Accounting Research Journal

Audit service quality in compulsory audit tendering: Preparer perceptions and

satisfaction
Kym Boon Jill McKinnon Philip Ross
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Audit service
Audit service quality quality in CAT
in compulsory audit tendering
Preparer perceptions and satisfaction
93
Kym Boon and Jill McKinnon
Department of Accounting and Finance, Macquarie University,
Sydney, Australia, and
Philip Ross
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School of Accounting, University of Western Sydney, Sydney, Australia

Abstract
Purpose – The paper aims to analyse audit service quality attributes that were perceived to be
important in compulsory audit tendering (CAT) in local councils in New South Wales (NSW). It focuses
principally on whether CAT leads to an impairment of auditor independence and audit quality.
Design/methodology/approach – A questionnaire survey was conducted of 235 NSW local council
finance professionals and 35 local council internal auditors in May 2006.
Findings – The most important attributes in evaluating audit service quality were industry
expertise, audit firm experience with a council, technical competence, independence, ethical standards
and due care. The least important attributes were scepticism, freshness of perspective, audit firm size,
and non-audit services. There is considerable consistency in the findings with those in non-CAT
contexts.
Research limitations/implications – The paper is subject to the general limitations of the survey
questionnaire method. A further limitation is that audit quality was assessed using perceptions of
audit service quality by preparers of local council financial statements, rather than by users of those
statements.
Practical implications – Audit firms will be better able to understand the audit service quality
attributes valued by local council clients, to differentiate their promotional and service-provision
strategies, improve their audit quality, and better satisfy local council clients. Concerns that CAT may
impair audit independence and audit quality do not appear to be founded.
Originality/value – Because the results are generally consistent with findings in non-CAT contexts,
there can be more confidence in CAT as a regulatory form of audit procurement.
Keywords Auditing, Auditors, Tendering, Quality, Local authorities, Australia
Paper type Research paper

1. Introduction
This study examines the audit service quality attributes that are perceived to be
important in evaluating the quality of audit services and in determining satisfaction
with audit service quality in the context of compulsory audit tendering (CAT). Audit
quality is an increasingly important area of examination. Recent audit regulation has

The authors acknowledge the helpful comments of Neil Fargher, Graeme Harrison and
Accounting Research Journal
Alicia Jiang, participants at conferences of the Accounting and Finance Association of Australia Vol. 21 No. 2, 2008
and New Zealand, the Asian Academic Accounting Association, the Financial Executives of pp. 93-122
q Emerald Group Publishing Limited
Local Government Departments in Australia, and the NSW Local Government Internal Auditors 1030-9616
Association of NSW. DOI 10.1108/10309610810905917
 ARJ focused on improving audit quality in order to enhance public confidence in the
21,2 credibility of the audit process and opinion following the alleged audit failures that
surrounded the collapse of major international and national corporations (e.g. Enron,
WorldCom), and the criminal indictment and collapse of former Big 5 audit firm Arthur
Andersen. Bell et al. (2005, p. iii) note that “. . . the emergence of new institutions,
regulations and authoritative guidance clearly raises the bar with respect to minimum
94 standards of audit quality”.
Audit is a service and audit service quality is defined as the “quality of the input
provided by the audit firm while performing the audit services” (Pandit, 1999, p. 173).
That is, “quality occurs during service delivery, usually in an interaction between the
client and the contact person from the service firm” (Parasuraman et al., 1985, p. 42,
cited in Pandit, 1999, p. 173). Audit quality, however, is difficult to observe directly
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(Shockley, 1982; Francis, 2004); consequently one approach to assessing quality is to

examine the perceptions of audit service quality held by clients and customers as users
of financial statements and the audit opinion (Schroeder et al., 1986; Carcello et al., 1992;
Davis, 1995; Behn et al., 1997; Warming-Rasmussen and Jensen, 1998). Zeithaml and
Bitner (2000, p. 81) state that service quality is “a critical component of customer
perceptions”, while Warming-Rasmussen and Jensen (1998, p. 65) argue that “there is
an increasing recognition in audit research that the only definition of quality is the
customers”[1].
Examining the CAT context is important because CAT is a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit firms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005,
p. 30). However, as a form of competitive bidding, there are concerns that CAT has the
potential to lead to a decrease in audit quality because:
. competitive pressure is likely to shift the balance of power in auditor-client
relationships towards the client which potentially impairs auditor independence;
and
.
place pressure on fees which leads to reduced audit procedures (Copley and
Doucet, 1993; Aldhizer and Lampe, 1997; Beattie and Fearnley, 1998).

