct of the audit, “clients may sometimes chafe at auditor skepticism”. Consistent
with Behn et al. (1997), therefore, the relation between skepticism and satisfaction is
predicted to be negative; that is, council ?nance professionals and internal auditors who
perceive audit team members to have a skeptical attitude are not likely to be satis?ed
with the overall quality of audit services.
3.13 Maintain freshness of perspective (Freshness of Perspective)
This attribute of audit quality relates to auditor tenure. Audit team members who are
rotated across audits periodically are more likely to detect errors and irregularities as
they are capable of reviewing the ?nancial statements with fresh eyes[4]. Finance
professionals and internal auditors who perceive that audit team members have a
“fresh perspective” are likely to be satis?ed with the overall quality of audit services.
3.14 Degree of individual responsibility (Individual Responsibility)
Audit ?rms that are large and geographically dispersed are more likely to be
decentralized and to have a higher degree of individual responsibility. Such ?rms are
likely to provide higher quality audit services as they are at risk of losing their brand
name reputation and client base if lower quality audit services are provided. Finance
professionals and internal auditors who perceive the audit ?rm to have a high degree of
individual responsibility, are likely to be satis?ed with the overall quality of audit
services.
Based on the foregoing discussion of each of the 14 audit service quality attributes,
we state the formal hypothesis to be tested as follows:
H1. Evaluation of overall satisfaction with the quality of audit services provided
by the incumbent auditor is positively related to council ?nance
professionals’ and internal auditors’ perceptions of:
ARJ
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H1a. Audit ?rm and team experience with the client.
H1b. Industry expertise.
H1c. Audit ?rm responsiveness to the needs of the council.
H1d. Technical competence of the audit team.
H1e. Audit ?rm independence.
H1f. Exercise of due care by the audit ?rm.
H1g. The audit ?rm’s commitment to quality.
H1h. Audit ?rm’s executive involvement.
H1i. The audit ?rm’s conduct of audit ?eld work.
H1j. Involvement of the audit committee in the conduct of the audit.
H1k. Individual characteristics of audit team members (ethical standards).
H1l. The audit ?rm’s ability to maintain freshness of perspective.
H1m. Degree of individual responsibility.
and negatively related to council ?nance professionals’ and internal auditors’
perceptions of the ability of the audit ?rm to maintain a skeptical attitude.
4. Method
4.1 Sample selection
The sample for the study was 235 ?nance professionals who attended the National
Local Government Finance Professionals’ Biennial Conference held in NSW in May
2005, and the population of 35 NSW council internal auditors[5]. These two groups
were chosen for the study because the NSW Department of Local Government
identi?ed ?nance professionals and internal auditors as being the most appropriate
people to evaluate the quality of audit services provided by the incumbent auditor
because they liaise closely with the external auditors during the audits of the councils’
?nancial statements.
4.2 Design
The questionnaire comprised two questions. The ?rst question provided respondents
with a list of 48 individual items re?ecting audit service quality. This list was
developed by reviewing the audit service quality literature to identify the individual
items of audit service quality that have been proposed or examined in prior literature.
These items were then theoretically matched to the 14 audit service quality attributes
used in the hypothesis testing. Table I shows the individual items and their derivation.
Column 1 lists the 14 audit service quality attributes used in the hypothesis; Column 2
lists prior studies that have examined these attributes; Column 3 lists the individual
items of audit service quality used in the prior studies; and Column 4 shows the items
used in the questionnaire.
Respondents were requested to assume they had been asked to evaluate the quality
of audit services provided by their incumbent auditor. Respondents were asked to
Audit service
quality in CAT
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Audit quality attributes
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i
n
d
e
p
e
n
d
e
n
c
e
(
i
n
d
e
p
e
n
d
e
n
c
e
)
3
1
T
h
e
o
v
e
r
a
l
l
r
e
p
u
t
a
t
i
o
n
o
f
t
h
e
a
u
d
i
t
f
i
r
m
i
s
p
o
s
i
t
i
v
e
-
T
h
e
o
v
e
r
a
l
l
r
e
p
u
t
a
t
i
o
n
o
f
t
h
e
C
P
A
f
i
r
m
i
s
p
o
s
i
t
i
v
e
(
S
c
h
r
o
e
d
e
r
e
t
a
l
.
1
9
8
6
;
C
a
r
c
e
l
l
o
e
t
a
l
.
1
9
9
2
;
C
h
e
n
e
t
a
l
.
2
0
0
1
)
-
T
h
e
C
P
A
f
i
r
m
i
s
a
m
e
m
b
e
r
o
f
a
f
a
m
o
u
s
i
n
t
e
r
n
a
t
i
o
n
a
l
a
c
c
o
u
n
t
i
n
g
f
i
r
m
(
C
h
e
n
e
t
a
l
.
2
0
0
1
)
3
3
I
n
a
l
l
y
o
u
r
d
e
a
l
i
n
g
s
w
i
t
h
t
h
e
a
u
d
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t
f
i
r
m
a
n
d
i
n
d
i
v
i
d
u
a
l
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
,
t
h
e
a
u
d
i
t
f
i
r
m
a
n
d
i
t
s
r
e
p
r
e
s
e
n
t
a
t
i
v
e
s
n
e
v
e
r
e
n
g
a
g
e
i
n
a
n
y
a
c
t
i
o
n
s
t
h
a
t
w
o
u
l
d
c
o
m
p
r
o
m
i
s
e
i
t
s
/
t
h
e
i
r
i
n
d
e
p
e
n
d
e
n
c
e
e
i
t
h
e
r
i
n
f
a
c
t
o
r
i
n
a
p
p
e
a
r
a
n
c
e
.
-
I
n
a
l
l
y
o
u
r
d
e
a
l
i
n
g
s
w
i
t
h
t
h
e
C
P
A
f
i
r
m
,
a
n
d
w
i
t
h
i
n
d
i
v
i
d
u
a
l
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
,
t
h
e
C
P
A
f
i
r
m
a
n
d
i
t
s
r
e
p
r
e
s
e
n
t
a
t
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v
e
s
n
e
v
e
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e
n
g
a
g
e
d
i
n
a
n
y
a
c
t
i
o
n
s
t
h
a
t
w
o
u
l
d
c
o
m
p
r
o
m
i
s
e
i
t
s
/
t
h
e
i
r
i
n
d
e
p
e
n
d
e
n
c
e
e
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t
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e
r
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n
f
a
c
t
o
r
i
n
a
p
p
e
a
r
a
n
c
e
(
B
e
h
n
e
t
a
l
.
1
9
9
9
)
Table I.
Audit service
quality in CAT
103
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
3
8
1
3
3
9
1
2
3
7
1
0
3
5
4
8
1
9
1
8
1
4
2
1
1
1
4
2
3
0
1
T
h
e
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o
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t
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d
v
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r
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o
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o
f
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t
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b
u
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r
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c
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a
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d
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t
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m
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p
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a
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r
T
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d
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m
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p
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a
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d
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t
T
h
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t
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m
a
k
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t
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T
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p
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f
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)
T
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m
a
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r
(
B
e
h
n
e
t
a
l
.
1
9
9
9
)
T
h
e
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d
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t
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r
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a
d
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n
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(
S
u
c
h
e
r
e
t
a
l
.
1
9
9
8
)
T
h
e
C
P
A
f
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r
m
m
a
k
e
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x
t
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c
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(
C
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r
c
e
l
l
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e
t
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l
.
1
9
9
2
;
P
a
n
d
i
t
1
9
9
9
;
C
h
e
n
e
t
a
l
.
2
0
0
1
)
T
h
e
C
P
A
f
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k
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1
9
9
2
;
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9
9
;
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h
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2
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;
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v
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)
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8
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h
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Table I.
ARJ
21,2
104
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
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R
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T
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t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
indicate, for each of the 48 individual items, whether they agreed or disagreed that the
audit service quality item affects their evaluation of the audit services provided. The
scale was a seven-point Likert-type scale ranging from strongly disagree (23) to
strongly agree (þ3). The 48 items were randomized both within and across the 14
attributes (to the extent possible) to avoid halo effect and order effect biases which
could potentially occur if all the items comprising a particular attribute were clustered
together in the question order. Randomization also helped guard against social
desirability response bias (SDRB) to the extent that the attributes were not obvious to
respondents through clustering of the items for each attribute. (Column 5 of Table I
shows the order number for each of the 48 items in the questionnaire.) Anonymity for
respondents also helped guard against SDRB.
The second question asked respondents to consider the incumbent auditor who
provided their most recent audit. Respondents were asked to indicate to what extent
they were satis?ed with the quality of their most recent audit in terms of:
.
satisfaction with the audit ?rm; and
.
satisfaction with the audit team.
The scale was a seven-point Likert-type scale ranging from very dissatis?ed (23) to
very satis?ed (þ3)[6].
The study followed the Dillman (2000) Tailored Design Method as closely as
possible to ensure the questionnaire was clearly formatted and visually appealing to
respondents. An incentive for completion was provided in the form of a $10 charity
donation that the researcher made to the respondent’s preferred charity on receipt of
the completed questionnaire. The questionnaire was anonymous. The draft
questionnaire was pre-tested by potential respondents, staff of the NSW Department
of Local Government Finance, and academics. The content, ordering and terminology
were revised accordingly.
4.3 Administration
Different procedures were used to administer the survey questionnaires to the ?nance
professionals and the internal auditors. For the ?nance professionals, as noted
previously, the survey was administered at a local government conference in 2006. The
surveys and accompanying information statement were distributed during the
conference and respondents were instructed to return their questionnaire to a
con?dential ballot box maintained by the researchers during the conference. The booth
offered respondents a convenient mechanism to lodge the questionnaire, as well as
providing access to the researchers if questions arose.
The survey questionnaire was mailed to each of the 35 NSW internal auditors. Prior
to mailing, all councils were phoned to con?rm the contact details of their internal
auditors. Three follow-ups were conducted at fortnightly intervals, two by mail and
one by phone. For the mail follow-ups a complete mail-out was necessary as the
responses were anonymous and unidenti?able. Prior to the third mail-out however,
each internal auditor was phoned to ask if they had received the questionnaire and if
they had responded. Those that had responded were removed from the mailing list.
4.4 Dependent variable
The dependent variable in the hypothesis is the overall satisfaction with the quality of
audit services provided by the audit ?rm. Overall satisfaction with audit service
Audit service
quality in CAT
105
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
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T
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t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
quality was measured as the sum of the response scores for the two items in the second
question in the questionnaire; that is, the measure of overall satisfaction was obtained
by adding together the scores for satisfaction with the audit ?rm and satisfaction with
the audit team. This is consistent with Behn et al.’s (1997) measure of overall client
satisfaction with audit service quality and based on their argument that overall client
satisfaction comprises both satisfaction with the audit ?rm and satisfaction with the
audit team (Behn et al., 1997, pp. 10-11). The Cronbach a measure was 0.82 indicating
good scale reliability[7].
5. Results
5.1 Response rate
Of the 235 ?nance professionals attending the conference, 207 responded[8]. Of the 207,
22 were excluded because they were from states other than NSW, resulting in 185
responses from NSW ?nance professionals. Of the 35 internal auditors, 28 responded.
Hence, overall, 213 responses were received giving a response rate of 86 per cent
(213/248). Given the high-response rate, non-response bias was not considered to be a
threat to the validity of the results.
5.2 Descriptive statistics
Section 1 of the questionnaire asked respondents to indicate, on a scale of 23 (strongly
disagree) to þ3 (strongly agree), the extent to which they agreed or disagreed that each
of the 48 audit service quality items impacted on their evaluation of the quality of audit
services provided by their incumbent auditor. The results are presented in Table II[9].
Table II shows the distribution of responses to the 48 items, as well as the mean and
standard deviation for each item (ranked in order from the item with the highest
reported impact on evaluation of audit service quality to the lowest). The “n” column
shows the number of responses for each item. For 39 of the 48 items, n is 213 (185
?nance professionals plus 28 internal auditors), while for the remaining nine items n is
slightly below 213 re?ecting some incomplete responses.
There were two items with a large number of NA responses; item 19 (there is
frequent communication between the audit team and the council’s audit committee)
and item 47 (the external auditors co-operate with the internal auditors) with 35 and 50
NA responses, respectively. The high NA response here re?ects the fact that not all
councils have internal auditors and/or audit committees. These two items are included
in Table II to show their importance ranking for the respondents who did score these
items, and to allow their inclusion in the analysis for RQ1. However, they are excluded
from the analysis for RQ2; that is, the relationship between audit quality attributes and
satisfaction with incumbent auditors.
5.3 Research question 1: attributes important in evaluating audit service quality
The ?rst research question is what audit service quality attributes are perceived to be
important to NSW local council ?nance professionals and internal auditors when
evaluating the quality of their audit services? The data to address this question were
the responses to the ?rst question in the questionnaire; that is, the importance ranking
of the 48 individual audit service quality items provided by the respondents, based on
the mean response to each item[10].
ARJ
21,2
106
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(
c
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Table II.
The importance of audit
service quality attributes
in impacting evaluation
of audit service quality
Audit service
quality in CAT
107
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.
5
0
1
.
3
9
9
2
8
4
4
T
h
e
a
u
d
i
t
s
u
p
e
r
v
i
s
o
r
h
a
s
b
e
e
n
o
n
t
h
e
a
u
d
i
t
f
o
r
a
t
l
e
a
s
t
t
w
o
t
o
t
h
r
e
e
y
e
a
r
s
2
1
3
7
7
9
2
6
2
9
7
3
6
1
1
1
.
4
8
1
.
5
4
7
2
9
2
4
T
h
e
a
u
d
i
t
e
n
g
a
g
e
m
e
n
t
p
a
r
t
n
e
r
a
n
d
m
a
n
a
g
e
r
m
a
k
e
f
r
e
q
u
e
n
t
v
i
s
i
t
s
t
o
t
h
e
c
o
u
n
c
i
l
d
u
r
i
n
g
t
h
e
c
o
n
d
u
c
t
o
f
t
h
e
a
u
d
i
t
2
1
3
4
2
1
4
1
9
4
8
8
0
4
4
2
1
.
4
7
1
.
3
2
1
(
c
o
n
t
i
n
u
e
d
)
Table II.
ARJ
21,2
108
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
D
i
s
t
r
i
b
u
t
i
o
n
o
f
r
e
s
p
o
n
s
e
s
(
f
r
e
q
u
e
n
c
y
)
R
a
n
k
A
t
t
r
i
b
u
t
e
n
u
m
b
e
r
D
e
s
c
r
i
p
t
i
o
n
n
2
3
2
2
2
1
0
1
2
3
N
A
M
e
a
n
S
D
3
0
1
9
T
h
e
r
e
i
s
f
r
e
q
u
e
n
t
c
o
m
m
u
n
i
c
a
t
i
o
n
b
e
t
w
e
e
n
t
h
e
a
u
d
i
t
t
e
a
m
a
n
d
t
h
e
c
o
u
n
c
i
l
’
s
a
u
d
i
t
c
o
m
m
i
t
t
e
e
2
1
3
6
3
9
2
5
3
2
6
8
3
5
3
5
1
.
