The Relative Importance of Audit Quality Attributes

Alan Kilgore, Renee Radich & Graeme Harrison

he importance of auditing and perceptions of au- Corporate collapses and audit failures have threatened the

T diting to the efficient operation of capital markets

is well recognised. For example, Wallman (1996)
and Coffee (2001) argue that without high quality audits
credibility of the audit function, with audit quality once
again being a major issue. Motivated by the significance of
auditing and perceptions of audit quality in enhancing
the capital market would be inefficient and the cost of the reliability and credibility of financial statements, this
capital higher. Similarly, Monroe and Tan (1997: 35) article investigates the relative importance of audit team
conclude ‘the quality of an audit can affect the reliability and audit firm attributes in perceptions of audit quality
of audited financial information, which in turn plays by users of audit services. Data are gathered from 81 users
an important role in capital markets’. Audit quality of audit services and analysed using adaptive conjoint
is, therefore, fundamental in providing the confidence analysis in order to measure the relative importance of
that capital market participants require and plays an audit team and audit firm attributes in perceptions of
important role in the effective allocation of economic audit quality. The results show that, in general, users of
resources. audit services perceive audit team attributes as being
As a result of a series of corporate collapses and relatively more important than audit firm attributes in
audit failures, perceptions of audit quality have been at perceptions of audit quality. The findings of the study
issue over recent decades. These events and the ensuing have implications for regulators and the accounting
investigations have resulted in changes to regulatory profession concerned with improving confidence in
arrangements. In Australia the ninth stage of the corporate governance and the effectiveness and integrity
Corporate Law Economic Reform Program (Audit Reform of the audit process, and for audit firms in monitoring
and Corporate Disclosure) Act 2004 (CLERP 9) proposed and promoting the quality of their audit services.
a range of measures designed to enhance the general cor-
porate disclosure framework. The Australian Securities
Exchange’s Corporate Governance Council also issued a
report entitled Principles of Good Corporate Governance
and Best Practice Recommendations (2003). Similarly,
in the United States (US) the Corporate and Auditing
Accountability, Responsibility, and Transparency Act of
2002, commonly called the Sarbanes-Oxley Act (2002)
(SOX), was enacted in response to financial reporting
irregularities (McGowan and Brisendine 2003). Various
governance initiatives were also implemented in the
United Kingdom (UK), including the issuance of the
Combined Code in 2003.
More recently the global financial crisis (GFC) has
seen policy makers once again focus attention on the
importance of an effective audit function as a key compo-
nent in effective capital markets and attempt to identify
key drivers of audit quality. For example, in the US, the
Advisory Committee on the Auditing Profession (2008) Correspondence
was established to provide advice to the US Treasury Alan Kilgore, Department of Accounting and Corporate
Governance, Macquarie University, NSW 2109, Australia.
Department on the auditing profession. In the UK the
Tel: + 61 2 9850 8564; fax: + 61 2 9850 8497; email:
Financial Reporting Council released The Audit Quality alan.kilgore@mq.edu.au
Framework (2008) and in Australia, the Treasury released
Audit Quality in Australia – A Strategic Review (2010). doi: 10.1111/j.1835-2561.2011.00141.x

