What do we know about the variance of audit quality? An empirical study from the perspective of individual auditor

In this paper, we analyze the variance in audit quality among a broad cross-section of listed firms in Chinese stock market from 1999 to 2012. The purpose of the analysis is to identify the importance of audit firm, audit client, and engagement auditor effects on the variance in audit quality. Using discretionary accruals and financial restatement to surrogate audit quality and based on simultaneous ANOVA method, we find that engagement auditor can add about 19% of incremental explanatory power to the variance in audit quality. As expected, audit firm effects and audit client effects also have significant influence on audit quality, which can add about 2% and 16% of incremental explanatory power to the variance in audit quality. In addition, we find that, relative to engagement auditors with short audit experience, engagement auditors with longer audit experience have no significant incremental power in explaining variance in audit quality. The analysis enriches previous studies by investigating audit client’s role and engagement auditor’s role in determining audit quality. Our study highlights the importance of understanding audit quality from the perspective of individual auditor.