3
5
1
.
4
4
7
3
1
5
T
h
e
a
u
d
i
t
?
r
m
p
a
r
t
i
c
i
p
a
t
e
s
i
n
t
h
e
p
e
e
r
r
e
v
i
e
w
p
r
o
c
e
s
s
,
a
n
d
i
t
s
m
o
s
t
r
e
c
e
n
t
p
e
e
r
r
e
v
i
e
w
r
e
p
o
r
t
w
a
s
a
c
l
e
a
n
o
n
e
2
1
3
2
8
3
4
0
3
8
7
1
3
6
1
5
1
.
3
3
1
.
3
3
2
3
2
3
9
T
h
e
a
u
d
i
t
?
r
m
m
a
k
e
s
e
x
t
e
n
s
i
v
e
u
s
e
o
f
s
t
a
t
i
s
t
i
c
a
l
t
e
c
h
n
i
q
u
e
s
i
n
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
2
1
3
3
1
2
4
1
5
0
7
2
3
4
1
1
.
3
1
1
.
1
9
9
3
3
4
8
T
h
e
n
u
m
b
e
r
o
f
h
o
u
r
s
s
p
e
n
t
b
y
t
h
e
a
u
d
i
t
t
e
a
m
t
o
c
o
m
p
l
e
t
e
t
h
e
a
u
d
i
t
(
f
r
o
m
t
h
e
b
e
g
i
n
n
i
n
g
o
f
?
e
l
d
w
o
r
k
t
o
t
h
e
a
u
d
i
t
r
e
p
o
r
t
d
a
t
e
)
2
1
1
2
8
5
1
4
9
6
0
2
5
1
6
1
.
1
9
1
.
1
4
4
3
4
6
T
h
e
a
u
d
i
t
?
r
m
a
c
t
i
v
e
l
y
e
n
c
o
u
r
a
g
e
s
s
t
a
f
f
m
e
m
b
e
r
s
t
o
t
a
k
e
c
o
u
r
s
e
s
a
n
d
a
t
t
e
n
d
s
e
m
i
n
a
r
s
i
n
?
e
l
d
s
w
h
e
r
e
t
h
e
?
r
m
h
a
s
m
a
j
o
r
c
l
i
e
n
t
s
2
1
3
2
1
2
7
3
8
4
9
6
1
3
5
9
1
.
1
7
1
.
4
0
5
3
5
2
5
T
h
e
p
e
r
c
e
n
t
a
g
e
t
h
a
t
t
h
e
c
o
u
n
c
i
l
a
u
d
i
t
f
e
e
r
e
p
r
e
s
e
n
t
s
t
o
t
h
e
t
o
t
a
l
a
u
d
i
t
f
e
e
r
e
v
e
n
u
e
o
f
t
h
e
a
u
d
i
t
?
r
m
i
s
n
o
t
m
a
t
e
r
i
a
l
2
1
2
6
4
1
2
4
8
3
7
5
8
4
0
7
1
.
1
5
1
.
4
7
1
3
6
8
T
h
e
a
u
d
i
t
?
r
m
i
s
s
k
i
l
l
f
u
l
i
n
d
e
v
i
s
i
n
g
a
c
c
e
p
t
a
b
l
e
a
c
c
o
u
n
t
i
n
g
t
r
e
a
t
m
e
n
t
s
f
o
r
t
r
a
n
s
a
c
t
i
o
n
s
t
h
a
t
g
e
n
e
r
a
t
e
r
e
s
u
l
t
s
t
h
a
t
c
o
u
n
c
i
l
m
a
n
a
g
e
m
e
n
t
w
a
n
t
s
2
1
3
8
1
4
2
1
3
0
3
7
6
4
3
8
1
0
.
9
7
1
.
6
6
3
3
7
2
6
T
h
e
p
e
r
s
o
n
n
e
l
o
n
t
h
e
e
n
g
a
g
e
m
e
n
t
b
e
l
o
w
m
a
n
a
g
e
r
l
e
v
e
l
h
a
v
e
p
a
s
s
e
d
t
h
e
p
r
o
f
e
s
s
i
o
n
a
l
b
o
d
i
e
s
’
e
x
a
m
s
2
1
3
4
9
1
4
4
9
4
6
7
2
1
6
3
0
.
9
2
1
.
3
5
7
3
8
4
0
T
h
e
a
u
d
i
t
r
e
p
o
r
t
a
n
d
w
o
r
k
p
a
p
e
r
s
r
e
c
e
i
v
e
a
s
e
c
o
n
d
p
a
r
t
n
e
r
r
e
v
i
e
w
2
1
3
1
1
1
9
5
4
4
3
5
1
2
9
6
0
.
9
2
1
.
3
8
4
3
9
1
0
T
h
e
a
u
d
i
t
?
r
m
d
e
v
e
l
o
p
s
s
t
r
i
n
g
e
n
t
t
i
m
e
b
u
d
g
e
t
s
f
o
r
e
a
c
h
a
u
d
i
t
a
r
e
a
a
n
d
e
x
p
e
c
t
s
i
t
s
p
e
o
p
l
e
t
o
m
e
e
t
t
h
e
m
2
1
3
4
1
8
1
8
4
6
4
3
5
2
2
6
6
0
.
7
7
1
.
5
4
1
4
0
2
8
B
e
f
o
r
e
a
c
c
e
p
t
i
n
g
a
n
e
w
c
l
i
e
n
t
,
t
h
e
C
P
A
?
r
m
c
o
n
d
u
c
t
s
a
p
r
e
-
e
n
g
a
g
e
m
e
n
t
i
n
v
e
s
t
i
g
a
t
i
o
n
a
n
d
g
o
e
s
t
h
r
o
u
g
h
r
i
s
k
c
o
n
t
r
o
l
p
r
o
c
e
d
u
r
e
s
i
n
c
l
u
d
i
n
g
t
h
e
c
o
n
d
u
c
t
o
f
a
b
a
c
k
g
r
o
u
n
d
s
e
a
r
c
h
o
n
s
e
n
i
o
r
m
a
n
a
g
e
m
e
n
t
o
f
t
h
e
p
e
r
s
p
e
c
t
i
v
e
c
l
i
e
n
t
2
1
3
5
9
1
4
6
8
3
4
4
5
2
4
1
4
0
.
7
5
1
.
4
4
5
4
1
4
2
T
h
e
s
i
z
e
o
f
t
h
e
a
u
d
i
t
?
r
m
i
n
t
e
r
m
s
o
f
i
t
s
t
o
t
a
l
r
e
v
e
n
u
e
a
n
d
n
u
m
b
e
r
o
f
a
u
d
i
t
o
r
s
i
s
m
u
c
h
l
a
r
g
e
r
t
h
a
n
t
h
e
a
v
e
r
a
g
e
s
i
z
e
i
n
t
h
e
r
e
g
i
o
n
2
1
3
8
1
5
2
7
6
3
3
2
3
8
2
6
4
0
.
5
0
1
.
5
8
8
(
c
o
n
t
i
n
u
e
d
)
Table II.
Audit service
quality in CAT
109
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
D
i
s
t
r
i
b
u
t
i
o
n
o
f
r
e
s
p
o
n
s
e
s
(
f
r
e
q
u
e
n
c
y
)
R
a
n
k
A
t
t
r
i
b
u
t
e
n
u
m
b
e
r
D
e
s
c
r
i
p
t
i
o
n
n
2
3
2
2
2
1
0
1
2
3
N
A
M
e
a
n
S
D
4
2
7
T
h
e
a
u
d
i
t
?
r
m
t
h
a
t
i
s
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
p
r
o
v
i
d
e
s
n
o
c
o
n
s
u
l
t
i
n
g
s
e
r
v
i
c
e
s
f
o
r
t
h
e
c
l
i
e
n
t
2
1
3
1
8
3
5
2
1
2
7
2
6
4
7
3
7
2
0
.
4
1
1
.
9
9
4
4
3
2
1
A
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
a
r
e
r
o
t
a
t
e
d
o
f
f
t
h
e
a
u
d
i
t
p
e
r
i
o
d
i
c
a
l
l
y
2
1
2
8
1
7
2
6
6
1
3
9
4
7
1
2
2
0
.
4
0
1
.
4
9
4
4
4
1
1
T
h
e
a
u
d
i
t
?
r
m
h
a
s
a
h
i
g
h
-
a
u
d
i
t
s
t
a
f
f
t
u
r
n
o
v
e
r
r
a
t
e
2
1
3
1
8
4
3
2
0
2
8
2
7
4
1
3
4
2
0
.
2
4
1
.
9
9
8
4
5
9
T
h
e
a
u
d
i
t
?
r
m
h
a
s
a
p
o
l
i
c
y
o
n
t
h
e
m
a
x
i
m
u
m
n
u
m
b
e
r
o
f
h
o
u
r
s
p
e
r
d
a
y
a
n
d
p
e
r
w
e
e
k
t
h
a
t
i
t
s
s
t
a
f
f
c
a
n
w
o
r
k
2
1
3
9
2
4
2
5
9
3
2
4
1
9
7
1
2
2
0
.
0
8
1
.
3
4
8
4
6
3
5
T
h
e
c
o
s
t
t
o
t
h
e
a
u
d
i
t
?
r
m
o
f
d
i
f
f
e
r
e
n
t
a
u
d
i
t
p
r
o
c
e
d
u
r
e
s
,
i
n
t
e
r
m
s
o
f
t
i
m
e
e
x
p
e
n
d
e
d
,
i
s
t
h
e
m
a
j
o
r
c
r
i
t
e
r
i
o
n
a
s
t
o
w
h
e
t
h
e
r
a
c
r
i
t
e
r
i
o
n
i
s
u
s
e
d
2
1
2
1
5
3
0
2
4
6
9
3
7
1
6
1
3
8
2
0
.
1
0
1
.
5
6
1
4
7
1
4
T
h
e
a
u
d
i
t
?
r
m
’
s
a
t
t
i
t
u
d
e
i
s
o
n
e
o
f
a
s
k
e
p
t
i
c
,
n
o
t
o
n
e
o
f
a
c
l
i
e
n
t
a
d
v
o
c
a
t
e
2
1
3
2
3
4
5
3
0
3
9
2
9
2
9
1
6
2
2
0
.
2
6
1
.
8
1
6
4
8
3
0
T
h
e
a
u
d
i
t
?
r
m
t
e
n
d
s
t
o
h
a
v
e
d
e
c
e
n
t
r
a
l
i
s
e
d
o
f
?
c
e
s
r
a
t
h
e
r
t
h
a
n
c
e
n
t
r
a
l
i
s
e
d
o
f
?
c
e
s
2
1
2
2
9
2
9
2
4
7
6
2
1
2
3
7
3
2
0
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3
9
1
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6
2
0
Table II.
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Table II shows that the ten items most likely to impact on respondents’ evaluation of
local council audit service quality are dominated by items from the attributes of
Industry Expertise (three items), Council Experience (two items) and Technical
Competence (two items). The seven most important items are from these three
attributes. Speci?cally, the three most highly rated items are (with the attribute to
which they are related shown in parentheses after each item):
(1) the partner assigned to the audit engagement is very knowledgeable about the
industry (Industry Expertise);
(2) the audit ?rm is considered to be a specialist in local government audit
(Industry Expertise); and
(3) the audit partner on the engagement is a CA/CPA (Technical Competence).
The next four items are:
(4) the audit ?rm has been performing the audit for at least two to three years
(Council Experience);
(5) the audit ?rm conducting the audit has other local council audit clients
(Industry Expertise);
(6) the audit engagement partner has been on the audit for at least two to three
years (Council Experience); and
(7) the auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (Technical Competence).
The remaining three items in the ten most important are:
(8) in all your dealings with the audit ?rm and individual team members, the audit
?rm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance
(Independence);
(9) the audit staff assigned to the engagement have very high-ethical standards
(Ethical Standards); and
(10) the overall reputation of the ?rm is positive (Due Care).
It can also be observed from Table II that, overall, the items least likely to impact on
evaluation of audit service quality (those ranked as the ten least important items) relate
to the audit service quality attributes of Field Work Conduct (two items), Quality
Commitment (two items), Degree of Individual Responsibility (two items), Freshness of
Perspective (two items), Independence (one item), and Skepticism (one item).
Speci?cally, the items (and attributes to which they are related shown in
parentheses) from the tenth least important item to the least important are:
(1) the audit ?rm develops stringent time budgets for each audit area and expects
its people to meet them (Field Work Conduct);
(2) before accepting a new client, the audit ?rm conducts a pre-engagement
investigationand goes through risk control procedures including the conduct of a
background search on senior management of the prospective client (Quality
Commitment);
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(3) the size of the audit ?rm in terms of its total revenue and number of auditors is
much larger than the average size in the region (Degree of Individual
Responsibility);
(4) the audit ?rm that is conducting the audit provides no consulting services for
the client (Independence);
(5) audit team members are rotated off the audit periodically (Freshness of
Perspective);
(6) the audit ?rm has a high staff turnover rate (Freshness of Perspective);
(7) the audit ?rm has a policy on the maximum number of hours per day and per
week that its staff can work (Quality Commitment);
(8) the cost to the audit ?rmof different audit procedures, in terms of time expended,
is the major criterion as to whether a criterion is used (Field Work Conduct);
(9) the audit ?rm’s attitude is one of a skeptic, not one of client advocate
(Skepticism); and
(10) the audit ?rm tends to have decentralized of?ces rather than centralized of?ces
(Degree of Individual Responsibility).
5.4 Research question 2: attributes important in evaluating satisfaction with audit
service quality
The second research question is what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by local
council incumbent auditors. This question was formulated into the hypothesis
developed in Section 3. This hypothesis related council ?nance professionals’ and
internal auditors’ perceptions of each of the 14 audit service quality attributes to their
evaluation of overall satisfaction with their auditors. The data to address this question,
and to test the hypothesis, were the responses to the ?rst question in the questionnaire
(the importance ratings of the 48 individual audit service quality items as perceived by
the ?nance professionals and internal auditors) and the responses to the second
question (the evaluation of overall satisfaction with the audit service quality of their
incumbent auditors).
The 48 items were factor analysed using con?rmatory factor analysis. That is, factor
analysis was applied to the items theoretically related to each of the 14 attributes. The
factors were then used as independent variables in an OLS regression model explaining
overall audit service quality satisfaction. As noted previously, overall satisfaction with
audit service quality was measured as the sum of the scores for satisfaction with the
incumbent audit ?rmand satisfaction with the incumbent audit team (Behn et al., 1997).
The factor analyses and multiple regressions use 155 complete responses. Again as
noted previously, items 19 and 47 were excluded because of their high number of NA
responses. Also excluded were all other NA and incomplete responses.
