Audit Quality Indicators: Measuring and Communicating Audit Quality

Nicklas Slot Torm & Adrian Marcus Tornøe

Student thesis: Master thesis


This research paper investigates how Audit Quality Indicators (AQIs) can be used to measure the quality of statutory audits. The paper also seeks to reveal the consequences of auditors communicating such indicators to external parties, including to uncover the pros and cons of using AQIs as a proxy for audit quality. The focus of this paper is on auditors, members of audit committees and creditors. In order to answer these questions, it is investigated how these different stakeholders perceive and define audit quality. This analysis serves to uncover whether there are different perceptions of the term “audit quality” among stakeholders, and how any differences might influence audit firms’ ability to communicate relevant information to external parties. The main conclusion of the paper is that AQIs can only to some extent be used to indicate audit quality, and that there are several limitations to relying solely on AQIs when evaluating the quality of statutory audits. It is shown that – according to some stakeholders – many conditions that affect audit quality cannot be measured reliably, and that AQIs are therefore best used as a complementary tool when evaluating audit quality. Moreover, it is shown that especially audit committee members to a great extent rely on internal communication with the auditor, rather than publicly available information, which further reduces the usefulness of these indicators for this group of stakeholders. Furthermore, it is argued that creditors only to a very limited extent worry about the quality of the work performed by auditors on statutory audits, and that this group of stakeholders sees audit quality as equal to financial reporting quality. In spite of these limitations the paper suggests specific AQIs tailored to the needs of audit committee members and creditors, which they nevertheless might find useful when evaluating audit quality. Furthermore, it is shown that communicating AQIs to the public might have several positive and negative consequences to the stakeholders and to the audit industry as a whole. Communicating AQIs might on the one hand improve both audit quality and the competition and comparability among audit firms and could also help to assist audit committee members in overseeing the quality of the work performed by auditors. On the other hand, the limitations and difficulties of defining and calculating specific AQIs might present particular challenges to the usefulness of AQIs, including the risk of distortion of competition if the purpose of AQIs is misunderstood among stakeholders.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2019
Number of pages136
SupervisorsThomas Riise Johansen