Australian Accounting Review No. 58 Vol. 21 Issue 3 2011 253

The Relative Importance of Audit Quality Attributes
These investigations and regulatory changes make it
clear that there has been considerable dissatisfaction with
the effectiveness of corporate governance, the quality of
the audit process and the roles of auditors and auditing.
In response, regulators and the accounting profession
have taken a number of policy measures to improve
audit quality in both fact and appearance. Recent
examples include the SEC’s proposed ban on audit
firms undertaking non-audit services (NAS) in 2000
(SEC 2000) and the rapid adoption of SOX following
Enron’s collapse (Francis 2004). However, these policy
decisions have been made despite the fact that the
empirical evidence regarding factors that can enhance or
impair audit quality is inconclusive and uncertain. This
study provides empirical evidence on the factors that are
perceived to affect audit quality, specifically the relative
importance of audit team and audit firm attributes in
affecting audit quality as perceived by users of audit
services.
This study contributes to the literature in three ways.
First, there is only limited empirical evidence of the
factors that affect perceptions of audit quality by users
of audit services. However, research into perceptions of
audit quality is important because it is perceptions that
determine the credibility of the audit report (Shockley
1981) and that have the potential to erode public
confidence in the integrity of the financial reporting
system (Pany and Reckers 1988). Consequently, gaining
an understanding of factors that affect perceptions
of audit quality is important because it can help
regulators and the accounting profession to formulate
policy based on empirical evidence rather than on
a priori assumptions (Schelluch and Thorpe 1995).
This evidence is also useful in ensuring that policies
and practices support confidence and credibility in the
audit function by encompassing attributes found to be
relatively more important in perceptions of audit quality.
Second, the findings of this study extend the scope
of prior studies by examining the relative importance of
audit team and audit firm attributes in perceptions of
audit quality by examining whether users place greater
importance on one type of attribute compared to the
other. Prior studies on perceptions of audit quality have
identified the distinction between, and importance of,
audit team and audit firm attributes (see, for example,
Schroeder et al. 1986; Carcello et al. 1992; Warming-
Rasmussen and Jensen 1998). However, these studies
have only examined the importance of audit quality
attributes in an absolute sense and have not examined
the relative importance (how important an attribute is
relative to all others) of attributes in perceptions of audit
quality.
Third, some studies (see, for example, Schroeder
et al. 1986; Carcello et al. 1992) found that audit team
attributes were more important in assessing audit quality
than audit firm attributes. By contrast, other studies
254 Australian Accounting Review
A. Kilgore, R. Radich & G. Harrison
(see, for example, Warming-Rasmussen and Jensen
1998) found a greater emphasis on audit firm attributes
compared to audit team attributes. Additionally, there
are sufficient variations in the number and type of
attributes and subject groups used in prior studies
that reduce their comparability and usefulness. Using
conjoint analysis, this study makes a unique and
innovative contribution to the literature. Conjoint
analysis, which has not previously been used to measure
the relative importance of audit quality attributes, allows
direct evidence to be obtained regarding the relative
importance of attributes in perceptions of audit quality.
Literature Review and Research Questions
There is a vast body of literature relating to audit
quality and its measurement. Despite the extent of
that literature, no single generally accepted definition
or generally accepted measure of audit quality has
emerged. Much of the audit quality literature derives
from DeAngelo’s (1981) frequently cited definition of
audit quality (the probability of both discovering and
reporting a breach or misstatement in the accounting
system or financial statements). Krishnan and Schauer
(2000) observe that the two aspects of the DeAngelo
(1981) definition are unobservable.
Two approaches have been adopted to measuring
audit quality; a direct and an indirect approach. The
direct approach is based on the assumption that the
probability of discovery and reporting of breaches will
be reflected in outcomes of the audit, such as audit
errors and financial statement outcomes. Examples of
studies using the direct approach include Brown and
Raghunandan (1995) and Colbert and Murray (1998)
(audit errors), Balsam et al. (2003) (abnormal accruals)
and Krishnan (2003) (valuation of earnings surprises).
Research using the indirect approach is of two types.
The first type measures audit quality using surrogates for
audit quality, such as audit firm size (see, for example,
DeAngelo 1981; Francis 1984; Palmrose 1986; Francis
and Simon 1987; Craswell et al. 1995; Colbert and
Murray 1998), audit tenure (see, for example, Geiger and
Raghunandan 2002), provision of NAS (see, for example,
Wines 1994; Barkess and Simnett 1994; Craswell 1999;
Elstein 2001) and industry experience (see, for example,
Craswell et al. 1995; Hogan and Jeter 1999). These
surrogate studies generally examine attributes of the
audit firm, rather than the audit team, and typically
examine only one attribute in each study.
The second type adopts a behavioural perspective
and assesses audit quality by examining the attributes
perceived to be associated with audit quality. Behavioural
studies include Shockley (1981), Mock and Samet
(1982), Knapp (1985), McKinley et al. (1985), Schroeder
et al. (1986), Knapp (1987), Sutton and Lampe (1990),

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A. Kilgore, R. Radich & G. Harrison
Gul (1991), Knapp (1991), Carcello et al. (1992), Sutton
(1993), Beattie and Fearnley (1995), Moizer (1995),
Behn et al. (1997), Warming-Rasmussen and Jensen
(1998), Behn et al. (1999), Chang and Monroe (2001)
and Duff (2004). These behavioural studies typically
examine combinations of audit quality attributes, and
include both audit firm and audit team attributes.
Two conclusions can be drawn from the behavioural
studies. The first is that users of audit services attach
different degrees of importance to particular audit
quality attributes in their perceptions of audit quality.
The second is that, in general terms, audit team attributes
are considered to be more important than audit firm
attributes in perceptions of audit quality. Based on this
discussion, this study examines the following research
questions:
RQ1: Do users of audit services attach different relative
importance to audit quality attributes?
RQ2: Are audit team or audit firm attributes considered
relatively more important in perceptions of audit
quality by users of audit services?
The research questions are based on two assumptions.
The first is that audit quality can be regarded as a set of
attributes with differing relative importance for users
of audit services. This assumption has support in both
the theoretical and empirical literature. The concept
of product quality in the economics-based literature,
summarised in Davidson and Monroe (1999), contends
that goods and/or services are considered to be composed
of sets or bundles of many different characteristics or
attributes. Goods and/or services are only considered to
have value to consumers because of the various attributes
that combine together to form the good or service.
Consumers will seek different attributes in the good or
service and will place different values on each attribute
depending on the consumers’ utility of the attribute.
The ‘quality’ of an economic good or service can
therefore be viewed as the sum of the values placed on
the desired attributes contained in the good or service.
With respect to the empirical literature, Simunic and
Stein (1987) find that audit services are not seen as
homogeneous but differentiated by users on the basis of
differences in the values placed on the attributes of audit
services. Similarly, the studies that examine audit quality
from a behavioural perspective demonstrate that there
is a long list of attributes perceived to be important in
assessing audit quality and there is considerable variation
in the importance of those attributes to users of audit
services.
The second assumption is that attributes perceived to
affect perceptions of audit quality may be classified as
one of two types; audit team and audit firm attributes.
Audit team attributes are characteristics of the audit
team and audit partner and include the level of partner
attention to the audit, communication and quality of

