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Abstract
Previousresearchdemonstratesthat"brandname"(e.g.,BigEightversusnonBigEight)isafactoraffecting
auditpricesandauditorselection.Asaqualitysurrogate,brandnamereflectsdifferencesbetweenauditorsize
categoriesinconcernforreputation(DeAngelo1981b)andtheabilitytowithstandclientpressure(Goldman
andBarlev1974).Ithasnot,however,beendemonstratedthatthesefeaturescharacterizequalitydifferences
withinanauditorsizecategory.Althoughtestsaredifficultwithoutadirectmeasureofquality,recent
announcementsbytheGeneralAccountingOfficeonCPAqualityingovernmentalauditsindicateaneedto
determinethefactorsthataffectqualitydifferenceswithinauditorsizecategories,whichisthesubjectofthis
study.Auditqualityisdefinedastheprobabilitythattheauditorwillbothdiscoverandreportabreachinthe
client'saccountingsystem(DeAngelo1981a).Twoexplanationsforvariationsinauditqualityinvolve
reputationandpowerconflict.Becauseanincumbentauditorcapturesclientspecificquasirents,thereis
incentivetolowerauditqualitytoretaintheclient.However,auditfirmsizeisamoderatingeffectsincealarge
clientbaseallowsaconcernforreputationtoremainmoreimportantthanretentionofanygivenclient.The
expectationsarethat(1)auditqualitydecreasesasauditortenureincreasesand(2)auditqualityincreases
withthenumberofclients.Inpowerconflicts,theclientcanexertpressureontheauditortoviolate
professionalstandards,andalarge,financiallyhealthyclientcanexertgreaterpressurewithathreatof
replacingtheauditor.However,theestablishedreviewofauditresultsorauditworkingpapersbythirdparties
canincreasetheauditor'sabilitytowithstandclientpressure.Theexpectationsarethat(3)auditqualityis
negativelyrelatedtothesizeandfinancialhealthofthefirmand(4)auditqualityimproveswhentheauditor
knowsworkwillbesubjecttoreviewbythirdpartiesandthatsanctionsforpoorqualityworkwilloccur.This
articlepresentstheresultsofaninvestigationintothedeterminantsofauditqualityprovidedbysmall,
independentCPAfirmsinTexasonauditsofindependentschooldistricts.Thestudyanalyzesqualitycontrol
review(QCR)findingstoobtainarelativelymoredirectmeasureofauditquality.Between1984and1989the
AuditDivisionoftheTexasEducationAgency(TEA)conducted308QCRs.Numericalscoringof232QCR
lettersoffindingsrepresentsthemeasureofminimumauditqualityandthedependentvariableinthe
regressionanalysis.Explanatoryvariablesassociatedwithreputationeffects,powerconflicteffects,report
timeliness,audithours,andreportedbreacheswereobtainedfromTEAsources.Themajorfindingofthe
studyisthatauditqualitydefinitions(DeAngelo1981bGoldmanandBarlev1974)considereddescriptive
amongauditsizecategoriesaresufficientlyrobusttoexplainqualityvariationswithinanauditsizegroup.The
resultsalsoconfirmearlierstudiesrelatingauditqualitytoauditreporttimeliness(DwyerandWilson1989)and
actualaudithours(Palmrose1986,1989).Weconcludethataudithoursisasuitablesurrogateforauditquality
whendirectmeasuresareunavailable.

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