Table III presents the results of the con?rmatory factor analysis performed using
the Principal Components extraction method with Varimax (Kaiser Normalisation)
rotation. Table III shows that 12 factors were extracted, based on extraction criteria of
a Scree Plot analysis and an absolute value coef?cient cut-off of 0.45. Factors were not
extracted for the attributes of executive involvement, ethical standards and skepticism
because these attributes consisted of only one item. Ten of the 12 factors were
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Attribute no. Attribute description
Factors (per cent)
Council experience (54.03 per cent)
43 The audit manager has been on the audit for at least two to three years (0.840)
44 The audit supervisor has been on the audit for at least two to three years (0.804)
1 The audit ?rm has been performing the audit for at least two to three years
(0.640)
3 The audit engagement partner has been on the audit for at least two to three
years (0.632)
Industry expertise (53.99 per cent)
4 The partner assigned to the audit engagement is very knowledgeable about the
industry (0.850)
2 The audit ?rm is considered to be a specialist in local government audit (0.835)
20 The audit ?rm conducting the audit has other local council audit clients (0.616)
45 The audit manager and supervisor assigned to the engagement are very
knowledgeable about the industry (0.600)
Responsiveness (61.84 per cent)
Responsiveness 1 (37.07)
23 The audit ?rm keeps council management informed during the year about
accounting and ?nancial reporting developments that affect the council (0.861)
22 There is frequent communication between the audit team and council
management (0.816)
41 The auditor adds value to the entity in terms of generating useful ideas for
improvement (0.734)
29 The audit ?rm reports internal control de?ciencies and the auditors’
recommendations on internal control are useful (0.708)
Responsiveness 2 (24.77 per cent)
8 The audit ?rm is skillful in devising acceptable accounting treatments for
transactions that generate results that council management wants (0.806)
46 The auditors are mindful of how busy the council’s key ?nance staff are and
contact these individuals only to the extent necessary (0.652)
15 The audit ?rm is agreeable to completing the audit by a date the client has set
(0.628)
Technical competence (47.77 per cent)
16 The auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (0.782)
27 The audit partner on the engagement is a CA/CPA (0.645)
26 The personnel on the engagement below manager level have passed the
professional bodies’ exams (0.637)
Independence (38.50 per cent)
25 The percentage that the council audit fee represents to the total audit fee revenue
of the audit ?rm is not material (0.760)
33 In all your dealings with the audit ?rm and individual audit team members, the
audit ?rm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance (0.757)
7 The audit ?rmthat is conducting the audit provides no consulting services for the
client (20.065)
Due care (58.74 per cent)
31 The overall reputation of the audit ?rm is positive (0.832)
17 The audit team members as a group always exercised due care throughout the
engagement (0.785)
(continued)
Table III.
Con?rmatory factor
analysis
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Attribute no. Attribute description
36 The audit ?rm has rarely been found negligent in lawsuits brought against it
(alleging inadequate audit performance) (0.673)
Quality commitment (33.55 per cent)
5 The audit ?rm participates in the peer review process, and its most recent peer
review report was a clean one (0.695)
34 The audit ?rm has strict guidelines on the procedures that must be completed
before signing the audit report (0.615)
6 The audit ?rm actively encourages staff members to take courses and attend
seminars in ?elds where the ?rm has major clients (0.613)
28 Before accepting a new client, the CPA ?rm conducts a pre-engagement
investigation and goes through risk control procedures including the
conduct of a background search on senior management of the perspective
client (0.601)
40 The audit report and work papers receive a second partner review (0.550)
32 The work performed by inexperienced members of the audit team is supervised
by the audit team manager (0.512)
9 The audit ?rm has a policy on the maximum number of hours per day and per
week that its staff can work (0.431)
Field work conduct (50.31 per cent)
Field work conduct 1 (28.79 per cent)
37 The audit team members as a group have an adequate understanding of the
operations of the council (0.809)
38 The audit team members conducted the audit ?eld work in an appropriate
manner (0.775)
12 The audit ?rm conducts a thorough study of the client’s system of internal
control (0.633)
39 The audit ?rm makes extensive use of statistical techniques in conducting the
audit (0.631)
13 The audit ?rm makes extensive use of computers in conducting the audit
(0.438)
Field work conduct 2 (21.51 per cent)
35 The cost to the audit ?rm of different audit procedures, in terms of time
expended, is the major criterion as to whether a procedure is used (0.759)
10 The audit ?rm develops stringent time budgets for each audit area and expects
its people to meet them (0.612)
48 The number of hours spent by the audit team to complete the audit (from the
beginning of ?eld work to the audit report date) (0.523)
Freshness of perspective (57.29 per cent)
11 The audit ?rm has a high audit staff turnover rate (0.757)
21 Audit team members are rotated off the audit periodically (0.757)
Individual responsibility (56.63 per cent)
42 The size of the audit ?rm in terms of its total revenue and number of auditors is
much larger than the average size in the region (0.752)
30 The audit ?rm tends to have decentralised of?ces rather than centralised of?ces
(0.752)
Notes: Each of the 14 attributes in the taxonomy in Table I was factor analysed. The number in
the parentheses after the factor label is the variance accounted for by the factor. The numbers in
parentheses after the original attribute descriptions are the factor loadings from the pooled factor
analysis. The extraction method is principal components analysis. The orthogonal
rotation method used is Varimax with Kaiser Normalisation. The factor loading co-ef?cient
cut-off is 0.45
Table III.
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one-factor solutions consistent with the theoretical taxonomy of audit quality
attributes that was based on Carcello et al. (1992). Two factors were extracted for the
attributes of Responsiveness and Field Work Conduct.
The factors and the three attributes of Executive Involvement, Ethical Standards
and Skepticism were included as independent variables in the OLS regression model
explaining overall audit service quality satisfaction. The results of the hypothesis
testing are presented in Table IV. Table IV shows that the OLS regression model is
signi?cant (F ¼ 6.821, p # 0.000) with an adjusted R
2
of 34.6 per cent. The coef?cients
of the factor scores for the attribute groupings Council Experience (t ¼ 2.518,
p , 0.013), Independence (t ¼ 2.136, p , 0.034), Responsiveness 1 (t ¼ 2.998,
p , 0.003) and Responsiveness 2 (t ¼ 2.675, p , 0.008), as well as the coef?cient for
the Ethical Standards attribute (t ¼ 1.781, p , 0.077) are, as expected, positive and
signi?cant. The coef?cient for Skepticism was, as expected, negative and signi?cant
(t ¼ 22.564, p , 0.011)[11].
Table V presents a summary of the hypothesis testing using con?rmatory factor
analysis. Table V shows that the hypothesis was supported for ?ve of the audit service
quality attributes, speci?cally Council Experience, Responsiveness, Independence,
Ethical Standards and Skepticism. Hence, overall satisfaction with audit service
quality in the NSW local council context is a positive function of the experience of the
audit ?rm and the audit team with the council, the independence of the audit ?rm from
the council, the extent to which the audit ?rm is responsive to the council’s needs, and
the ethical standards of the audit team, and a negative function of the skepticism of the
audit team members.
OLS regression model relating audit service quality attributes to satisfaction with the overall quality
of audit services provided
a,b
Factor score/attribute Coef?cient t-statistic p-value (2 tail)
Constant 2.951 5.180 0.000
Council experience 0.427 2.518 0.013
* *
Industry expertise 0.206 0.964 0.337
Responsiveness_1 0.735 2.998 0.003
* * *
Responsiveness_2 0.536 2.675 0.008
* * *
Technical competence 20.181 20.832 0.407
Independence 0.378 2.136 0.034
* *
Due care 0.066 0.295 0.769
Quality commitment 20.051 20.217 0.829
Field work conduct_2 0.030 0.157 0.875
Freshness of perspective 20.123 20.783 0.435
Individual responsibility 0.080 0.473 0.637
Executive involvement 20.134 20.889 0.376
Ethical standards 0.442 1.781 0.077
*
Skepticism 20.224 22.564 0.011
* *
Notes:
*
Signi?cant at the 10 per cent level;
* *
signi?cant at the 5 per cent level;
* * *
signi?cant at the
1 per cent level.
a
The dependent variable is overall satisfaction with the quality of audit services
provided:
b
Field work conduct_1 is excluded due to multicollinearity. Sample size: 155; F-statistic:
6.821; signi?cant at the p # 0.000; adjusted R
2
: 34.6 per cent
Table IV.
Audit service quality
attributes and
satisfaction
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5.5 Research question 2: additional analysis
We also conducted exploratory factor analysis on the 48 individual items of audit
service quality, and used the resulting factors in an OLS regression model explaining
overall audit service quality satisfaction. Using the Principal Components extraction
method with Varimax (Kaiser Normalisation) rotation, factors were extracted based on
an eigenvalue greater than one and an absolute value coef?cient cut-off of 0.40,
consistent with Carcello et al. (1992).
Some differences were found between the factor structure developed from the
exploratory and con?rmatory factor analyses. In particular, the exploratory factor
analysis produced a 13 factor structure, the ?rst of which was dominated by items
from the Responsiveness and Field Work Conduct audit service quality attributes. This
contrasted with the con?rmatory factor analysis where, as noted above,
Responsiveness and Field Work Conduct each split into two separate factors.
For Responsiveness, the ?rst factor in the con?rmatory analysis (Responsiveness 1)
comprised four items:
(1) the audit ?rm keeps council management informed during the year about
accounting and ?nancial reporting developments that affect the council;
(2) there is frequent communication between the audit team and council
management;
(3) the auditor adds value to the entity in terms of generating useful ideas for
improvement; and
(4) the audit ?rm reports internal control de?ciencies and the auditors’
recommendations on internal control are useful.
The second factor (Responsiveness 2) comprised three items:
(1) the audit ?rm is skilful in devising acceptable accounting treatments for
transactions that generate results that council management wants;
(2) the auditors are mindful of how busy the council’s key ?nance staff are and
contact these individuals only to the extent necessary; and
(3) the audit ?rm is agreeable to completing the audit by a date the client has set.
Hypothesis Expected direction Signi?cant p , 0.05 Direction
Council experience (H1) þ U U
Industry expertise (H2) þ X
Responsiveness (H3) þ U U
Technical competence (H4) þ X
Independence (H5) þ U U
Due care (H6) þ X
Quality commitment (H7) þ X
Executive involvement (H8) þ X
Field work conduct (H9) þ X
Audit committee (H10) þ Not tested
Ethical standards (H11) þ U U
Skepticism (H12) 2 U U
Freshness of perspective (H13) þ X
Individual responsibility (H14) þ X
Table V.
Summary of hypothesis
testing using
con?rmatory factor
analysis
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These two factors are logically different. The ?rst relates to operational aspects of the
interaction of the audit ?rm and audit team with the client council that enhance the
quality of the council’s internal control system and its accounting and ?nancial
reporting. The second may be seen as a “client appeasing” component of responsiveness.
While both are legitimate aspects of client satisfaction with the level of audit service
quality, they are different in nature. This difference was apparent in the exploratory
factor analysis. In the exploratory analysis, the items in the ?rst factor (Responsiveness
1 relating to operational aspects which enhance quality) loaded not with the items in the
second (client-appeasing) factor (Responsiveness 2), but with items from the attribute
grouping of Field Work Conduct, speci?cally the items that loaded on the ?rst of the two
factors extracted for Field Work Conduct.
For Field Work Conduct, the ?rst factor in the con?rmatory factor analysis (Field
Work Conduct 1) comprised the attributes:
.
the audit team members as a group have an adequate understanding of the
operations of the council;
.
the audit team members conducted the audit ?eld work in an appropriate
manner;
.
the audit ?rm conducts a thorough study of the client’s system of internal
control;
.
the audit ?rm makes extensive use of statistical techniques in conducting the
audit; and
.
the audit ?rm makes extensive use of computers in conducting the audit.
The second factor (Field Work Conduct 2) comprised the attributes:
.
the cost to the audit ?rm of different audit procedures, in terms of time expended,
is the major criterion as to whether a procedure is used;
.
the audit ?rm develops stringent time budgets for each audit area and expects its
people to meet them; and
.
the number of hours spent by the audit team to complete the audit (from the
beginning of ?eld work to the audit report date).
Again, these two factors are logically different. The ?rst (Field Work Conduct 1) relates
to operational aspects of ?eld work, while the second (Field Work Conduct 2) relates to
audit time and cost considerations.
The fact that the exploratory factor analysis placed the items Responsiveness 1 and
Field Work Conduct 1, from the con?rmatory factor analysis based on Carcello et al.
(1992), in the same factor is logical. Both relate to operational aspects of interactions of
the audit ?rm and audit team with the council in the conduct of the audit, leading to
enhanced outcomes in the internal control systems and accounting and ?nancial
reporting of the council.
When used in the OLS regression explaining overall satisfaction with audit service
quality, the factors produced from the exploratory factor analysis showed considerable
similarity in terms of the hypothesis results with those from the con?rmatory factor
analysis. Four of the ?ve attributes found to be positively related to overall satisfaction
with audit service quality in the analysis based on the con?rmatory factor analysis
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also dominated the ?rst three factors identi?ed in the exploratory factor analysis.
These were the attributes relating to Responsiveness, Independence, Ethical Standards
and Council Experience. With regard to the attribute of skepticism, the regression
based on the exploratory factor analysis showed Skepticism to be negatively and
signi?cantly associated with satisfaction, again consistent with the result for the
regression based on the con?rmatory factor analysis. The regression based on the
exploratory factor analysis found two additional attributes to be positively related to
satisfaction with audit service quality. These were Industry Expertise and Executive
Involvement in the audit.
6. Conclusions
This study addressed two research questions. The ?rst was what audit quality
attributes are perceived to be important to NSW local council ?nance professionals and
internal auditors when evaluating the quality of audit services provided by their
incumbent auditor? The second was what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by their
incumbent auditor?
With respect to the ?rst question, the study found that the audit quality attributes
perceived as most important in evaluating audit service quality were industry
expertise, council experience, technical competence, independence, ethical standards
and due care. The items comprising these attributes showed that local council ?nance
professionals and internal auditors perceived a quality audit service when the audit
partner and engagement staff are very knowledgeable about the industry and with
accounting and auditing standards generally, when the audit ?rm is considered to be a
specialist in local government, when the audit ?rm and engagement staff have gained
knowledge of and experience with the council in prior years, and where the audit staff
exercise independence and due care. The attribute groupings considered least
important by local council ?nance professionals and internal auditors included
skepticism, freshness of perspective, the size of the audit ?rm and the provision of
non-audit services.
With respect to the second question, ?ve audit quality attributes were found to be
related to overall satisfaction with audit service quality. Satisfaction with audit service
quality was found to be higher when the audit ?rm and team had experience with the
council, were responsive to council needs, were independent, and maintained
high-ethical standards. Satisfaction was higher when the audit ?rm and team
maintained a low level of skepticism.
These results are consistent with Behn et al. (1997), who also found that experience
with the client and responsiveness to client needs were positively associated with client
satisfaction, and that skepticism was negatively associated with satisfaction, in the
non-CAT context of their study. The results are also consistent with Pandit (1999) who
found that clients’ intention to retain their incumbent audit ?rm was positively
associated with responsiveness to client needs.