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The Relative Importance of Audit Quality Attributes
working relationships between the audit team and client
management, and the skills and experience of the audit
team (drawing examples from Schroeder et al. 1986).
Audit team attributes also include the knowledge of the
audit team and partner both generally and in relation
to the client’s industry, and the ethical standards of
the audit team (Carcello et al. 1992); and the technical
competence of the audit team (Beattie and Fearnley
1995; Zerni 2008). Schroeder et al. (1986) argue that,
because the audit service is delivered by a relatively small
number of professionals comprising the audit team,
audit team attributes are likely to play an important role
in perceptions of audit quality. Audit team attributes
were also found to be important in perceptions of
audit quality in the behavioural studies identified
earlier.
Audit firm attributes are characteristics of the audit
firm. Both the surrogate and behavioural studies have
found audit firm attributes to be important in percep-
tions of audit quality. The surrogate studies identify
audit firm attributes to include audit firm size, litigation
experience, auditor reputation, auditor tenure, provision
of NAS, audit structure and industry experience to be
associated with audit quality. The behavioural studies
identify audit firm attributes including quality control
procedures, regulatory experience (Schroeder et al.
1986), audit firm responsiveness to client needs and
compliance with general audit standards (Carcello et al.
1992), and firm industry experience and sceptical atti-
tude of the firm (Warming-Rasmussen and Jensen 1998).
Research Method
Adaptive conjoint analysis
This study gathers and analyses data using Sawtooth
Software’s Adaptive Conjoint Analysis System (ACA).
The ACA system, developed by Johnson (1987), is
a computer-administered, interactive conjoint method
and combines the design of conjoint tasks, data
collection and data analysis. ACA uses a computerised
questionnaire that consists of four sections, namely,
importance, ratings, trade-off and calibration. The
importance section asks respondents to indicate which
audit quality attributes they consider most important.
In the ratings section, respondents provide a rating
preference for different levels of the particular audit
quality attribute. In the trade-off section a series of
customised paired comparison trade-off questions are
presented to respondents in order to obtain the conjoint
data so that utility values can be calculated. In the
calibration section a series of ‘calibration concepts’
are composed using those attributes determined to be
most important. This information is used to calibrate
the utility values calculated in the earlier sections of
Australian Accounting Review 255
The Relative Importance of Audit Quality Attributes
the questionnaire for use in further data analysis. A
unique feature of ACA is that the procedure is both
‘adaptive’ and ‘dynamic’ in that the answers already
provided by respondents are used at each step to select
the next paired comparison question.
Audit quality attributes
Collection of conjoint data using the ACA system
requires identification of the attributes and attribute
levels (descriptors) to be included in the survey
questionnaire. Initially, five audit firm attributes were
identified from the literature as the main audit firm
attributes implicated in perceptions of audit quality.
These were audit firm size, audit tenure, provision
of NAS, audit structure and industry experience. Five
audit team attributes were selected: partner/manager
attention to audit; communication between audit team
and client management; partner knowledgeable about
client industry; very knowledgeable audit team; and
senior manager/manager knowledgeable about the client
industry. These audit team attributes were the five
highest rated in the two most significant behavioural
studies of perceptions of audit quality (Schroeder et al.
1986; Carcello et al. 1992).
ACA survey questionnaire
The survey questionnaire was previewed for errors
using the ACA system tool that automatically checks
the completed survey for errors or warnings. Four
faculty members of the Department of Accounting and
Finance at Macquarie University also reviewed the draft
questionnaire. This process resulted in a number of
minor changes being made to the questionnaire, namely
the use of three levels for the audit firm size attribute
(Big N firms, mid-tier and local firms), and audit tenure
being specified as audit partner tenure with two levels
(five years or fewer and more than five years).
The reviewers also reported that they had difficulty
understanding and interpreting the term audit structure.
Consulting the relevant literature (see, for example,
Cushing and Loebbecke 1986; Ashton and Willingham
1988; Dirsmith and Haskins 1991; Carcello et al.
1995) revealed that audit structure methodologies are
not likely to be familiar to users of audit services.
Consequently, this attribute was replaced with the
attribute ‘audit quality assurance review’ with two
levels (internal/external). The inclusion of this attribute
was motivated by debate surrounding the efficacy of
audit quality reviews and the subsequent formation,
in February 2006, of the Audit Quality Review Board
(AQRB).1 Furthermore, a number of empirical studies
have attempted to determine whether peer review is
effective in improving audit quality. Examples of these
256 Australian Accounting Review
A. Kilgore, R. Radich & G. Harrison
studies include Francis et al. (1990), Wallace (1991), Deis
and Giroux (1992), Krishnan and Schauer (2000) and
Hilary and Lennox (2005). These requirements and the
distinction between external and internal quality control
reviews are likely to be known by users of audit services
and provide further motivation for the inclusion of this
attribute with two levels (internal/external).
The survey questionnaire was pilot tested by 19 faculty
members of the Department of Accounting and Finance
at Macquarie University. No difficulties in completing
the questionnaire were reported. The final audit firm
and audit team attributes, their operational definitions
and the attribute levels used in the ACA survey
questionnaire are shown in Table 1. A copy of the ACA
survey questionnaire used in this study is available on
request.
Data collection
The respondents chosen for this study are audit
committee chairs/members and financial analysts/fund
managers representing users of audit services. As no
readily accessible database of either respondent group
is available it was necessary to construct databases from
publicly available information. The audit committee
chairs/members database was constructed from annual
reports of companies listed on the Australian Securities
Exchange (ASX) selected at random from Aspect
Annual Reports Online Database. Information regarding
audit committee membership was obtained from the
corporate governance section of the annual reports from
which the names of audit committee chairs/members
were obtained. Contact details for each audit committee
chair/member were obtained from the Business Who’s
Who of Australia Database, where available. A total of
318 audit committee chairs/members were identified,
with 158 representing the Top 500 firms listed on the
ASX, and the remaining 160 representing non Top 500
firms.
The financial analysts/fund managers database was
constructed from information obtained from the
Australian Financial Services Directory (AFSD), which
provides web addresses for all financial analysts/fund
managers listed in the AFSD. Individual websites were
accessed to obtain the names, position descriptions
and contact details (mailing address, telephone number
and email address). Only individuals whose position
descriptions clearly identified them as working in
financial analysis/funds management areas, or who
could clearly be identified as having prior work
experience in these areas, were selected for inclusion
in the database. In order to obtain a similar sample
size for financial analysts/fund managers, the names and
contact details of 331 individuals were selected through
this process.

