Audit quality : the effect of prior experience

Abstract

Auditing regulation has been under constant change in the recent decades and it seems to continue to evolve. The latest European Union regulation (537/2014) and directive (2014/56) require mandatory auditor rotation. However the auditing research is not unanimous how the rotation and audit quality are related and there are still issues that have not been studied at all. This study focuses on one of these unstudied issues by examining whether auditors‟ prior firm specific experience helps the auditors achieve higher quality audits when starting new engagements with previously familiar client. The theoretical framework is based on the research about the relationship between audit tenure and audit quality by Johnson et al. (2002); Geiger & Raghunandan (2002); Chen et al. 2008. In addition the analysis also takes into account other variables such as auditor and client size. The study is conducted by creating regression models and utilizing correlation analysis. The variables used are based on a large sample of Swedish companies over a ten year period. The quality is measured indirectly using modified auditing reports and amount of abnormal accruals as proxies for audit quality. The results indicate that auditors‟ prior experience does in fact increase the quality of audits during the first years of new engagements. However the models‟ coefficients of determination are rather low and therefore further analysis on the subject might be beneficial.