Behn et al. (1997) also found industry expertise and executive involvement in the
audit to be positively associated with client satisfaction. These associations were not
found in this study when the attributes of Carcello et al. (1992) were used as the
independent variables in the hypothesis testing. However, they were found to be
positively associated with satisfaction in the additional analysis when exploratory
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factor analysis was used to generate the independent variables for the hypothesis
testing. This suggests that the failure to ?nd their signi?cance in the original
hypothesis testing may be a result of the constraints of imposing the Carcello et al.
(1992) factor structure. The Carcello et al. (1992) factor structure may not completely ?t
different contexts of study and may fail to reveal some associations of signi?cance in
those contexts. Future research into the association between audit quality attributes
and satisfaction with audit service quality should be mindful of the appropriateness of
the Carcello et al. (1992) factor structure in different contexts and with different cohorts
of respondents.
Our study provides several contributions to the literature and to practice. First, the
consistency of our ?ndings in a CAT context with those of Behn et al. (1997) and Pandit
(1999) in non-CAT contexts, suggests that the concerns that CAT may lead to the
impairment of audit independence and quality may not be founded. Our study has
shown considerable consistency of the importance of audit quality attributes in both
CAT and non-CAT contexts. This suggests that, to the extent that client perceptions of
the importance of audit quality attributes in?uence client choice of, and satisfaction
with, auditors, those perceptions are similar in the CAT context of our study and the
non-CAT contexts of other studies. CAT has been argued to be a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit ?rms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005).
Our study suggests that policy-setters may be able to consider the bene?ts of CAT as a
regulatory form of audit procurement without necessarily incurring audit
independence and quality costs.
A second practical contribution of our study is that it allows audit ?rms to better
understand the audit service quality attributes valued by local council clients, and,
consequently, to differentiate their promotional and service-provision strategies to
accord with those attributes, as well as to improve their own audit quality in a local
council context and to deliver more satisfaction to local council clients. Audit ?rms
may be able to focus on a speci?c and reduced set of audit service quality attributes
that we have found to be most valued by local council clients; in particular, experience
with the council, responsiveness to council needs, independence and the maintenance
of high-ethical standards.
A limitation of the study is that audit quality was measured using perceptions of
audit service quality by local council ?nance professionals and internal auditors in a
CAT context. The perceptions, therefore, are those of clients as preparers of local
council ?nancial statements, rather than of external parties such as auditors or users of
those statements. As such, the ?ndings might not re?ect audit quality as perceived by
other parties interested in local government ?nancial reporting. Future research into
audit quality in local government, and in a CAT context, could well be directed at
non-preparer interest groups such as auditors, government regulatory bodies and other
users of local council ?nancial statements, and could also be directed to different
competitive bidding audit procurement regimes other than the CAT context of NSW
local government.
Audit service
quality in CAT
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Notes
1. The marketing literature discusses service quality in terms of the ServQual construct. This
construct consists of ?ve dimensions used to assess service quality; reliability,
responsiveness, assurance, empathy and tangibles (Zeithaml and Bitner, 2000, p. 82).
2. Several of the studies in this literature distinguish between audit ?rm and audit team
attributes (Schroeder et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Behn et al., 1997;
Behn et al., 1999), although the attributes comprising the audit ?rm and audit team
constructs are only operationalised in Schroeder et al. (1986) and Aldhizer et al. (1995).
3. It should be noted, however, that audit ?rms that become too responsive to the needs of the
client council may compromise their independence, with auditor-client con?icts being
resolved in favour of the council, resulting in a lower quality audit.
4. However, audit teams that are rotated too frequently are likely to consist of team members
who are unfamiliar with the operations of the council and do not have the experience
necessary to detect errors or irregularities.
5. The NSW Department of Local Government advised that, given the detail of the
questionnaire, the best way to obtain a good response rate from the ?nance professionals
was to administer the survey at a conference. As it was a national conference however, there
were ?nancial professionals from inter-state councils attending who completed the
questionnaire along with the NSW ?nance professionals. The responses for inter-state
respondents were excluded from the analysis.
6. Consistent with Schroeder et al. (1986, p. 89), audit quality was not de?ned in the survey to
avoid demand effects.
7. In terms of sensitivity analysis, three dependent variables were used: (1) satisfaction with the
audit ?rm; (2) satisfaction with the audit team; and (3) satisfaction with the overall quality of
audit services provided. The results were generally consistent regardless of which
dependent variable was used.
8. The high-response rate is due to the support of the survey by the NSWFinance Professionals
Executive, particularly the chairperson, Michael Sewell, and the NSW Department of Local
Government, particularly the Director, Performance Management and Compliance, Grahame
Gibbs.
9. t-Tests of differences between the two groups showed signi?cant differences at the 5 per cent
level for only two of the 48 items. The responses for ?nance professionals and internal
auditors were pooled.
10. All NA responses were excluded in calculating the means for ranking.
11. The attribute grouping Field Work Conduct 1 was excluded from the regression because of
high correlations (between 0.506 and 0.593) with some other variables. This attribute
grouping was not signi?cant when included in the regression and its exclusion improved the
signi?cance of some variables.
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and its implications for future research”, Journal of Marketing, Vol. 49 No. 4, pp. 41-50.
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Firm, Irwin McGraw-Hill, London.
Corresponding author
Kym Boon can be contacted at: [email protected]
ARJ
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This article has been cited by:
1. Arezoo Aghaei Chadegani, Zakiah Muhammaddun Mohamed. 2014. Reporting errors and misstatements:
a measurement for the quality of auditors' work. Asian Journal of Business Ethics 3, 83-96. [CrossRef]
2. Kym Butcher, Graeme Harrison, Philip Ross. 2013. Perceptions of Audit Service Quality and Auditor
Retention. International Journal of Auditing 17:10.1111/ijau.2013.17.issue-1, 54-74. [CrossRef]
3. Kym Butcher, Graeme Harrison, Jill McKinnon, Philip Ross. 2011. Auditor appointment in compulsory
audit tendering. Accounting Research Journal 24:2, 104-149. [Abstract] [Full Text] [PDF]
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doc_724655293.pdf
The paper aims to analyse audit service quality attributes that were perceived to be
important in compulsory audit tendering (CAT) in local councils in New South Wales (NSW). It focuses
principally on whether CAT leads to an impairment of auditor independence and audit quality.
Accounting Research Journal
Audit service quality in compulsory audit tendering: Preparer perceptions and
satisfaction
Kym Boon J ill McKinnon Philip Ross
Article information:
To cite this document:
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Accounting Research J ournal, Vol. 21 Iss 2 pp. 93 - 122
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Audit service quality
in compulsory audit tendering
Preparer perceptions and satisfaction
Kym Boon and Jill McKinnon
Department of Accounting and Finance, Macquarie University,
Sydney, Australia, and
Philip Ross
School of Accounting, University of Western Sydney, Sydney, Australia
Abstract
Purpose – The paper aims to analyse audit service quality attributes that were perceived to be
important in compulsory audit tendering (CAT) in local councils in NewSouth Wales (NSW). It focuses
principally on whether CAT leads to an impairment of auditor independence and audit quality.
Design/methodology/approach – A questionnaire survey was conducted of 235 NSW local council
?nance professionals and 35 local council internal auditors in May 2006.
Findings – The most important attributes in evaluating audit service quality were industry
expertise, audit ?rm experience with a council, technical competence, independence, ethical standards
and due care. The least important attributes were scepticism, freshness of perspective, audit ?rm size,
and non-audit services. There is considerable consistency in the ?ndings with those in non-CAT
contexts.
Research limitations/implications – The paper is subject to the general limitations of the survey
questionnaire method. A further limitation is that audit quality was assessed using perceptions of
audit service quality by preparers of local council ?nancial statements, rather than by users of those
statements.
Practical implications – Audit ?rms will be better able to understand the audit service quality
attributes valued by local council clients, to differentiate their promotional and service-provision
strategies, improve their audit quality, and better satisfy local council clients. Concerns that CAT may
impair audit independence and audit quality do not appear to be founded.
Originality/value – Because the results are generally consistent with ?ndings in non-CAT contexts,
there can be more con?dence in CAT as a regulatory form of audit procurement.
Keywords Auditing, Auditors, Tendering, Quality, Local authorities, Australia
Paper type Research paper
1. Introduction
This study examines the audit service quality attributes that are perceived to be
important in evaluating the quality of audit services and in determining satisfaction
with audit service quality in the context of compulsory audit tendering (CAT). Audit
quality is an increasingly important area of examination. Recent audit regulation has
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors acknowledge the helpful comments of Neil Fargher, Graeme Harrison and
Alicia Jiang, participants at conferences of the Accounting and Finance Association of Australia
and New Zealand, the Asian Academic Accounting Association, the Financial Executives of
Local Government Departments in Australia, and the NSW Local Government Internal Auditors
Association of NSW.
Audit service
quality in CAT
93
Accounting Research Journal
Vol. 21 No. 2, 2008
pp. 93-122
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610810905917
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focused on improving audit quality in order to enhance public con?dence in the
credibility of the audit process and opinion following the alleged audit failures that
surrounded the collapse of major international and national corporations (e.g. Enron,
WorldCom), and the criminal indictment and collapse of former Big 5 audit ?rm Arthur
Andersen. Bell et al. (2005, p. iii) note that “. . . the emergence of new institutions,
regulations and authoritative guidance clearly raises the bar with respect to minimum
standards of audit quality”.
Audit is a service and audit service quality is de?ned as the “quality of the input
provided by the audit ?rm while performing the audit services” (Pandit, 1999, p. 173).
That is, “quality occurs during service delivery, usually in an interaction between the
client and the contact person from the service ?rm” (Parasuraman et al., 1985, p. 42,
cited in Pandit, 1999, p. 173). Audit quality, however, is dif?cult to observe directly
(Shockley, 1982; Francis, 2004); consequently one approach to assessing quality is to
examine the perceptions of audit service quality held by clients and customers as users
of ?nancial statements and the audit opinion (Schroeder et al., 1986; Carcello et al., 1992;
Davis, 1995; Behn et al., 1997; Warming-Rasmussen and Jensen, 1998). Zeithaml and
Bitner (2000, p. 81) state that service quality is “a critical component of customer
perceptions”, while Warming-Rasmussen and Jensen (1998, p. 65) argue that “there is
an increasing recognition in audit research that the only de?nition of quality is the
customers”[1].
Examining the CAT context is important because CAT is a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit ?rms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005,
p. 30). However, as a form of competitive bidding, there are concerns that CAT has the
potential to lead to a decrease in audit quality because:
.
competitive pressure is likely to shift the balance of power in auditor-client
relationships towards the client which potentially impairs auditor independence;
and
.
place pressure on fees which leads to reduced audit procedures (Copley and
Doucet, 1993; Aldhizer and Lampe, 1997; Beattie and Fearnley, 1998).
Examining whether CAT leads to the impairment of auditor independence and audit
quality is dif?cult because CAT is a relatively rare phenomenon, providing limited
opportunities to observe and examine its operation. Local government in the
Australian state of New South Wales (NSW) provides such an opportunity as it is one
of the few contexts where CAT operates, and has operated since 1993. The NSW Local
Government Act (1993) requires that local councils tender their audits every six years
and make a decision on each occasion whether to re-appoint the incumbent auditor or
appoint a new auditor.
This study provides evidence on the question of whether CAT leads to impaired
auditor independence and audit quality. This is achieved by examining the perceptions
of audit quality by NSW local council ?nance professionals and internal auditors as
clients of audit service in a CAT environment. We use the perceptions of audit quality
approach of Carcello et al. (1992) and Behn et al. (1997) to address two, related research
questions. First, what audit quality attributes are perceived to be important to NSW
local council ?nance professionals and internal auditors when evaluating the quality of
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audit services provided by the incumbent auditor? And second, what audit quality
attributes are related to, or associated with, overall satisfaction with the quality of
audit services provided by the incumbent auditor?
Understanding what audit quality attributes are perceived to be important to clients
in evaluating audit service quality and satisfaction in a CATcontext is also important to
regulators and audit ?rms. Regulators are able to use such information to identify what
is likely to make an audit substandard in a CATcontext (Aldhizer et al., 1995, p. 61), and
to formulate auditing standards aimed at improving actual and perceived audit quality
(Chang and Monroe, 1995, p. 20). Audit ?rms are able to use this information to
differentiate themselves better on service quality, to improve their own audit quality,
and to deliver more satisfaction to clients (Carcello et al., 1992; Behn et al., 1997, 1999).
The paper is organized as follows. Section 2 provides an overview of the literature
on multi-attribute perceptions of audit quality that is drawn on to determine the audit
service quality attributes used in this study. Section 3 develops the hypothesis while
Section 4 discusses the research method. The results are presented in Section 5, while
Section 6 presents the conclusions, limitations and suggestions for further research.
2. Literature review
2.1 The multi-attribute perceptions of audit quality literature
The literature on multi-attribute perceptions of audit quality examines a number of
attributes perceived to be associated with audit quality by ?nancial statement
preparers, users and other interest groups in different proximity to the audit process.
These studies typically examine two main issues:
(1) the impact of the audit quality attributes on overall audit quality (Schroeder
et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Warming-Rasmussen and
Jensen, 1998; Chen et al., 2001); and
(2) evaluating the performance of, or satisfaction with, the incumbent auditor
against the attributes of audit quality (Davis, 1995; Behn et al., 1997; Sucher
et al., 1998; Pandit, 1999).
The groups that have been studied for their perceptions on audit quality include
auditors (Schroeder et al., 1986; Carcello et al., 1992; Davis, 1995; Chen et al., 2001), audit
committee chairpersons (Schroeder et al., 1986), preparers (Carcello et al., 1992;
Warming-Rasmussen and Jensen, 1998), clients (Davis, 1995), federal inspectors
general (Aldhizer et al., 1995), shareholders (Warming-Rasmussen and Jensen, 1998),
?nancial journalists (Warming-Rasmussen and Jensen, 1998), and ?nancial statement
users generally (Carcello et al., 1992).
Two main observations are made from this literature. The ?rst is that audit quality
attributes are often broadly referred to as audit ?rm and audit team attributes[2]. Audit
?rm attributes are those that relate to the audit ?rm as an entity (e.g. location and size
of audit ?rm of?ces, litigation the ?rm has been involved in). Audit team attributes are
those concerned with the speci?c audit team assigned to the engagement (e.g.
communication between the audit team and client management, level of partner/audit
manager attention given to the audit) (Schroeder et al., 1986, p. 87). The majority of
studies have found audit team attributes to be more important than ?rm attributes in
evaluating audit service quality (Schroeder et al., 1986; Carcello et al., 1992), and overall
client satisfaction with quality (Behn et al., 1997). While, overall client satisfaction
Audit service
quality in CAT
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encompasses satisfaction with attributes of both the audit ?rm and the audit team
(Behn et al., 1997, 1999), the team attributes are more important because the audit team
is a sub-set of the audit ?rm, and, as Behn et al. (1999, p. 594) note, “management’s
primary impressions of the audit ?rm likely come from its interactions with the
members of the audit team”.