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A. Kilgore, R. Radich & G. Harrison The Relative Importance of Audit Quality Attributes

Table 1 Audit firm and audit team attributes, operational definitions and attribute levels used in the ACA questionnaire
Attribute Operational Definition Attribute Levels
Audit firm size Big N/Mid-tier/Local firm 1. Big N auditor
2. Mid-tier firm
3. Local firm
Audit partner tenure Duration of auditor–client relationship 1. ≤5 years
2. >5 years
Provision of non-audit services (NAS) Percentage of NAS fees to audit fees 1. <30% of audit fees
2. 30–60% of audit fees
3. >60% of audit fees
Industry experience Industry specialisation 1. Specialist
2. Non-specialist
Audit quality assurance review Audit quality control review 1. External quality control review
2. Internal quality control review
Partner/manager attention to audit Activity level of partner/manager 1. High activity level
2. Moderate activity level
3. Low activity level
Communication between audit team and Nature and frequency of communication 1. Formalised and regular
client management 2. Informal and regular
3. Ad hoc
Partner knowledgeable about client Years of experience in client industry 1. ≤3 years
industry 2. 4–6 years
3. >6 years
Senior manager/manager Years of experience in client industry 1. ≤3 years
knowledgeable – client industry 2. 4–6 years
3. >6 years
Very knowledgeable audit team Years of experience in accounting and auditing 1. ≤3 years
2. 4–6 years
3. >6 years

Data collection was undertaken in two stages. In Results

stage 1, 649 invitation letters and acceptance forms were
mailed to all 318 audit committee chairs/members and
331 financial analysts/fund managers. After following
the multiple mailing procedure in line with Dillman’s
(2000) Tailored Design Method (TDM), 173 responses
agreeing to participate in the study were received from
audit committee chairs/members (96) and financial
analysts/fund managers (77). An overall response rate
of 28.8% to the invitation letter was achieved.
Stage 2 commenced with each audit committee
chair/member and financial analyst/fund manager who
agreed to participate in the study being sent an
email thanking them and providing details of how
to access the survey questionnaire online. Subsequent
emails/telephone calls were made to encourage re-
spondents to complete the questionnaire. In total,
22 respondents withdrew from the study despite
initially agreeing to participate. A further 66 did not
respond to repeated emails/telephone calls. A total of
85 respondents attempted the questionnaire, of which
four were incomplete, resulting in an overall response
rate of 46.8% of respondents that initially agreed to
participate. For audit committee chairs/members, 40.6%
responded; for financial analysts/fund managers 54.5%
responded. Table 2 summarises the response rates for
stage 1 and 2 procedures.
ACA average utility values
Prior to analysis, the utility data must be scaled and
normalised so that utility values can be compared across
respondents.2 Table 3 shows the average utility values.
The average utility values represent the desirability of
the attribute levels within each attribute.3
Relative importance scores
To enable comparison between attributes, the relative im-
portance score for each attribute across all respondents
was calculated using the formula:
(MaxU − MinU )i
RI i = (1)

n
(MaxU − MinU )
i
Where: RI i = the relative importance of the ith
attribute
Max U = the maximum utility of the ith attribute
Min U = the minimum utility of the ith attribute.
The relative importance scores for each attribute
across all respondents are provided in Table 4 and are


