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Auditing Standards, Professional Judgement, and Audit Quality

Pingyang Gao - Gaoqing Zhang

eBook Edition: 2017

The establishment of the PCAOB has profoundly changed the auditing profession. We propose a model to study how auditing standards affect audit quality. Auditing standards provide remedy to the auditors’ possible misalignment of interest with investors. However, auditing standards also restrict auditors’ exercise of professional judgement, which in turn leads to compliance mentality and reduces auditors’ incentive to become competent in the first place. We identify the conditions under which stricter auditing standards increase or decrease audit quality. Moreover, stricter auditing standards always increase audit fees, but can benefit auditors at firms’ expense. The model also generates a number of testable empirical predictions. (From Author)

eBook Contents

Introduction – The Model – The Equilibrium - The Economic Consequences of Auditing Standards – Extensions - The Empirical Implications – Conclusion – Appendix

eBook License: Copyright from The University of Chicago Booth School of Business

Available in PDF format – 46 pages – 348 Kb