The second observation from the literature is that the attributes of audit quality
derived by Carcello et al. (1992) have been used to underpin a number of subsequent
studies of audit quality and satisfaction with quality. Carcello et al. (1992) surveyed 264
controllers (representing ?nancial statement preparers), 245 audit partners and 120
investors and creditors (representing ?nancial statement users) to identify the attributes
that were perceived to be associated with audit service quality both overall and among
the three groups of preparers, auditors and users. Carcello et al. (1992) identi?ed 41
attributes from the literature and from the authors’ audit partner experience, and then
used exploratory factor analysis to extract 12 audit quality factors. The factors were:
(1) audit team and ?rm experience with the client;
(2) industry expertise;
(3) audit ?rm responsiveness to client needs;
(4) audit ?rm compliance with general audit standards;
(5) audit ?rm commitment to quality;
(6) audit ?rm executive involvement;
(7) conduct of audit ?eld work;
(8) involvement of audit committee;
(9) individual team member characteristics;
(10) audit ?rm maintains a skeptical attitude;
(11) audit ?rm freshness of perspective; and
(12) degree of individual responsibility.
Subsequent studies using the Carcello et al. (1992) attributes include Behn et al. (1997)
and Pandit (1999). Behn et al. (1997) surveyed 434 ?nancial controllers of Fortune 1000
companies to ascertain which of the attributes were associated with satisfaction with
the audit ?rm and the audit team, and with overall client satisfaction. Behn et al. (1997)
found six of the attributes to be positively associated with overall client satisfaction:
(1) responsiveness to client needs;
(2) active involvement of the audit ?rm;
(3) effective involvement of audit committee;
(4) appropriate conduct of ?eld work;
(5) industry expertise; and
(6) prior audit ?rm and team experience with the client.
Skepticism was negatively associated with client satisfaction.
Pandit (1999) surveyed 359 senior executives of US corporations to examine the
effect of client satisfaction with audit service quality, and auditor ef?ciency and
credibility, on the intention to retain or switch auditors. Pandit (1999) used those
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attributes from Carcello et al. (1992) that were expected to be important to client
management as preparers of ?nancial statements; speci?cally:
.
audit ?rm responsiveness to client needs;
.
industry expertise;
.
executive involvement in the audit; and
.
conduct of the audit ?eld work.
Pandit (1999) hypothesized positive associations between each of these attributes and
intention to retain the audit ?rm, but found support only for responsiveness and
executive involvement.
2.2 Audit quality attributes relevant to the CAT context of NSW local government
The literature on multi-attribute perceptions of audit quality was reviewed to identify
those audit quality attributes to be used in this study. A total of 14 attributes were
identi?ed based on Carcello et al. (1992) and Behn et al. (1997). The 14 attributes (with
abbreviated names in parentheses) are:
(1) audit team and ?rm experience with the council (Council Experience);
(2) industry expertise (Industry Expertise);
(3) audit ?rm responsiveness to council needs (Responsiveness);
(4) audit ?rm compliance with general audit standards – technical competence
(Technical Competence);
(5) audit ?rm compliance with general audit standards – independence
(Independence);
(6) audit ?rm compliance with general audit standards – due care (Due Care);
(7) audit ?rm commitment to quality (Quality Commitment);
(8) audit ?rm executive involvement (Executive Involvement);
(9) conduct of audit ?eld work (Field Work Conduct);
(10) involvement of audit committee (Audit Committee);
(11) individual team member characteristics (Ethical Standards);
(12) audit ?rm maintains skeptical attitude (Skepticism);
(13) maintain freshness of perspective (Freshness of Perspective); and
(14) degree of individual responsibility (Individual Responsibility).
These attributes comprise 11 of the 12 attributes originally identi?ed by Carcello et al.
(1992). These attributes were also used by Behn et al. (1997). Carcello et al.’s (1992) 12th
attribute, audit ?rm compliance with general audit standards, was decomposed by
Behn et al. (1997) into three components, technical competence, independence, and due
care. We use the three components as separate attributes. The abbreviated names for
the attributes are consistent with Behn et al. (1997).
3. Hypothesis development
An hypothesis is developed for the relation between each of the 14 audit quality
attributes and overall client satisfaction with the quality of audit services. Audit service
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quality and client satisfaction are related theoretically because perceptions of audit
service quality are in?uential in determining client satisfaction (Behn et al., 1997, 1999).
For 13 attributes, a positive association with satisfaction is predicted, while for one
attribute, a negative association is predicted. Each of the attributes is brie?y discussed
for its relationship with satisfaction, followed by a formal statement of the hypothesis.
3.1 Audit ?rm and team experience with the council (Council Experience)
Audit experience with the client at the ?rmand teamlevel is important to a quality audit.
Audit experience means that, as the auditor has conducted the audit previously, it is
likely to be planned and conducted with improved ef?ciency and effectiveness.
Experienced audit teams, familiar with the operations, information systems and speci?c
risks of the council, are able to direct attention to accounts where audit adjustments were
previously required, or where there are likely to be errors or irregularities given the risks
of the council. Therefore, if ?nance professionals and internal auditors perceive that the
audit ?rm and team are experienced with the council, they are likely to be satis?ed with
the overall quality of audit services.
3.2 Industry expertise (Industry Expertise)
Industry expertise is likely to be important to a quality audit because industry experts
(or specialists) have knowledge of the risks, opportunities and accounting practices of
the client industry arising from training and practical experience gained from auditing
within that industry (Craswell et al., 1995; Hogan and Jeter, 1999; Solomon et al., 1999;
Gramling and Stone, 2001; Velury et al., 2003). Finance professionals and internal
auditors who perceive the audit to be conducted by a local government expert or
specialist are likely to be satis?ed with the overall quality of the audit.
3.3 Audit ?rm responsiveness to council needs (Responsiveness)
Responsiveness of the audit ?rm to the needs of the client is likely to affect satisfaction
with the overall quality of audit services. A good working relationship is likely to
result in auditor-client cooperation, an effective and ef?cient audit process, and the
audit ?rm being proactive in suggesting improvements to the operations and ?nancial
reporting practices of the client[3].
3.4 Audit ?rm compliance with general audit standards – technical competence
(Technical Competence)
Technical competence is anauditor’s “knowledge” and “individual know-how” (Richard,
2006, p. 157) with a technically competent auditor being “a quali?ed auditor . . . (with) . . .
suf?cient knowledge, quali?cation and experience to conduct a ?nancial audit”
(Richard, 2006, p. 157). Audit staff members who are technically competent in terms of
being CA or CPA quali?ed, are likely to be more familiar with accounting and auditing
standards and are more likely to detect material misstatements. Finance professionals
and internal auditors who perceive the audit team members to be technically competent
are likely to be satis?ed with the overall quality of the audit services provided.
3.5 Audit ?rm compliance with general audit standards – independence (Independence)
Audit independence is de?ned in terms of independence in fact and independence in
appearance (Richard, 2006). Independence in fact refers to the mental processes of the
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auditor, giving rise to an attitude of impartiality and objectivity (Richard, 2006, p. 156).
Independence in appearance refers to perceptions of independence by users and
whether, despite the (necessary) relationship with the client, third parties perceive the
auditor is capable of maintaining impartiality in judgment and resisting pressures
from client management (Richard, 2006, p. 156). Audit teams that are independent of
the client are more likely to provide a higher quality audit. Therefore, ?nance
professionals and internal auditors who perceive the audit ?rm to be independent of
the council, are likely to be satis?ed with the overall quality of audit services.
3.6 Audit ?rm compliance with general audit standards – due care (Due Care)
Audits conducted with “due care” in accordance with accounting and auditing
standards are likely to result in higher quality audits, a more credible audit opinion,
and a lower likelihood of the audit ?rm being involved in lawsuits alleging negligence.
As noted by Carcello et al. (1992, p. 8), “the audit ?rm rarely being found negligent in
lawsuits against it . . . provides a measure of due professional care”. Finance
professionals and internal auditors who perceive the audit ?rm to be conducting the
audit with due care are more likely to be satis?ed with the overall quality of audit
services.
3.7 Audit ?rm commitment to quality (Quality Commitment)
Quality control practices are the procedures used to ensure that the audit ?rm meets
quality standards consistently on every engagement (Arens et al., 2005). Audit ?rms
that have a strong quality culture are more likely to conduct higher quality audits as
the audit engagement teams are likely to adhere strictly to the quality control practices
of the ?rm. Finance professionals and internal auditors who perceive the audit ?rm to
have a strong commitment to quality are likely to be satis?ed with the overall quality
of audit services.
3.8 Audit ?rm executive involvement (Executive Involvement)
Audits that have a high degree of executive involvement are likely to be of a higher
quality because audit ?rm executives are the most quali?ed and experienced members
of the audit team and, hence, the most equipped to guide the audit process. Finance
professionals and internal auditors perceiving audit ?rm executives to be involved in
the conduct of the audit are likely to be satis?ed with the overall quality of audit
services provided.
3.9 Conduct of audit ?eld work (Field Work Conduct)
Audit ?rms that conduct the audit ?eld work thoroughly in accordance with
accounting and auditing standards are likely to provide high-quality audits. Therefore,
perceptions that the audit ?eld work is conducted thoroughly means that the council is
likely to be satis?ed with the overall quality of audit services.
3.10 Involvement of audit committee (Audit Committee)
Audit teams that communicate with the client’s audit committee are likely to conduct a
higher quality audit because audit committees oversee and strengthen the audit
process (Goodwin-Stewart and Kent, 2006, p. 388). Audit committees are likely to
demand a higher level of assurance (Francis, 2004), question the ?ndings of the auditor,
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direct audit attention to areas of concern and resolve con?icts between client
management and the auditor. Finance professionals and internal auditors who perceive
the council’s audit committee to be involved in the conduct of the audit, are likely to be
satis?ed with the overall quality of audit services.
3.11 Individual team member characteristics (Ethical Standards)
Audit ?rms whose team members have high-ethical standards are more likely to
conduct a higher quality audit because they are likely to detect and report discovered
errors and irregularities, and are less likely to engage in behaviour that compromises
the integrity of the audit process. Perceptions of high-ethical standards among audit
team members are likely to mean ?nance professionals and internal auditors are
satis?ed with the overall quality of audit services.
3.12 Audit ?rm maintains skeptical attitude (Skepticism)
Skepticism implies that audit team members do not accept the representations of the
client’s management, ?nance professionals or internal auditors at face value, but pursue
their owninvestigation to verify these representations. Perceived irregularities are likely
to be investigatedthoroughly, andcon?icts are likely to be resolved infavour of the audit
?rm. Behn et al. (1997, p. 15) argue that, while certain constituents, such as the regulatory
bodies and the community, expect auditors to bring the attitude of skepticism to the
conduct of the audit, “clients may sometimes chafe at auditor skepticism”. Consistent
with Behn et al. (1997), therefore, the relation between skepticism and satisfaction is
predicted to be negative; that is, council ?nance professionals and internal auditors who
perceive audit team members to have a skeptical attitude are not likely to be satis?ed
with the overall quality of audit services.
3.13 Maintain freshness of perspective (Freshness of Perspective)
This attribute of audit quality relates to auditor tenure. Audit team members who are
rotated across audits periodically are more likely to detect errors and irregularities as
they are capable of reviewing the ?nancial statements with fresh eyes[4]. Finance
professionals and internal auditors who perceive that audit team members have a
“fresh perspective” are likely to be satis?ed with the overall quality of audit services.
3.14 Degree of individual responsibility (Individual Responsibility)
Audit ?rms that are large and geographically dispersed are more likely to be
decentralized and to have a higher degree of individual responsibility. Such ?rms are
likely to provide higher quality audit services as they are at risk of losing their brand
name reputation and client base if lower quality audit services are provided. Finance
professionals and internal auditors who perceive the audit ?rm to have a high degree of
individual responsibility, are likely to be satis?ed with the overall quality of audit
services.
Based on the foregoing discussion of each of the 14 audit service quality attributes,
we state the formal hypothesis to be tested as follows:
H1. Evaluation of overall satisfaction with the quality of audit services provided
by the incumbent auditor is positively related to council ?nance
professionals’ and internal auditors’ perceptions of:
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H1a. Audit ?rm and team experience with the client.
H1b. Industry expertise.
H1c. Audit ?rm responsiveness to the needs of the council.
H1d. Technical competence of the audit team.
H1e. Audit ?rm independence.
H1f. Exercise of due care by the audit ?rm.
H1g. The audit ?rm’s commitment to quality.
H1h. Audit ?rm’s executive involvement.
H1i. The audit ?rm’s conduct of audit ?eld work.
H1j. Involvement of the audit committee in the conduct of the audit.
H1k. Individual characteristics of audit team members (ethical standards).
H1l. The audit ?rm’s ability to maintain freshness of perspective.
H1m. Degree of individual responsibility.
and negatively related to council ?nance professionals’ and internal auditors’
perceptions of the ability of the audit ?rm to maintain a skeptical attitude.
4. Method
4.1 Sample selection
The sample for the study was 235 ?nance professionals who attended the National
Local Government Finance Professionals’ Biennial Conference held in NSW in May
2005, and the population of 35 NSW council internal auditors[5]. These two groups
were chosen for the study because the NSW Department of Local Government
identi?ed ?nance professionals and internal auditors as being the most appropriate
people to evaluate the quality of audit services provided by the incumbent auditor
because they liaise closely with the external auditors during the audits of the councils’
?nancial statements.
4.2 Design
The questionnaire comprised two questions. The ?rst question provided respondents
with a list of 48 individual items re?ecting audit service quality. This list was
developed by reviewing the audit service quality literature to identify the individual
items of audit service quality that have been proposed or examined in prior literature.
These items were then theoretically matched to the 14 audit service quality attributes
used in the hypothesis testing. Table I shows the individual items and their derivation.
Column 1 lists the 14 audit service quality attributes used in the hypothesis; Column 2
lists prior studies that have examined these attributes; Column 3 lists the individual
items of audit service quality used in the prior studies; and Column 4 shows the items
used in the questionnaire.
Respondents were requested to assume they had been asked to evaluate the quality
of audit services provided by their incumbent auditor. Respondents were asked to
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Table I.
Audit quality attributes
and individual audit
quality items used in this
study and their
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0
1
)
A
u
d
i
t
f
i
r
m
e
x
e
c
u
t
i
v
e
i
n
v
o
l
v
e
m
e
n
t
(
e
x
e
c
u
t
i
v
e
i
n
v
o
l
v
e
m
e
n
t
)
A
u
d
i
t
f
i
r
m
c
o
m
m
i
t
m
e
n
t
t
o
q
u
a
l
i
t
y
(
q
u
a
l
i
t
y
c
o
m
m
i
t
m
e
n
t
)
1
7
T
h
e
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
a
s
a
g
r
o
u
p
a
l
w
a
y
s
e
x
e
r
c
i
s
e
d
d
u
e
c
a
r
e
t
h
r
o
u
g
h
o
u
t
t
h
e
e
n
g
a
g
e
m
e
n
t
T
h
e
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
a
s
a
g
r
o
u
p
a
l
w
a
y
s
e
x
e
r
c
i
s
e
d
d
u
e
c
a
r
e
t
h
r
o
u
g
h
o
u
t
t
h
e
e
n
g
a
g
e
m
e
n
t
(
B
e
h
n
e
t
a
l
.