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The Relative Importance of Audit Quality Attributes A. Kilgore, R. Radich & G. Harrison

Table 2 Response rates

Audit Committee Chairs/ Financial Analysts/Fund
Members (% of total) Managers (% of total) Total Percent
Stage 1 Procedures
Invitations mailed 318 (49.0) 331 (51.0) 649 100.0
Less: No response 192 (60.4) 236 (71.3) 428 64.6
Undeliverable 30 (9.4) 18 (5.4) 48 7.4
Responses received 96 (30.2) 77 (23.3) 173 28.8
Stage 2 Procedures
E-mails sent 96 (55.5) 77 (44.5) 173 100.0
Less: Withdrawals 15 (15.7) 7 (9.1) 22 12.8
No response 39 (40.6) 27 (35.1) 66 38.1
Complete responses 39 (40.6) 42 (54.5) 81 46.8
Incomplete responses 3 (3.1) 1 (1.3) 4 2.3

Table 3 Average utility values for all levels of all attributes Since the relative importance scores of the 10 attributes
for all complete responses (N=81) total 100, if the attributes were equally preferred by
Average respondents, the importance score of each attribute
Attribute Utility would be 10.4
Attribute Levels Values a Table 4 and Figure 1 indicate that the most important
Audit firm size Big N auditor 52.86 attribute for respondents is ‘Audit firm size’ (relative
Mid-tier firm 8.64 importance score 13.63). The average utility values
Local firm −61.50 (Table 3) indicate that the preferred levels for all
Audit partner tenure 5 years or less 21.54 respondents are, firstly, ‘Big N auditor’ average utility
More than 5 years −21.54
Provision of NAS <30% of audit fees 38.59
value 52.86) and then ‘Mid-tier firm’ (average utility
30–60% of audit fees −2.22 value 8.64), since the average utility values for both levels
>60% of audit fees −36.37 are positive.
Audit firm industry Specialist 50.61 Other attributes considered important by respondents
experience Non-specialist −50.61 (relative importance scores greater than 10) in order
Audit quality assurance External quality assurance 14.96
review review
of relative importance are ‘Partner/manager attention
Internal quality assurance −14.96 to audit’ (relative importance score 12.72), ‘Senior
review manager/manager knowledgeable – client industry’
Partner/manager attention High activity level 58.24 (relative importance score 11.04), ‘Very knowledgeable
to audit Moderate activity level −1.94 audit team’ (relative importance score 10.65), ‘Commu-
Low activity level −56.3
Communication between Formalised and regular 33.86
nication between audit team and client management’
audit team and client Informal and regular 15.73 (relative importance score 10.62), ‘Audit firm industry
management Ad hoc −49.59 experience’ (relative importance score 10.51) and
Partner knowledgeable 3 years’ experience −52.26 ‘Partner knowledgeable about client industry’ (relative
about client industry 4–6 years’ experience 9.72 importance score 10.34). The least important attributes
>6 years’ experience 42.55
Senior manager/manager 3 years’ experience −56.09
for respondents are ‘Audit quality-assurance review’,
knowledgeable – client 4–6 years’ experience 11.66 ‘Audit partner tenure’ and ‘Provision of non-audit
industry >6 years’ experience 44.44 services’ (relative importance scores less than 10).
Very knowledgeable 3 years’ experience −57.26 Within each attribute the level preferred by respon-
audit team 4–6 years’ experience 14.52 dents is provided by the average utility values (Table 3).
>6 years’ experience 42.74
For the attribute ‘Partner/manager attention to audit’,
a respondent preference is for a ‘high activity level’ (aver-
Utility values are interval data scaled to an arbitrary additive
constant within each attribute using the ‘Zero-Centred Diffs’ age utility value 58.24). Respondents prefer a minimum
method. level of knowledge of at least four years for the attributes
‘Partner knowledgeable about client industry’, ‘Senior
manager/manager knowledgeable – client industry’, and
shown in histogram graphic form in Figure 1. Relative ‘Very knowledgeable audit team’, since the average
importance scores measure how much influence an utility values for levels ‘4–6 years’ experience’ (average
attribute has on a person’s choices. An attribute with utility values 9.72, 11.66 and 14.52, respectively) and
a high importance score is more influential because the ‘More than 6 years’ experience’ (average utility values
difference between the average utility values at the ‘best 42.55, 44.44 and 42.74, respectively) are positive for all
level’ and the ‘worst level’ for such an attribute is high. attributes. Respondents prefer regular communication

258 Australian Accounting Review 

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A. Kilgore, R. Radich & G. Harrison The Relative Importance of Audit Quality Attributes