Examining whether CAT leads to the impairment of auditor independence and audit
quality is difficult because CAT is a relatively rare phenomenon, providing limited
opportunities to observe and examine its operation. Local government in the
Australian state of New South Wales (NSW) provides such an opportunity as it is one
of the few contexts where CAT operates, and has operated since 1993. The NSW Local
Government Act (1993) requires that local councils tender their audits every six years
and make a decision on each occasion whether to re-appoint the incumbent auditor or
appoint a new auditor.
This study provides evidence on the question of whether CAT leads to impaired
auditor independence and audit quality. This is achieved by examining the perceptions
of audit quality by NSW local council finance professionals and internal auditors as
clients of audit service in a CAT environment. We use the perceptions of audit quality
approach of Carcello et al. (1992) and Behn et al. (1997) to address two, related research
questions. First, what audit quality attributes are perceived to be important to NSW
local council finance professionals and internal auditors when evaluating the quality of
 audit services provided by the incumbent auditor? And second, what audit quality Audit service
attributes are related to, or associated with, overall satisfaction with the quality of quality in CAT
audit services provided by the incumbent auditor?
Understanding what audit quality attributes are perceived to be important to clients
in evaluating audit service quality and satisfaction in a CAT context is also important to
regulators and audit firms. Regulators are able to use such information to identify what
is likely to make an audit substandard in a CAT context (Aldhizer et al., 1995, p. 61), and 95
to formulate auditing standards aimed at improving actual and perceived audit quality
(Chang and Monroe, 1995, p. 20). Audit firms are able to use this information to
differentiate themselves better on service quality, to improve their own audit quality,
and to deliver more satisfaction to clients (Carcello et al., 1992; Behn et al., 1997, 1999).
The paper is organized as follows. Section 2 provides an overview of the literature
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on multi-attribute perceptions of audit quality that is drawn on to determine the audit

service quality attributes used in this study. Section 3 develops the hypothesis while
Section 4 discusses the research method. The results are presented in Section 5, while
Section 6 presents the conclusions, limitations and suggestions for further research.

2. Literature review
2.1 The multi-attribute perceptions of audit quality literature
The literature on multi-attribute perceptions of audit quality examines a number of
attributes perceived to be associated with audit quality by financial statement
preparers, users and other interest groups in different proximity to the audit process.
These studies typically examine two main issues:
(1) the impact of the audit quality attributes on overall audit quality (Schroeder
et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Warming-Rasmussen and
Jensen, 1998; Chen et al., 2001); and
(2) evaluating the performance of, or satisfaction with, the incumbent auditor
against the attributes of audit quality (Davis, 1995; Behn et al., 1997; Sucher
et al., 1998; Pandit, 1999).

The groups that have been studied for their perceptions on audit quality include
auditors (Schroeder et al., 1986; Carcello et al., 1992; Davis, 1995; Chen et al., 2001), audit
committee chairpersons (Schroeder et al., 1986), preparers (Carcello et al., 1992;
Warming-Rasmussen and Jensen, 1998), clients (Davis, 1995), federal inspectors
general (Aldhizer et al., 1995), shareholders (Warming-Rasmussen and Jensen, 1998),
financial journalists (Warming-Rasmussen and Jensen, 1998), and financial statement
users generally (Carcello et al., 1992).
Two main observations are made from this literature. The first is that audit quality
attributes are often broadly referred to as audit firm and audit team attributes[2]. Audit
firm attributes are those that relate to the audit firm as an entity (e.g. location and size
of audit firm offices, litigation the firm has been involved in). Audit team attributes are
those concerned with the specific audit team assigned to the engagement (e.g.
communication between the audit team and client management, level of partner/audit
manager attention given to the audit) (Schroeder et al., 1986, p. 87). The majority of
studies have found audit team attributes to be more important than firm attributes in
evaluating audit service quality (Schroeder et al., 1986; Carcello et al., 1992), and overall
client satisfaction with quality (Behn et al., 1997). While, overall client satisfaction
 ARJ encompasses satisfaction with attributes of both the audit firm and the audit team
21,2 (Behn et al., 1997, 1999), the team attributes are more important because the audit team
is a sub-set of the audit firm, and, as Behn et al. (1999, p. 594) note, “management’s
primary impressions of the audit firm likely come from its interactions with the
members of the audit team”.
The second observation from the literature is that the attributes of audit quality
96 derived by Carcello et al. (1992) have been used to underpin a number of subsequent
studies of audit quality and satisfaction with quality. Carcello et al. (1992) surveyed 264
controllers (representing financial statement preparers), 245 audit partners and 120
investors and creditors (representing financial statement users) to identify the attributes
that were perceived to be associated with audit service quality both overall and among
the three groups of preparers, auditors and users. Carcello et al. (1992) identified 41
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attributes from the literature and from the authors’ audit partner experience, and then
used exploratory factor analysis to extract 12 audit quality factors. The factors were:
(1) audit team and firm experience with the client;
(2) industry expertise;
(3) audit firm responsiveness to client needs;
(4) audit firm compliance with general audit standards;
(5) audit firm commitment to quality;
(6) audit firm executive involvement;
(7) conduct of audit field work;
(8) involvement of audit committee;
(9) individual team member characteristics;
(10) audit firm maintains a skeptical attitude;
(11) audit firm freshness of perspective; and
(12) degree of individual responsibility.