1
9
9
9
)
3
6
S
c
h
r
o
e
d
e
r
e
t
a
l
.
(
1
9
8
6
)
;
C
a
r
c
e
l
l
o
e
t
a
l
.
(
1
9
9
2
)
;
A
l
d
h
i
z
e
r
e
t
a
l
.
(
1
9
9
5
)
;
B
e
h
n
e
t
a
l
.
(
1
9
9
7
)
;
W
a
r
m
i
n
g
-
R
a
s
m
u
s
s
e
n
a
n
d
J
e
n
s
e
n
(
1
9
9
8
)
;
S
u
c
h
e
r
e
t
a
l
.
(
1
9
9
8
)
;
B
e
h
n
e
t
a
l
.
(
1
9
9
9
)
;
P
a
n
d
i
t
(
1
9
9
9
)
-
T
h
e
C
P
A
f
i
r
m
h
a
s
r
a
r
e
l
y
b
e
e
n
f
o
u
n
d
n
e
g
l
i
g
e
n
t
i
n
l
a
w
s
u
i
t
s
b
r
o
u
g
h
t
a
g
a
i
n
s
t
i
t
(
a
l
l
e
g
i
n
g
i
n
a
d
e
q
u
a
t
e
a
u
d
i
t
p
e
r
f
o
r
m
a
n
c
e
)
(
C
a
r
c
e
l
l
o
e
t
a
l
.
1
9
9
2
)
T
h
e
a
u
d
i
t
f
i
r
m
h
a
s
r
a
r
e
l
y
b
e
e
n
f
o
u
n
d
n
e
g
l
i
g
e
n
t
i
n
l
a
w
s
u
i
t
s
b
r
o
u
g
h
t
a
g
a
i
n
s
t
i
t
(
a
l
l
e
g
i
n
g
i
n
a
d
e
q
u
a
t
e
a
u
d
i
t
p
e
r
f
o
r
m
a
n
c
e
)
2
5
T
h
e
p
e
r
c
e
n
t
a
g
e
t
h
a
t
t
h
e
a
u
d
i
t
f
e
e
r
e
p
r
e
s
e
n
t
s
t
o
t
o
t
a
l
b
i
l
l
i
n
g
s
o
f
t
h
e
C
P
A
f
i
r
m
i
s
m
a
t
e
r
i
a
l
(
C
h
e
n
e
t
a
l
.
2
0
0
1
)
T
h
e
p
e
r
c
e
n
t
a
g
e
t
h
a
t
t
h
e
c
o
u
n
c
i
l
a
u
d
i
t
f
e
e
r
e
p
r
e
s
e
n
t
s
t
o
t
h
e
t
o
t
a
l
a
u
d
i
t
f
e
e
r
e
v
e
n
u
e
o
f
t
h
e
a
u
d
i
t
f
i
r
m
i
s
n
o
t
m
a
t
e
r
i
a
l
A
u
d
i
t
f
i
r
m
c
o
m
p
l
i
a
n
c
e
w
i
t
h
g
e
n
e
r
a
l
a
u
d
i
t
s
t
a
n
d
a
r
d
s
–
d
u
e
c
a
r
e
(
d
u
e
c
a
r
e
)
7
S
c
h
r
o
e
d
e
r
e
t
a
l
.
(
1
9
8
6
)
;
C
a
r
c
e
l
l
o
e
t
a
l
.
(
1
9
9
2
)
;
A
l
d
h
i
z
e
r
e
t
a
l
.
(
1
9
9
5
)
;
B
e
h
n
e
t
a
l
.
(
1
9
9
7
)
;
W
a
r
m
i
n
g
-
R
a
s
m
u
s
s
e
n
a
n
d
J
e
n
s
e
n
(
1
9
9
8
)
;
S
u
c
h
e
r
e
t
a
l
.
(
1
9
9
8
)
;
B
e
h
n
e
t
a
l
.
(
1
9
9
9
)
;
P
a
n
d
i
t
(
1
9
9
9
)
T
h
e
C
P
A
f
i
r
m
t
h
a
t
i
s
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
p
e
r
f
o
r
m
s
n
o
c
o
n
s
u
l
t
i
n
g
s
e
r
v
i
c
e
s
f
o
r
t
h
e
c
l
i
e
n
t
(
C
a
r
c
e
l
l
o
e
t
a
l
.
1
9
9
2
;
C
h
e
n
e
t
a
l
.
2
0
0
1
)
T
h
e
a
u
d
i
t
f
i
r
m
t
h
a
t
i
s
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
p
e
r
f
o
r
m
s
n
o
c
o
n
s
u
l
t
i
n
g
s
e
r
v
i
c
e
s
f
o
r
t
h
e
c
l
i
e
n
t
A
u
d
i
t
f
i
r
m
c
o
m
p
l
i
a
n
c
e
w
i
t
h
g
e
n
e
r
a
l
a
u
d
i
t
s
t
a
n
d
a
r
d
s
–
i
n
d
e
p
e
n
d
e
n
c
e
(
i
n
d
e
p
e
n
d
e
n
c
e
)
3
1
T
h
e
o
v
e
r
a
l
l
r
e
p
u
t
a
t
i
o
n
o
f
t
h
e
a
u
d
i
t
f
i
r
m
i
s
p
o
s
i
t
i
v
e
-
T
h
e
o
v
e
r
a
l
l
r
e
p
u
t
a
t
i
o
n
o
f
t
h
e
C
P
A
f
i
r
m
i
s
p
o
s
i
t
i
v
e
(
S
c
h
r
o
e
d
e
r
e
t
a
l
.
1
9
8
6
;
C
a
r
c
e
l
l
o
e
t
a
l
.
1
9
9
2
;
C
h
e
n
e
t
a
l
.
2
0
0
1
)
-
T
h
e
C
P
A
f
i
r
m
i
s
a
m
e
m
b
e
r
o
f
a
f
a
m
o
u
s
i
n
t
e
r
n
a
t
i
o
n
a
l
a
c
c
o
u
n
t
i
n
g
f
i
r
m
(
C
h
e
n
e
t
a
l
.
2
0
0
1
)
3
3
I
n
a
l
l
y
o
u
r
d
e
a
l
i
n
g
s
w
i
t
h
t
h
e
a
u
d
i
t
f
i
r
m
a
n
d
i
n
d
i
v
i
d
u
a
l
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
,
t
h
e
a
u
d
i
t
f
i
r
m
a
n
d
i
t
s
r
e
p
r
e
s
e
n
t
a
t
i
v
e
s
n
e
v
e
r
e
n
g
a
g
e
i
n
a
n
y
a
c
t
i
o
n
s
t
h
a
t
w
o
u
l
d
c
o
m
p
r
o
m
i
s
e
i
t
s
/
t
h
e
i
r
i
n
d
e
p
e
n
d
e
n
c
e
e
i
t
h
e
r
i
n
f
a
c
t
o
r
i
n
a
p
p
e
a
r
a
n
c
e
.
-
I
n
a
l
l
y
o
u
r
d
e
a
l
i
n
g
s
w
i
t
h
t
h
e
C
P
A
f
i
r
m
,
a
n
d
w
i
t
h
i
n
d
i
v
i
d
u
a
l
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
,
t
h
e
C
P
A
f
i
r
m
a
n
d
i
t
s
r
e
p
r
e
s
e
n
t
a
t
i
v
e
s
n
e
v
e
r
e
n
g
a
g
e
d
i
n
a
n
y
a
c
t
i
o
n
s
t
h
a
t
w
o
u
l
d
c
o
m
p
r
o
m
i
s
e
i
t
s
/
t
h
e
i
r
i
n
d
e
p
e
n
d
e
n
c
e
e
i
t
h
e
r
i
n
f
a
c
t
o
r
i
n
a
p
p
e
a
r
a
n
c
e
(
B
e
h
n
e
t
a
l
.
1
9
9
9
)
Table I.
Audit service
quality in CAT
103
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
3
8
1
3
3
9
1
2
3
7
1
0
3
5
4
8
1
9
1
8
1
4
2
1
1
1
4
2
3
0
1
T
h
e
s
h
o
r
t
e
n
e
d
v
e
r
s
i
o
n
o
f
t
h
e
s
e
a
t
t
r
i
b
u
t
e
s
a
r
e
i
n
i
t
a
l
i
c
s
T
h
e
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
c
o
n
d
u
c
t
e
d
t
h
e
a
u
d
i
t
f
i
e
l
d
w
o
r
k
i
n
a
n
a
p
p
r
o
p
r
i
a
t
e
m
a
n
n
e
r
T
h
e
a
u
d
i
t
f
i
r
m
m
a
k
e
s
e
x
t
e
n
s
i
v
e
u
s
e
o
f
c
o
m
p
u
t
e
r
s
i
n
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
T
h
e
a
u
d
i
t
f
i
r
m
m
a
k
e
s
e
x
t
e
n
s
i
v
e
u
s
e
o
f
s
t
a
t
i
s
t
i
c
a
l
t
e
c
h
n
i
q
u
e
s
i
n
c
o
n
d
u
c
t
i
n
g
t
h
e
a
u
d
i
t
T
h
e
a
u
d
i
t
f
i
r
m
c
o
n
d
u
c
t
s
a
t
h
o
r
o
u
g
h
s
t
u
d
y
o
f
t
h
e
c
l
i
e
n
t
’
s
s
y
s
t
e
m
o
f
i
n
t
e
r
n
a
l
c
o
n
t
r
o
l
T
h
e
a
u
d
i
t
t
e
a
m
m
e
m
b
e
r
s
h
a
d
a
n
a
p
p
r
o
p
r
i
a
t
e
u
n
d
e
r
s
t
a
n
d
i
n
g
o
f
t
h
e
c
o
u
n
c
i
l
’
s
b
u
s
i
n
e
s
s
T
h
e
a
u
d
i
t
f
i
r
m
d
e
v
e
l
o
p
s
s
t
r
i
n
g
e
n
t
t
i
m
e
b
u
d
g
e
t
s
f
o
r
e
a
c
h
a
u
d
i
t
a
r
e
a
a
n
d
e
x
p
e
c
t
s
i
t
s
p
e
o
p
l
e
t
o
m
e
e
t
t
h
e
m
T
h
e
c
o
s
t
t
o
t
h
e
a
u
d
i
t
f
i
r
m
o
f
d
i
f
f
e
r
e
n
t
a
u
d
i
t
p
r
o
c
e
d
u
r
e
s
,
i
n
t
e
r
m
s
o
f
t
i
m
e
e
x
p
e
n
d
e
d
,
i
s
t
h
e
m
a
j
o
r
c
r
i
t
e
r
i
o
n
a
s
t
o
w
h
e
t
h
e
r
a
p
r
o
c
e
d
u
r
e
i
s
u
s
e
d
T
h
e
n
u
m
b
e
r
o
f
h
o
u
r
s
s
p
e
n
t
b
y
t
h
e
a
u
d
i
t
t
e
a
m
t
o
c
o
m
p
l
e
t
e
t
h
e
a
u
d
i
t
(
f
r
o
m
t
h
e
b
e
g
i
n
n
i
n
g
o
f
f
i
e
l
d
w
o
r
k
t
o
t
h
e
a
u
d
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t
r
e
p
o
r
t
d
a
t
e
)
T
h
e
r
e
i
s
f
r
e
q
u
e
n
t
c
o
m
m
u
n
i
c
a
t
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o
n
b
e
t
w
e
e
n
t
h
e
a
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Table I.
ARJ
21,2
104
D
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d
b
y
P
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N
D
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0
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4
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6
(
P
T
)
indicate, for each of the 48 individual items, whether they agreed or disagreed that the
audit service quality item affects their evaluation of the audit services provided. The
scale was a seven-point Likert-type scale ranging from strongly disagree (23) to
strongly agree (þ3). The 48 items were randomized both within and across the 14
attributes (to the extent possible) to avoid halo effect and order effect biases which
could potentially occur if all the items comprising a particular attribute were clustered
together in the question order. Randomization also helped guard against social
desirability response bias (SDRB) to the extent that the attributes were not obvious to
respondents through clustering of the items for each attribute. (Column 5 of Table I
shows the order number for each of the 48 items in the questionnaire.) Anonymity for
respondents also helped guard against SDRB.
The second question asked respondents to consider the incumbent auditor who
provided their most recent audit. Respondents were asked to indicate to what extent
they were satis?ed with the quality of their most recent audit in terms of:
.
satisfaction with the audit ?rm; and
.
satisfaction with the audit team.
The scale was a seven-point Likert-type scale ranging from very dissatis?ed (23) to
very satis?ed (þ3)[6].
The study followed the Dillman (2000) Tailored Design Method as closely as
possible to ensure the questionnaire was clearly formatted and visually appealing to
respondents. An incentive for completion was provided in the form of a $10 charity
donation that the researcher made to the respondent’s preferred charity on receipt of
the completed questionnaire. The questionnaire was anonymous. The draft
questionnaire was pre-tested by potential respondents, staff of the NSW Department
of Local Government Finance, and academics. The content, ordering and terminology
were revised accordingly.
4.3 Administration
Different procedures were used to administer the survey questionnaires to the ?nance
professionals and the internal auditors. For the ?nance professionals, as noted
previously, the survey was administered at a local government conference in 2006. The
surveys and accompanying information statement were distributed during the
conference and respondents were instructed to return their questionnaire to a
con?dential ballot box maintained by the researchers during the conference. The booth
offered respondents a convenient mechanism to lodge the questionnaire, as well as
providing access to the researchers if questions arose.
The survey questionnaire was mailed to each of the 35 NSW internal auditors. Prior
to mailing, all councils were phoned to con?rm the contact details of their internal
auditors. Three follow-ups were conducted at fortnightly intervals, two by mail and
one by phone. For the mail follow-ups a complete mail-out was necessary as the
responses were anonymous and unidenti?able. Prior to the third mail-out however,
each internal auditor was phoned to ask if they had received the questionnaire and if
they had responded. Those that had responded were removed from the mailing list.
4.4 Dependent variable
The dependent variable in the hypothesis is the overall satisfaction with the quality of
audit services provided by the audit ?rm. Overall satisfaction with audit service
Audit service
quality in CAT
105
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
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E
R
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U
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S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
quality was measured as the sum of the response scores for the two items in the second
question in the questionnaire; that is, the measure of overall satisfaction was obtained
by adding together the scores for satisfaction with the audit ?rm and satisfaction with
the audit team. This is consistent with Behn et al.’s (1997) measure of overall client
satisfaction with audit service quality and based on their argument that overall client
satisfaction comprises both satisfaction with the audit ?rm and satisfaction with the
audit team (Behn et al., 1997, pp. 10-11). The Cronbach a measure was 0.82 indicating
good scale reliability[7].
5. Results
5.1 Response rate
Of the 235 ?nance professionals attending the conference, 207 responded[8]. Of the 207,
22 were excluded because they were from states other than NSW, resulting in 185
responses from NSW ?nance professionals. Of the 35 internal auditors, 28 responded.