Table 4 Attribute relative importance scores for all relative importance scores were greater than 10. Only
complete responses (N = 81) two audit firm attributes had relative importance scores
Relative Importance greater than 10. These two attributes were audit firm size
Attribute Score and audit firm industry experience. The results for each
Audit firm size 13.63
of the 10 attributes are discussed in descending order of
Audit partner tenure 6.39 relative importance.
Provision of NAS 8.94
Audit firm industry experience 10.51
Audit quality assurance review 5.15 Audit firm size
Partner/manager attention to audit 12.72
Communication between audit team 10.62
and client management This attribute was ranked as the most important
Partner knowledgeable about client 10.34 attribute. In terms of attribute levels, respondents
industry indicated a preference for Big N and mid-tier audit firms
Senior manager/manager 11.04 compared to local firms. This result is not surprising
knowledgeable – client industry
since audit firm size has been demonstrated to be an
Very knowledgeable audit team 10.65
important factor in perceptions of audit quality in prior
literature (see, for example, DeAngelo 1981; Francis
2004), with audit firm size serving as a proxy for audit
with client management, whether formal or informal quality, based on the assumption that larger audit firms
(average utility values of 33.86 and 15.73, respectively) are more competent and independent than smaller firms,
for the attribute ‘Communication between audit team resulting in audits of a higher quality.
and client management’. For the attribute ‘Audit firm
industry experience’, the level ‘specialist’ (average utility
value 50.61) is preferred by respondents. Partner/manager attention to audit

Respondents ranked this attribute second in terms

Discussion
The study found that, in general terms, users of audit
services consider audit team attributes to be relatively
more important than audit firm attributes in their
perceptions of audit quality. All five audit team attributes
were found to be relatively more important since their
of relative importance. This ranking emphasises the
perception by respondents of the importance of the
audit partner/manager in providing a high level of audit
quality. The attribute level with the highest average
utility value was ‘high activity level’. This result supports
findings of studies such as Knechel (2000), who observes
that, since auditing is inherently a judgement and

Audit quality assurance review

Audit partner tenure

Provision of non-audit services

Partner knowledgeable about client industry

Audit firm industry experience

Communication between audit team and client

management

Very knowledgeable audit tea m

Senior manager/manager knowledgeable -client

industry

Partner/manager attention to audit

Audit firm size.

0.00 5.00 10.00 15.00

Figure 1 The relative importance of attributes for all respondents


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The Relative Importance of Audit Quality Attributes
decision-making process, audit quality is particularly
contingent upon both the judgement and decision-
making qualities of the members of the audit team and
the audit partner.
Senior manager/manager knowledgeable – client
industry
Respondents ranked this attribute third most important
in their perception of audit quality. Greater average
utility values were assigned to the levels ‘4–6 years’
experience’ and ‘More than 6 years’ experience’
compared to the level ‘3 years’ experience’, thereby
rating more experience as more important in perceptions
of audit quality. The importance accorded to this
attribute is, again, likely explained by recognition that the
audit manager is closely connected with the individual
audit procedures and practices that affect audit quality.
Audit managers are responsible for the conduct of the
audit and the supervision and review of the work of the
audit team. Consequently, audit managers are pivotal in
ensuring that the audit is conducted to a high standard.
Very knowledgeable audit team
Respondents ranked this attribute fourth most im-
portant. They assigned higher average utility values
to the levels ‘4–6 years’ experience’ and ‘More than
6 years’ experience’ than to the level ‘3 years’ experience’,
thereby indicating more experience as more important
in perceptions of audit quality. This finding supports the
results of Zerni (2008), who argues that audit quality
is related to the characteristics of the audit engagement
staff; that is, to audit team characteristics, which include
factors such as the technical competence, knowledge and
experience of the audit team.
Communication between audit team and client
management
This attribute was ranked fifth in terms of relative
importance. Respondents assigned the highest average
utility value to the level ‘Formalised and regular’
communication and higher average utility values to the
level ‘Informal and regular’ compared to ‘ad hoc’, further
emphasising the importance of regular communication,
whether formal or informal, as opposed to ad hoc
communication.
Audit firm industry experience
Respondents ranked this attribute sixth in terms of
relative importance, indicating that audit firm industry
260 Australian Accounting Review
A. Kilgore, R. Radich & G. Harrison
experience is considered less important than other
attributes in perceptions of audit quality. Within the
attribute respondents assigned the greatest average utility
value to the audit firm being an industry specialist.
Prior studies (see, for example, Hogan and Jeter 1999;
Deis and Giroux 1992; Solomon et al. 1999) support
a link between audit firm industry experience and
audit quality. These studies argue that because industry
specialists have more experience, have financial savings
(economies of scale) and a higher concentration of
clients, they will make better judgements and therefore
provide audits of higher quality. Further, studies by
Craswell et al. (1995), Knechel et al. (2007) and
Lowensohn et al. (2007) suggest that participants in
the audit market perceive differences in audit quality
due to factors such as industry specialisation. While the
result in this study supports prior research in finding that
respondents assigned the greatest utility to the ‘specialist’
attribute level, it also extends earlier research by finding
that industry experience is relatively less important than
other attributes in assessing audit quality.
Partner knowledgeable about client industry
Respondents ranked this attribute seventh in terms of
relative importance, indicating that it was somewhat less
important in perceptions of audit quality. The attribute
levels with the highest/lowest average utility values were
‘More than 6 years’ experience’ and ‘3 years’ experience’,
respectively. These findings indicate that users of audit
services, while not considering partner knowledge about
the client industry to be particularly important in their
assessments of audit quality, nevertheless prefer a more
experienced partner compared to a less experienced one.
An explanation for this finding is that the role of the
audit partner in the conduct of the audit is somewhat
different from that of the audit manager and audit team.
While the audit partner has overall responsibility for
the audit engagement, it is the responsibility of the audit
manager to coordinate and supervise the execution of the
audit program, and the responsibility of the audit team
to undertake the audit procedures. Users of audit services
appear to be aware that while the audit partner bears the
responsibility for the audit, it is the other members of
the audit team and their connection to individual audit
procedures and practices that play a more significant role
in achieving an audit of high quality.
Provision of non-audit services
Respondents ranked this attribute eighth in relative
importance, indicating that they did not consider
this attribute to be particularly important in their
perceptions of audit quality. However they assigned