Subsequent studies using the Carcello et al. (1992) attributes include Behn et al. (1997)
and Pandit (1999). Behn et al. (1997) surveyed 434 financial controllers of Fortune 1000
companies to ascertain which of the attributes were associated with satisfaction with
the audit firm and the audit team, and with overall client satisfaction. Behn et al. (1997)
found six of the attributes to be positively associated with overall client satisfaction:
(1) responsiveness to client needs;
(2) active involvement of the audit firm;
(3) effective involvement of audit committee;
(4) appropriate conduct of field work;
(5) industry expertise; and
(6) prior audit firm and team experience with the client.

Skepticism was negatively associated with client satisfaction.

Pandit (1999) surveyed 359 senior executives of US corporations to examine the
effect of client satisfaction with audit service quality, and auditor efficiency and
credibility, on the intention to retain or switch auditors. Pandit (1999) used those
 attributes from Carcello et al. (1992) that were expected to be important to client Audit service
management as preparers of financial statements; specifically: quality in CAT
.
audit firm responsiveness to client needs;
.
industry expertise;
.
executive involvement in the audit; and
.
conduct of the audit field work. 97
Pandit (1999) hypothesized positive associations between each of these attributes and
intention to retain the audit firm, but found support only for responsiveness and
executive involvement.
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2.2 Audit quality attributes relevant to the CAT context of NSW local government
The literature on multi-attribute perceptions of audit quality was reviewed to identify
those audit quality attributes to be used in this study. A total of 14 attributes were
identified based on Carcello et al. (1992) and Behn et al. (1997). The 14 attributes (with
abbreviated names in parentheses) are:
(1) audit team and firm experience with the council (Council Experience);
(2) industry expertise (Industry Expertise);
(3) audit firm responsiveness to council needs (Responsiveness);
(4) audit firm compliance with general audit standards – technical competence
(Technical Competence);
(5) audit firm compliance with general audit standards – independence
(Independence);
(6) audit firm compliance with general audit standards – due care (Due Care);
(7) audit firm commitment to quality (Quality Commitment);
(8) audit firm executive involvement (Executive Involvement);
(9) conduct of audit field work (Field Work Conduct);
(10) involvement of audit committee (Audit Committee);
(11) individual team member characteristics (Ethical Standards);
(12) audit firm maintains skeptical attitude (Skepticism);
(13) maintain freshness of perspective (Freshness of Perspective); and
(14) degree of individual responsibility (Individual Responsibility).

These attributes comprise 11 of the 12 attributes originally identified by Carcello et al.

(1992). These attributes were also used by Behn et al. (1997). Carcello et al.’s (1992) 12th
attribute, audit firm compliance with general audit standards, was decomposed by
Behn et al. (1997) into three components, technical competence, independence, and due
care. We use the three components as separate attributes. The abbreviated names for
the attributes are consistent with Behn et al. (1997).

3. Hypothesis development
An hypothesis is developed for the relation between each of the 14 audit quality
attributes and overall client satisfaction with the quality of audit services. Audit service
 ARJ quality and client satisfaction are related theoretically because perceptions of audit
21,2 service quality are influential in determining client satisfaction (Behn et al., 1997, 1999).
For 13 attributes, a positive association with satisfaction is predicted, while for one
attribute, a negative association is predicted. Each of the attributes is briefly discussed
for its relationship with satisfaction, followed by a formal statement of the hypothesis.