Hence, overall, 213 responses were received giving a response rate of 86 per cent
(213/248). Given the high-response rate, non-response bias was not considered to be a
threat to the validity of the results.
5.2 Descriptive statistics
Section 1 of the questionnaire asked respondents to indicate, on a scale of 23 (strongly
disagree) to þ3 (strongly agree), the extent to which they agreed or disagreed that each
of the 48 audit service quality items impacted on their evaluation of the quality of audit
services provided by their incumbent auditor. The results are presented in Table II[9].
Table II shows the distribution of responses to the 48 items, as well as the mean and
standard deviation for each item (ranked in order from the item with the highest
reported impact on evaluation of audit service quality to the lowest). The “n” column
shows the number of responses for each item. For 39 of the 48 items, n is 213 (185
?nance professionals plus 28 internal auditors), while for the remaining nine items n is
slightly below 213 re?ecting some incomplete responses.
There were two items with a large number of NA responses; item 19 (there is
frequent communication between the audit team and the council’s audit committee)
and item 47 (the external auditors co-operate with the internal auditors) with 35 and 50
NA responses, respectively. The high NA response here re?ects the fact that not all
councils have internal auditors and/or audit committees. These two items are included
in Table II to show their importance ranking for the respondents who did score these
items, and to allow their inclusion in the analysis for RQ1. However, they are excluded
from the analysis for RQ2; that is, the relationship between audit quality attributes and
satisfaction with incumbent auditors.
5.3 Research question 1: attributes important in evaluating audit service quality
The ?rst research question is what audit service quality attributes are perceived to be
important to NSW local council ?nance professionals and internal auditors when
evaluating the quality of their audit services? The data to address this question were
the responses to the ?rst question in the questionnaire; that is, the importance ranking
of the 48 individual audit service quality items provided by the respondents, based on
the mean response to each item[10].
ARJ
21,2
106
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(
c
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Table II.
The importance of audit
service quality attributes
in impacting evaluation
of audit service quality
Audit service
quality in CAT
107
D
o
w
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T
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2
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1
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4
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2
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6
T
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a
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T
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2
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T
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2
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2
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2
3
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2
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1
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T
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T
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3
0
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4
6
T
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T
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2
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2
1
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4
7
1
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3
2
1
(
c
o
n
t
i
n
u
e
d
)
Table II.
ARJ
21,2
108
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
D
i
s
t
r
i
b
u
t
i
o
n
o
f
r
e
s
p
o
n
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e
s
(
f
r
e
q
u
e
n
c
y
)
R
a
n
k
A
t
t
r
i
b
u
t
e
n
u
m
b
e
r
D
e
s
c
r
i
p
t
i
o
n
n
2
3
2
2
2
1
0
1
2
3
N
A
M
e
a
n
S
D
3
0
1
9
T
h
e
r
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i
s
f
r
e
q
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t
c
o
m
m
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n
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t
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o
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b
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n
c
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l
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s
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d
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t
c
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m
m
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2
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6
3
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6
8
3
5
3
5
1
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3
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1
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4
4
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1
5
T
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3
3
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9
T
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3
1
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2
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4
1
1
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3
1
1
.
1
9
9
3
3
4
8
T
h
e
n
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m
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f
h
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r
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p
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t
b
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t
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a
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t
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m
p
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a
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d
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t
(
f
r
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m
t
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f
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l
d
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p
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)
2
1
1
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1
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1
.
1
4
4
3
4
6
T
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v
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n
c
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r
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t
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f
m
e
m
b
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s
t
o
t
a
k
e
c
o
u
r
s
e
s
a
n
d
a
t
t
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n
d
s
e
m
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n
a
r
s
i
n
?
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l
d
s
w
h
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r
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t
h
e
?
r
m
h
a
s
m
a
j
o
r
c
l
i
e
n
t
s
2
1
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2
1
2
7
3
8
4
9
6
1
3
5
9
1
.
1
7
1
.
4
0
5
3
5
2
5
T
h
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p
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t
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g
e
t
h
a
t
t
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c
o
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c
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d
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t
f
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r
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p
r
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s
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n
t
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o
t
h
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t
o
t
a
l
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t
f
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v
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n
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o
f
t
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e
a
u
d
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t
?
r
m
i
s
n
o
t
m
a
t
e
r
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a
l
2
1
2
6
4
1
2
4
8
3
7
5
8
4
0
7
1
.
1
5
1
.
4
7
1
3
6
8
T
h
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d
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t
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r
m
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s
s
k
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l
f
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l
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v
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a
c
c
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p
t
a
b
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a
c
c
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t
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n
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t
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m
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f
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t
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m
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t
w
a
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s
2
1
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1
3
0
3
7
6
4
3
8
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0
.
9
7
1
.
6
6
3
3
7
2
6
T
h
e
p
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s
o
n
n
e
l
o
n
t
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e
n
g
a
g
e
m
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b
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l
o
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m
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t
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p
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f
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s
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o
n
a
l
b
o
d
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e
s
’
e
x
a
m
s
2
1
3
4
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1
4
4
9
4
6
7
2
1
6
3
0
.
9
2
1
.
3
5
7
3
8
4
0
T
h
e
a
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t
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p
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t
a
n
d
w
o
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k
p
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p
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r
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c
e
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v
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a
s
e
c
o
n
d
p
a
r
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n
e
r
r
e
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2
1
3
1
1
1
9
5
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2
9
6
0
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9
2
1
.
3
8
4
3
9
1
0
T
h
e
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d
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t
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r
m
d
e
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l
o
p
s
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r
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Table II.
Audit service
quality in CAT
109
D
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Table II.
ARJ
21,2
110
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o
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o
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d
e
d
b
y
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O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Table II shows that the ten items most likely to impact on respondents’ evaluation of
local council audit service quality are dominated by items from the attributes of
Industry Expertise (three items), Council Experience (two items) and Technical
Competence (two items). The seven most important items are from these three
attributes. Speci?cally, the three most highly rated items are (with the attribute to
which they are related shown in parentheses after each item):
(1) the partner assigned to the audit engagement is very knowledgeable about the
industry (Industry Expertise);
(2) the audit ?rm is considered to be a specialist in local government audit
(Industry Expertise); and
(3) the audit partner on the engagement is a CA/CPA (Technical Competence).
The next four items are:
(4) the audit ?rm has been performing the audit for at least two to three years
(Council Experience);
(5) the audit ?rm conducting the audit has other local council audit clients
(Industry Expertise);
(6) the audit engagement partner has been on the audit for at least two to three
years (Council Experience); and
(7) the auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (Technical Competence).
The remaining three items in the ten most important are:
(8) in all your dealings with the audit ?rm and individual team members, the audit
?rm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance
(Independence);
(9) the audit staff assigned to the engagement have very high-ethical standards
(Ethical Standards); and
(10) the overall reputation of the ?rm is positive (Due Care).
It can also be observed from Table II that, overall, the items least likely to impact on
evaluation of audit service quality (those ranked as the ten least important items) relate
to the audit service quality attributes of Field Work Conduct (two items), Quality
Commitment (two items), Degree of Individual Responsibility (two items), Freshness of
Perspective (two items), Independence (one item), and Skepticism (one item).
Speci?cally, the items (and attributes to which they are related shown in
parentheses) from the tenth least important item to the least important are:
(1) the audit ?rm develops stringent time budgets for each audit area and expects
its people to meet them (Field Work Conduct);
(2) before accepting a new client, the audit ?rm conducts a pre-engagement
investigationand goes through risk control procedures including the conduct of a
background search on senior management of the prospective client (Quality
Commitment);
Audit service
quality in CAT
111
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o
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o
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e
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b
y
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O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(3) the size of the audit ?rm in terms of its total revenue and number of auditors is
much larger than the average size in the region (Degree of Individual
Responsibility);
(4) the audit ?rm that is conducting the audit provides no consulting services for
the client (Independence);
(5) audit team members are rotated off the audit periodically (Freshness of
Perspective);
(6) the audit ?rm has a high staff turnover rate (Freshness of Perspective);
(7) the audit ?rm has a policy on the maximum number of hours per day and per
week that its staff can work (Quality Commitment);
(8) the cost to the audit ?rmof different audit procedures, in terms of time expended,
is the major criterion as to whether a criterion is used (Field Work Conduct);
(9) the audit ?rm’s attitude is one of a skeptic, not one of client advocate
(Skepticism); and
(10) the audit ?rm tends to have decentralized of?ces rather than centralized of?ces
(Degree of Individual Responsibility).
5.4 Research question 2: attributes important in evaluating satisfaction with audit
service quality
The second research question is what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by local
council incumbent auditors. This question was formulated into the hypothesis
developed in Section 3. This hypothesis related council ?nance professionals’ and
internal auditors’ perceptions of each of the 14 audit service quality attributes to their
evaluation of overall satisfaction with their auditors. The data to address this question,
and to test the hypothesis, were the responses to the ?rst question in the questionnaire
(the importance ratings of the 48 individual audit service quality items as perceived by
the ?nance professionals and internal auditors) and the responses to the second
question (the evaluation of overall satisfaction with the audit service quality of their
incumbent auditors).
The 48 items were factor analysed using con?rmatory factor analysis. That is, factor
analysis was applied to the items theoretically related to each of the 14 attributes. The
factors were then used as independent variables in an OLS regression model explaining
overall audit service quality satisfaction. As noted previously, overall satisfaction with
audit service quality was measured as the sum of the scores for satisfaction with the
incumbent audit ?rmand satisfaction with the incumbent audit team (Behn et al., 1997).
The factor analyses and multiple regressions use 155 complete responses. Again as
noted previously, items 19 and 47 were excluded because of their high number of NA
responses. Also excluded were all other NA and incomplete responses.
Table III presents the results of the con?rmatory factor analysis performed using
the Principal Components extraction method with Varimax (Kaiser Normalisation)
rotation. Table III shows that 12 factors were extracted, based on extraction criteria of
a Scree Plot analysis and an absolute value coef?cient cut-off of 0.45. Factors were not
extracted for the attributes of executive involvement, ethical standards and skepticism
because these attributes consisted of only one item. Ten of the 12 factors were
ARJ
21,2
112
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R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Attribute no. Attribute description
Factors (per cent)
Council experience (54.03 per cent)
43 The audit manager has been on the audit for at least two to three years (0.840)
44 The audit supervisor has been on the audit for at least two to three years (0.804)
1 The audit ?rm has been performing the audit for at least two to three years
(0.640)
3 The audit engagement partner has been on the audit for at least two to three
years (0.632)
Industry expertise (53.99 per cent)
4 The partner assigned to the audit engagement is very knowledgeable about the
industry (0.850)
2 The audit ?rm is considered to be a specialist in local government audit (0.835)
20 The audit ?rm conducting the audit has other local council audit clients (0.616)
45 The audit manager and supervisor assigned to the engagement are very
knowledgeable about the industry (0.600)
Responsiveness (61.84 per cent)
Responsiveness 1 (37.07)
23 The audit ?rm keeps council management informed during the year about
accounting and ?nancial reporting developments that affect the council (0.861)
22 There is frequent communication between the audit team and council
management (0.816)
41 The auditor adds value to the entity in terms of generating useful ideas for
improvement (0.734)
29 The audit ?rm reports internal control de?ciencies and the auditors’
recommendations on internal control are useful (0.708)
Responsiveness 2 (24.77 per cent)
8 The audit ?rm is skillful in devising acceptable accounting treatments for
transactions that generate results that council management wants (0.806)
46 The auditors are mindful of how busy the council’s key ?nance staff are and
contact these individuals only to the extent necessary (0.652)
15 The audit ?rm is agreeable to completing the audit by a date the client has set
(0.628)
Technical competence (47.77 per cent)
16 The auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (0.782)
27 The audit partner on the engagement is a CA/CPA (0.645)
26 The personnel on the engagement below manager level have passed the
professional bodies’ exams (0.637)
Independence (38.50 per cent)
25 The percentage that the council audit fee represents to the total audit fee revenue
of the audit ?rm is not material (0.760)
33 In all your dealings with the audit ?rm and individual audit team members, the
audit ?rm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance (0.757)
7 The audit ?rmthat is conducting the audit provides no consulting services for the
client (20.065)
Due care (58.74 per cent)
31 The overall reputation of the audit ?rm is positive (0.832)
17 The audit team members as a group always exercised due care throughout the
engagement (0.785)
(continued)
Table III.
Con?rmatory factor
analysis
Audit service
quality in CAT
113
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Y
U
N
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V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Attribute no. Attribute description
36 The audit ?rm has rarely been found negligent in lawsuits brought against it
(alleging inadequate audit performance) (0.673)
Quality commitment (33.55 per cent)
5 The audit ?rm participates in the peer review process, and its most recent peer
review report was a clean one (0.695)
34 The audit ?rm has strict guidelines on the procedures that must be completed
before signing the audit report (0.615)
6 The audit ?rm actively encourages staff members to take courses and attend
seminars in ?elds where the ?rm has major clients (0.613)
28 Before accepting a new client, the CPA ?rm conducts a pre-engagement
investigation and goes through risk control procedures including the
conduct of a background search on senior management of the perspective
client (0.601)
40 The audit report and work papers receive a second partner review (0.550)
32 The work performed by inexperienced members of the audit team is supervised
by the audit team manager (0.512)
9 The audit ?rm has a policy on the maximum number of hours per day and per
week that its staff can work (0.431)
Field work conduct (50.31 per cent)
Field work conduct 1 (28.79 per cent)
37 The audit team members as a group have an adequate understanding of the
operations of the council (0.809)
38 The audit team members conducted the audit ?eld work in an appropriate
manner (0.775)
12 The audit ?rm conducts a thorough study of the client’s system of internal
control (0.633)
39 The audit ?rm makes extensive use of statistical techniques in conducting the
audit (0.631)
13 The audit ?rm makes extensive use of computers in conducting the audit
(0.438)
Field work conduct 2 (21.51 per cent)
35 The cost to the audit ?rm of different audit procedures, in terms of time
expended, is the major criterion as to whether a procedure is used (0.759)
10 The audit ?rm develops stringent time budgets for each audit area and expects
its people to meet them (0.612)
48 The number of hours spent by the audit team to complete the audit (from the
beginning of ?eld work to the audit report date) (0.523)
Freshness of perspective (57.29 per cent)
11 The audit ?rm has a high audit staff turnover rate (0.757)
21 Audit team members are rotated off the audit periodically (0.757)
Individual responsibility (56.63 per cent)
42 The size of the audit ?rm in terms of its total revenue and number of auditors is
much larger than the average size in the region (0.752)
30 The audit ?rm tends to have decentralised of?ces rather than centralised of?ces
(0.752)
Notes: Each of the 14 attributes in the taxonomy in Table I was factor analysed. The number in
the parentheses after the factor label is the variance accounted for by the factor. The numbers in
parentheses after the original attribute descriptions are the factor loadings from the pooled factor
analysis. The extraction method is principal components analysis. The orthogonal
rotation method used is Varimax with Kaiser Normalisation. The factor loading co-ef?cient
cut-off is 0.45
Table III.