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A. Kilgore, R. Radich & G. Harrison
the greatest average utility value to the level ‘Less than
30% of audit fees’. The result regarding the average
utility value is not surprising given the significant and
ongoing attention that has been given to the issue of
NAS provision by audit firms in both the academic and
professional literature and by regulators and legislators
in recent years. In particular, the provision of NAS has
been the subject of considerable scrutiny and recent
legislative and regulatory change in Australia (CLERP 9)
and elsewhere (e.g., SOX in the US). By indicating a
preference for limiting the provision of NAS by audit
firms, respondents appear to support recent legislative
and regulatory efforts on this issue.
Audit partner tenure
Respondents ranked this attribute ninth in relative
importance in their perceptions of audit quality,
indicating that they did not consider audit partner tenure
to be very important. However, respondents assigned
the highest average utility vales to the level ‘5 years or
less’. The result regarding the average utility value is
most likely due to audit partner tenure having received
significant attention by regulators and the auditing
profession. Specifically, CLERP 9, Australian Securities
and Investments Commission’s Policy Statement PS 187
Auditor Rotation, and standards set by the Accounting
Professional and Ethical Standards Board mandate lead
audit and audit review partner rotation every five
years. The intent of these regulatory and professional
mandates is to restore public confidence in the auditing
process and in the quality of that process. Nevertheless,
it is interesting to note that respondents consider
this attribute to be relatively less important in their
perceptions of audit quality.
Audit quality assurance review
In terms of relative importance respondents ranked this
attribute the lowest for all attributes (tenth). Within
the attribute respondents assigned the greatest average
utility value to the level ‘External quality assurance
review’. Recent attention has been given to the issue
of audit quality review. For example, the Audit Quality
Review Board (AQRB) was established in 2006 with the
stated objective of undertaking independent, transparent
monitoring of the quality of assurance services in order
to enhance audit quality. The intent of this initiative
is aimed at restoring public confidence in the auditing
process and in the quality of that process. Given this
intent, it is interesting to find that respondents consider
this attribute to be relatively less important in their
perceptions of audit quality.

