Audit quality, monitoring mechanisms and auditor reporting behaviour

Abstract

This study extends previous research by empirically investigating the relationship of audit quality and governance monitoring mechanisms with the probability of receiving a qualified audit report. Using Australian manufacturing company data we find that Big 4 auditors are more likely to issue a clean audit report. We also note that auditors are less likely to qualify a certain firm’s financial statements when higher levels of non-audit fees are derived. Finally, this study adds to the growing body of literature that documents the importance of boards’ role in monitoring management behavior; that is, we find that smaller size boards appear to be less effective than larger size boards. The above findings have implications about the perception of auditor independence and effectiveness of board of directors.