ARJ
21,2
114
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E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
6
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
one-factor solutions consistent with the theoretical taxonomy of audit quality
attributes that was based on Carcello et al. (1992). Two factors were extracted for the
attributes of Responsiveness and Field Work Conduct.
The factors and the three attributes of Executive Involvement, Ethical Standards
and Skepticism were included as independent variables in the OLS regression model
explaining overall audit service quality satisfaction. The results of the hypothesis
testing are presented in Table IV. Table IV shows that the OLS regression model is
signi?cant (F ¼ 6.821, p # 0.000) with an adjusted R
2
of 34.6 per cent. The coef?cients
of the factor scores for the attribute groupings Council Experience (t ¼ 2.518,
p , 0.013), Independence (t ¼ 2.136, p , 0.034), Responsiveness 1 (t ¼ 2.998,
p , 0.003) and Responsiveness 2 (t ¼ 2.675, p , 0.008), as well as the coef?cient for
the Ethical Standards attribute (t ¼ 1.781, p , 0.077) are, as expected, positive and
signi?cant. The coef?cient for Skepticism was, as expected, negative and signi?cant
(t ¼ 22.564, p , 0.011)[11].
Table V presents a summary of the hypothesis testing using con?rmatory factor
analysis. Table V shows that the hypothesis was supported for ?ve of the audit service
quality attributes, speci?cally Council Experience, Responsiveness, Independence,
Ethical Standards and Skepticism. Hence, overall satisfaction with audit service
quality in the NSW local council context is a positive function of the experience of the
audit ?rm and the audit team with the council, the independence of the audit ?rm from
the council, the extent to which the audit ?rm is responsive to the council’s needs, and
the ethical standards of the audit team, and a negative function of the skepticism of the
audit team members.
OLS regression model relating audit service quality attributes to satisfaction with the overall quality
of audit services provided
a,b
Factor score/attribute Coef?cient t-statistic p-value (2 tail)
Constant 2.951 5.180 0.000
Council experience 0.427 2.518 0.013
* *
Industry expertise 0.206 0.964 0.337
Responsiveness_1 0.735 2.998 0.003
* * *
Responsiveness_2 0.536 2.675 0.008
* * *
Technical competence 20.181 20.832 0.407
Independence 0.378 2.136 0.034
* *
Due care 0.066 0.295 0.769
Quality commitment 20.051 20.217 0.829
Field work conduct_2 0.030 0.157 0.875
Freshness of perspective 20.123 20.783 0.435
Individual responsibility 0.080 0.473 0.637
Executive involvement 20.134 20.889 0.376
Ethical standards 0.442 1.781 0.077
*
Skepticism 20.224 22.564 0.011
* *
Notes:
*
Signi?cant at the 10 per cent level;
* *
signi?cant at the 5 per cent level;
* * *
signi?cant at the
1 per cent level.
a
The dependent variable is overall satisfaction with the quality of audit services
provided:
b
Field work conduct_1 is excluded due to multicollinearity. Sample size: 155; F-statistic:
6.821; signi?cant at the p # 0.000; adjusted R
2
: 34.6 per cent
Table IV.
Audit service quality
attributes and
satisfaction
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5.5 Research question 2: additional analysis
We also conducted exploratory factor analysis on the 48 individual items of audit
service quality, and used the resulting factors in an OLS regression model explaining
overall audit service quality satisfaction. Using the Principal Components extraction
method with Varimax (Kaiser Normalisation) rotation, factors were extracted based on
an eigenvalue greater than one and an absolute value coef?cient cut-off of 0.40,
consistent with Carcello et al. (1992).
Some differences were found between the factor structure developed from the
exploratory and con?rmatory factor analyses. In particular, the exploratory factor
analysis produced a 13 factor structure, the ?rst of which was dominated by items
from the Responsiveness and Field Work Conduct audit service quality attributes. This
contrasted with the con?rmatory factor analysis where, as noted above,
Responsiveness and Field Work Conduct each split into two separate factors.
For Responsiveness, the ?rst factor in the con?rmatory analysis (Responsiveness 1)
comprised four items:
(1) the audit ?rm keeps council management informed during the year about
accounting and ?nancial reporting developments that affect the council;
(2) there is frequent communication between the audit team and council
management;
(3) the auditor adds value to the entity in terms of generating useful ideas for
improvement; and
(4) the audit ?rm reports internal control de?ciencies and the auditors’
recommendations on internal control are useful.
The second factor (Responsiveness 2) comprised three items:
(1) the audit ?rm is skilful in devising acceptable accounting treatments for
transactions that generate results that council management wants;
(2) the auditors are mindful of how busy the council’s key ?nance staff are and
contact these individuals only to the extent necessary; and
(3) the audit ?rm is agreeable to completing the audit by a date the client has set.
Hypothesis Expected direction Signi?cant p , 0.05 Direction
Council experience (H1) þ U U
Industry expertise (H2) þ X
Responsiveness (H3) þ U U
Technical competence (H4) þ X
Independence (H5) þ U U
Due care (H6) þ X
Quality commitment (H7) þ X
Executive involvement (H8) þ X
Field work conduct (H9) þ X
Audit committee (H10) þ Not tested
Ethical standards (H11) þ U U
Skepticism (H12) 2 U U
Freshness of perspective (H13) þ X
Individual responsibility (H14) þ X
Table V.
Summary of hypothesis
testing using
con?rmatory factor
analysis
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These two factors are logically different. The ?rst relates to operational aspects of the
interaction of the audit ?rm and audit team with the client council that enhance the
quality of the council’s internal control system and its accounting and ?nancial
reporting. The second may be seen as a “client appeasing” component of responsiveness.
While both are legitimate aspects of client satisfaction with the level of audit service
quality, they are different in nature. This difference was apparent in the exploratory
factor analysis. In the exploratory analysis, the items in the ?rst factor (Responsiveness
1 relating to operational aspects which enhance quality) loaded not with the items in the
second (client-appeasing) factor (Responsiveness 2), but with items from the attribute
grouping of Field Work Conduct, speci?cally the items that loaded on the ?rst of the two
factors extracted for Field Work Conduct.
For Field Work Conduct, the ?rst factor in the con?rmatory factor analysis (Field
Work Conduct 1) comprised the attributes:
.
the audit team members as a group have an adequate understanding of the
operations of the council;
.
the audit team members conducted the audit ?eld work in an appropriate
manner;
.
the audit ?rm conducts a thorough study of the client’s system of internal
control;
.
the audit ?rm makes extensive use of statistical techniques in conducting the
audit; and
.
the audit ?rm makes extensive use of computers in conducting the audit.
The second factor (Field Work Conduct 2) comprised the attributes:
.
the cost to the audit ?rm of different audit procedures, in terms of time expended,
is the major criterion as to whether a procedure is used;
.
the audit ?rm develops stringent time budgets for each audit area and expects its
people to meet them; and
.
the number of hours spent by the audit team to complete the audit (from the
beginning of ?eld work to the audit report date).
Again, these two factors are logically different. The ?rst (Field Work Conduct 1) relates
to operational aspects of ?eld work, while the second (Field Work Conduct 2) relates to
audit time and cost considerations.
The fact that the exploratory factor analysis placed the items Responsiveness 1 and
Field Work Conduct 1, from the con?rmatory factor analysis based on Carcello et al.
(1992), in the same factor is logical. Both relate to operational aspects of interactions of
the audit ?rm and audit team with the council in the conduct of the audit, leading to
enhanced outcomes in the internal control systems and accounting and ?nancial
reporting of the council.
When used in the OLS regression explaining overall satisfaction with audit service
quality, the factors produced from the exploratory factor analysis showed considerable
similarity in terms of the hypothesis results with those from the con?rmatory factor
analysis. Four of the ?ve attributes found to be positively related to overall satisfaction
with audit service quality in the analysis based on the con?rmatory factor analysis
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also dominated the ?rst three factors identi?ed in the exploratory factor analysis.
These were the attributes relating to Responsiveness, Independence, Ethical Standards
and Council Experience. With regard to the attribute of skepticism, the regression
based on the exploratory factor analysis showed Skepticism to be negatively and
signi?cantly associated with satisfaction, again consistent with the result for the
regression based on the con?rmatory factor analysis. The regression based on the
exploratory factor analysis found two additional attributes to be positively related to
satisfaction with audit service quality. These were Industry Expertise and Executive
Involvement in the audit.
6. Conclusions
This study addressed two research questions. The ?rst was what audit quality
attributes are perceived to be important to NSW local council ?nance professionals and
internal auditors when evaluating the quality of audit services provided by their
incumbent auditor? The second was what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by their
incumbent auditor?
With respect to the ?rst question, the study found that the audit quality attributes
perceived as most important in evaluating audit service quality were industry
expertise, council experience, technical competence, independence, ethical standards
and due care. The items comprising these attributes showed that local council ?nance
professionals and internal auditors perceived a quality audit service when the audit
partner and engagement staff are very knowledgeable about the industry and with
accounting and auditing standards generally, when the audit ?rm is considered to be a
specialist in local government, when the audit ?rm and engagement staff have gained
knowledge of and experience with the council in prior years, and where the audit staff
exercise independence and due care. The attribute groupings considered least
important by local council ?nance professionals and internal auditors included
skepticism, freshness of perspective, the size of the audit ?rm and the provision of
non-audit services.
With respect to the second question, ?ve audit quality attributes were found to be
related to overall satisfaction with audit service quality. Satisfaction with audit service
quality was found to be higher when the audit ?rm and team had experience with the
council, were responsive to council needs, were independent, and maintained
high-ethical standards. Satisfaction was higher when the audit ?rm and team
maintained a low level of skepticism.
These results are consistent with Behn et al. (1997), who also found that experience
with the client and responsiveness to client needs were positively associated with client
satisfaction, and that skepticism was negatively associated with satisfaction, in the
non-CAT context of their study. The results are also consistent with Pandit (1999) who
found that clients’ intention to retain their incumbent audit ?rm was positively
associated with responsiveness to client needs.
Behn et al. (1997) also found industry expertise and executive involvement in the
audit to be positively associated with client satisfaction. These associations were not
found in this study when the attributes of Carcello et al. (1992) were used as the
independent variables in the hypothesis testing. However, they were found to be
positively associated with satisfaction in the additional analysis when exploratory
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factor analysis was used to generate the independent variables for the hypothesis
testing. This suggests that the failure to ?nd their signi?cance in the original
hypothesis testing may be a result of the constraints of imposing the Carcello et al.
(1992) factor structure. The Carcello et al. (1992) factor structure may not completely ?t
different contexts of study and may fail to reveal some associations of signi?cance in
those contexts. Future research into the association between audit quality attributes
and satisfaction with audit service quality should be mindful of the appropriateness of
the Carcello et al. (1992) factor structure in different contexts and with different cohorts
of respondents.
Our study provides several contributions to the literature and to practice. First, the
consistency of our ?ndings in a CAT context with those of Behn et al. (1997) and Pandit
(1999) in non-CAT contexts, suggests that the concerns that CAT may lead to the
impairment of audit independence and quality may not be founded. Our study has
shown considerable consistency of the importance of audit quality attributes in both
CAT and non-CAT contexts. This suggests that, to the extent that client perceptions of
the importance of audit quality attributes in?uence client choice of, and satisfaction
with, auditors, those perceptions are similar in the CAT context of our study and the
non-CAT contexts of other studies. CAT has been argued to be a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit ?rms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005).
Our study suggests that policy-setters may be able to consider the bene?ts of CAT as a
regulatory form of audit procurement without necessarily incurring audit
independence and quality costs.
A second practical contribution of our study is that it allows audit ?rms to better
understand the audit service quality attributes valued by local council clients, and,
consequently, to differentiate their promotional and service-provision strategies to
accord with those attributes, as well as to improve their own audit quality in a local
council context and to deliver more satisfaction to local council clients. Audit ?rms
may be able to focus on a speci?c and reduced set of audit service quality attributes
that we have found to be most valued by local council clients; in particular, experience
with the council, responsiveness to council needs, independence and the maintenance
of high-ethical standards.
A limitation of the study is that audit quality was measured using perceptions of
audit service quality by local council ?nance professionals and internal auditors in a
CAT context. The perceptions, therefore, are those of clients as preparers of local
council ?nancial statements, rather than of external parties such as auditors or users of
those statements. As such, the ?ndings might not re?ect audit quality as perceived by
other parties interested in local government ?nancial reporting. Future research into
audit quality in local government, and in a CAT context, could well be directed at
non-preparer interest groups such as auditors, government regulatory bodies and other
users of local council ?nancial statements, and could also be directed to different
competitive bidding audit procurement regimes other than the CAT context of NSW
local government.
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Notes
1. The marketing literature discusses service quality in terms of the ServQual construct. This
construct consists of ?ve dimensions used to assess service quality; reliability,
responsiveness, assurance, empathy and tangibles (Zeithaml and Bitner, 2000, p. 82).
2. Several of the studies in this literature distinguish between audit ?rm and audit team
attributes (Schroeder et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Behn et al., 1997;
Behn et al., 1999), although the attributes comprising the audit ?rm and audit team
constructs are only operationalised in Schroeder et al. (1986) and Aldhizer et al. (1995).
3. It should be noted, however, that audit ?rms that become too responsive to the needs of the
client council may compromise their independence, with auditor-client con?icts being
resolved in favour of the council, resulting in a lower quality audit.
4. However, audit teams that are rotated too frequently are likely to consist of team members
who are unfamiliar with the operations of the council and do not have the experience
necessary to detect errors or irregularities.
5. The NSW Department of Local Government advised that, given the detail of the
questionnaire, the best way to obtain a good response rate from the ?nance professionals
was to administer the survey at a conference. As it was a national conference however, there
were ?nancial professionals from inter-state councils attending who completed the
questionnaire along with the NSW ?nance professionals. The responses for inter-state
respondents were excluded from the analysis.
6. Consistent with Schroeder et al. (1986, p. 89), audit quality was not de?ned in the survey to
avoid demand effects.
7. In terms of sensitivity analysis, three dependent variables were used: (1) satisfaction with the
audit ?rm; (2) satisfaction with the audit team; and (3) satisfaction with the overall quality of
audit services provided. The results were generally consistent regardless of which
dependent variable was used.
8. The high-response rate is due to the support of the survey by the NSWFinance Professionals
Executive, particularly the chairperson, Michael Sewell, and the NSW Department of Local
Government, particularly the Director, Performance Management and Compliance, Grahame
Gibbs.
9. t-Tests of differences between the two groups showed signi?cant differences at the 5 per cent
level for only two of the 48 items. The responses for ?nance professionals and internal
auditors were pooled.
10. All NA responses were excluded in calculating the means for ranking.
11. The attribute grouping Field Work Conduct 1 was excluded from the regression because of
high correlations (between 0.506 and 0.593) with some other variables. This attribute
grouping was not signi?cant when included in the regression and its exclusion improved the
signi?cance of some variables.
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