C 2011 CPA Australia
The Relative Importance of Audit Quality Attributes
Implications
To date, there is limited empirical evidence of the
attributes that affect perceptions of audit quality and
limited evidence regarding the relative importance of
those attributes for users of audit services. The findings
from this study are important because it is these percep-
tions that determine the credibility of the audit report
and are associated with confidence in the integrity of the
financial reporting system. This confidence is important
to capital market participants and plays a prominent role
in the effective allocation of economic resources (Coffee
2001; Monroe and Tan 1997; Wallman 1996).
The findings of this study have implications at an
international level. As previously indicated, corporate
collapses and audit failures and the ensuing investiga-
tions have resulted in significant changes to regulatory
arrangements in an effort to enhance the reliability
and credibility of financial statements (e.g., CLERP 9
in Australia, SOX in the US and the Combined Code
in the UK). More recently the GFC has seen policy
makers again focus attention on the importance of
an effective audit function as a key component in
effective capital markets. Examples include the Audit
Quality in Australia – A Strategic Review (2010) by the
Treasury in Australia, the final report of the Advisory
Committee on the Auditing Profession in the US and
the release in the UK of The Audit Quality Framework
(2008).
These reports have identified key drivers (indicators)
central to achieving high audit quality and, in particular,
have recognised the importance of the culture within au-
dit firms and audit partner and staff skills (i.e., audit team
attributes) as important drivers of audit quality. The
International Forum of Independent Audit Regulators
(IFIAR) has also endorsed these drivers of audit quality.
These developments have further encouraged regulators
and policy makers at an international level to focus
on these drivers of audit quality. The findings of this
study that users of audit services consider audit team
attributes to be relatively more important than audit firm
attributes in their perceptions of audit quality, will assist
regulators and policy makers internationally to address
any real or perceived threats to these drivers of audit
quality.
The findings also have implications for regulators,
the accounting profession and audit firms. The findings
have implications for regulatory and professional bodies,
which, in seeking to improve audit quality, have focused
on audit firm factors such as audit tenure (both
firm and partner), the provision of NAS and audit
quality assurance reviews. This focus, however, has been
determined more by a priori arguments and normative
assertions than by empirical evidence (Schelluch and
Thorpe 1995). The findings of this study provide direct
Australian Accounting Review 261
The Relative Importance of Audit Quality Attributes
evidence that, relative to audit team attributes, the
only audit firm attributes relatively more important
in perceptions of audit quality are audit firm size and
audit firm industry experience. The findings of the
study are therefore useful in assisting regulatory and
professional bodies in formulating policy based on
direct empirical evidence of the relative importance of
attributes perceived to affect audit quality by users of
audit services.
The finding that, in general terms, audit team
attributes are relatively more important than audit
firm attributes is also relevant to audit firms in
communicating and promoting themselves with clients
and potential clients. Despite the greater importance
accorded to audit team attributes, generally speaking,
users of audit services must rely on attributes they can
observe, particularly audit firm attributes (specifically
audit firm size). Nevertheless, the opportunity exists
for audit firms to make available through their com-
munications and promotions with clients, particularly
prospective clients, information about their audit team
and its characteristics. Making audit team characteristics,
particularly those characteristics that have been found in
this study to be relatively more important in perceptions
of audit quality, more publicly visible and available to
clients may be a more effective means of demonstrating
and signalling audit quality than promoting audit firm
characteristics.
This opportunity may be of particular importance to
mid-tier and local audit firms, who may differentiate
themselves and demonstrate audit quality through
emphasising audit team attributes such as the level
of partner involvement in the audit and their audit
teams’ knowledge both generally and in specific client
industries. This may enable non-Big N audit firms to
signal to potential purchasers the quality of their services
and obtain fee premiums not previously available to
them.
The findings also have implications for the literature in
terms of understanding the nature of audit quality. First,
consistent with prior research, the study finds that audit
quality is perceived as a multi-dimensional construct.
This was demonstrated by the relative importance
assigned by respondents to both sets of audit quality
attributes and the trade-offs they made within and
between these sets. Second, the finding that audit team
attributes are perceived as relatively more important in
perceptions of audit quality than audit firm attributes is
consistent with the findings of Schroeder et al. (1986),
Carcello et al. (1992), Herrbach (2001) and Knechel
et al. (2007) but inconsistent with the findings of
Warming-Rasmussen and Jensen (1998), who found
audit firm factors to be more important. The
current study lends weight to the greater per-
ceived importance of audit team factors and sup-
ports the suggestion that the results of Warming-
262 Australian Accounting Review
A. Kilgore, R. Radich & G. Harrison
Rasmussen and Jensen (1998) may have been culturally
driven.
Alan Kilgore, Renee Radich and Graeme Harrison are in
the Department of Accounting and Corporate Governance
at Macquarie University.
Notes
1 The AQRB’s function is to review the systems, processes and
controls applied by audit firms to ensure that they meet the
independence and quality standards required in audits of listed
entities.
2 The ACA system rescales utility data using a normalisation
method termed ‘Zero-Centred Diffs’ so that each respondent
has equal impact when computing average utility values for all
respondents.
3 Horng (2005) indicates that due to the arbitrary origin within
each attribute, the utility values of levels between attributes (e.g.,
‘Audit-partner tenure of 5 years or less’ versus ‘External quality
assurance review’) cannot be directly compared. Horng (2005)
also points out that since utility values are interval data, they do
not support ratio operations. Therefore, when comparing utility
values within the same attribute, a level with a utility value of
30 is not twice as desirable as a level with a utility value of 15.
However, the directionality of attribute-level utility values does
reveal the overall preferences of respondents for levels within an
attribute. For example, for the attribute ‘Audit firm size’ it can be
concluded that, on average, respondents prefer a ‘Big N auditor’
(average utility value 52.86 in Table 3) to either a ‘Mid-tier firm’
(average utility value 8.64) or ‘Local firm’ (average utility value
−61.50)
4 Horng (2005) points out that, unlike average utility values, relative
importance scores are ratio data, have a meaningful zero point
and are relative to the other attributes. Therefore, an attribute
with a relative importance score of 20 is twice as important as one
with a relative importance score of 10. The relative importance
scores reported in Table 4 can be interpreted in the following way.
Using the attributes ‘Audit firm size’ and ‘Audit partner tenure’
as an example, the ‘Audit firm size’ attribute (relative importance
score 13.63) is seen as being more than twice as important as the
‘Audit partner tenure’ attribute (relative importance score 6.39).
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