98 3.1 Audit firm and team experience with the council (Council Experience)
Audit experience with the client at the firm and team level is important to a quality audit.
Audit experience means that, as the auditor has conducted the audit previously, it is
likely to be planned and conducted with improved efficiency and effectiveness.
Experienced audit teams, familiar with the operations, information systems and specific
risks of the council, are able to direct attention to accounts where audit adjustments were
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previously required, or where there are likely to be errors or irregularities given the risks
of the council. Therefore, if finance professionals and internal auditors perceive that the
audit firm and team are experienced with the council, they are likely to be satisfied with
the overall quality of audit services.

3.2 Industry expertise (Industry Expertise)

Industry expertise is likely to be important to a quality audit because industry experts
(or specialists) have knowledge of the risks, opportunities and accounting practices of
the client industry arising from training and practical experience gained from auditing
within that industry (Craswell et al., 1995; Hogan and Jeter, 1999; Solomon et al., 1999;
Gramling and Stone, 2001; Velury et al., 2003). Finance professionals and internal
auditors who perceive the audit to be conducted by a local government expert or
specialist are likely to be satisfied with the overall quality of the audit.

3.3 Audit firm responsiveness to council needs (Responsiveness)

Responsiveness of the audit firm to the needs of the client is likely to affect satisfaction
with the overall quality of audit services. A good working relationship is likely to
result in auditor-client cooperation, an effective and efficient audit process, and the
audit firm being proactive in suggesting improvements to the operations and financial
reporting practices of the client[3].

3.4 Audit firm compliance with general audit standards – technical competence
(Technical Competence)
Technical competence is an auditor’s “knowledge” and “individual know-how” (Richard,
2006, p. 157) with a technically competent auditor being “a qualified auditor . . . (with) . . .
sufficient knowledge, qualification and experience to conduct a financial audit”
(Richard, 2006, p. 157). Audit staff members who are technically competent in terms of
being CA or CPA qualified, are likely to be more familiar with accounting and auditing
standards and are more likely to detect material misstatements. Finance professionals
and internal auditors who perceive the audit team members to be technically competent
are likely to be satisfied with the overall quality of the audit services provided.

3.5 Audit firm compliance with general audit standards – independence (Independence)
Audit independence is defined in terms of independence in fact and independence in
appearance (Richard, 2006). Independence in fact refers to the mental processes of the
 auditor, giving rise to an attitude of impartiality and objectivity (Richard, 2006, p. 156). Audit service
Independence in appearance refers to perceptions of independence by users and quality in CAT
whether, despite the (necessary) relationship with the client, third parties perceive the
auditor is capable of maintaining impartiality in judgment and resisting pressures
from client management (Richard, 2006, p. 156). Audit teams that are independent of
the client are more likely to provide a higher quality audit. Therefore, finance
professionals and internal auditors who perceive the audit firm to be independent of 99
the council, are likely to be satisfied with the overall quality of audit services.

3.6 Audit firm compliance with general audit standards – due care (Due Care)
Audits conducted with “due care” in accordance with accounting and auditing
standards are likely to result in higher quality audits, a more credible audit opinion,
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and a lower likelihood of the audit firm being involved in lawsuits alleging negligence.
As noted by Carcello et al. (1992, p. 8), “the audit firm rarely being found negligent in
lawsuits against it . . . provides a measure of due professional care”. Finance
professionals and internal auditors who perceive the audit firm to be conducting the
audit with due care are more likely to be satisfied with the overall quality of audit
services.

3.7 Audit firm commitment to quality (Quality Commitment)

Quality control practices are the procedures used to ensure that the audit firm meets
quality standards consistently on every engagement (Arens et al., 2005). Audit firms
that have a strong quality culture are more likely to conduct higher quality audits as
the audit engagement teams are likely to adhere strictly to the quality control practices
of the firm. Finance professionals and internal auditors who perceive the audit firm to
have a strong commitment to quality are likely to be satisfied with the overall quality
of audit services.

3.8 Audit firm executive involvement (Executive Involvement)

Audits that have a high degree of executive involvement are likely to be of a higher
quality because audit firm executives are the most qualified and experienced members
of the audit team and, hence, the most equipped to guide the audit process. Finance
professionals and internal auditors perceiving audit firm executives to be involved in
the conduct of the audit are likely to be satisfied with the overall quality of audit
services provided.

3.9 Conduct of audit field work (Field Work Conduct)

Audit firms that conduct the audit field work thoroughly in accordance with
accounting and auditing standards are likely to provide high-quality audits. Therefore,
perceptions that the audit field work is conducted thoroughly means that the council is
likely to be satisfied with the overall quality of audit services.

3.10 Involvement of audit committee (Audit Committee)

Audit teams that communicate with the client’s audit committee are likely to conduct a
higher quality audit because audit committees oversee and strengthen the audit
process (Goodwin-Stewart and Kent, 2006, p. 388). Audit committees are likely to
demand a higher level of assurance (Francis, 2004), question the findings of the auditor,
 ARJ direct audit attention to areas of concern and resolve conflicts between client
21,2 management and the auditor. Finance professionals and internal auditors who perceive
the council’s audit committee to be involved in the conduct of the audit, are likely to be
satisfied with the overall quality of audit services.

3.11 Individual team member characteristics (Ethical Standards)

100 Audit firms whose team members have high-ethical standards are more likely to
conduct a higher quality audit because they are likely to detect and report discovered
errors and irregularities, and are less likely to engage in behaviour that compromises
the integrity of the audit process. Perceptions of high-ethical standards among audit
team members are likely to mean finance professionals and internal auditors are
satisfied with the overall quality of audit services.
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3.12 Audit firm maintains skeptical attitude (Skepticism)

Skepticism implies that audit team members do not accept the representations of the
client’s management, finance professionals or internal auditors at face value, but pursue
their own investigation to verify these representations. Perceived irregularities are likely
to be investigated thoroughly, and conflicts are likely to be resolved in favour of the audit
firm. Behn et al. (1997, p. 15) argue that, while certain constituents, such as the regulatory
bodies and the community, expect auditors to bring the attitude of skepticism to the
conduct of the audit, “clients may sometimes chafe at auditor skepticism”. Consistent
with Behn et al. (1997), therefore, the relation between skepticism and satisfaction is
predicted to be negative; that is, council finance professionals and internal auditors who
perceive audit team members to have a skeptical attitude are not likely to be satisfied
with the overall quality of audit services.

3.13 Maintain freshness of perspective (Freshness of Perspective)

This attribute of audit quality relates to auditor tenure. Audit team members who are
rotated across audits periodically are more likely to detect errors and irregularities as
they are capable of reviewing the financial statements with fresh eyes[4]. Finance
professionals and internal auditors who perceive that audit team members have a
“fresh perspective” are likely to be satisfied with the overall quality of audit services.

3.14 Degree of individual responsibility (Individual Responsibility)

Audit firms that are large and geographically dispersed are more likely to be
decentralized and to have a higher degree of individual responsibility. Such firms are
likely to provide higher quality audit services as they are at risk of losing their brand
name reputation and client base if lower quality audit services are provided. Finance
professionals and internal auditors who perceive the audit firm to have a high degree of
individual responsibility, are likely to be satisfied with the overall quality of audit
services.
Based on the foregoing discussion of each of the 14 audit service quality attributes,
we state the formal hypothesis to be tested as follows:
H1. Evaluation of overall satisfaction with the quality of audit services provided
by the incumbent auditor is positively related to council finance
professionals’ and internal auditors’ perceptions of:
 H1a. Audit firm and team experience with the client. Audit service
H1b. Industry expertise. quality in CAT
H1c. Audit firm responsiveness to the needs of the council.
H1d. Technical competence of the audit team.
H1e. Audit firm independence. 101
H1f. Exercise of due care by the audit firm.
H1g. The audit firm’s commitment to quality.
H1h. Audit firm’s executive involvement.
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H1i. The audit firm’s conduct of audit field work.

H1j. Involvement of the audit committee in the conduct of the audit.
H1k. Individual characteristics of audit team members (ethical standards).
H1l. The audit firm’s ability to maintain freshness of perspective.
H1m. Degree of individual responsibility.
and negatively related to council finance professionals’ and internal auditors’
perceptions of the ability of the audit firm to maintain a skeptical attitude.

4. Method
4.1 Sample selection
The sample for the study was 235 finance professionals who attended the National
Local Government Finance Professionals’ Biennial Conference held in NSW in May
2005, and the population of 35 NSW council internal auditors[5]. These two groups
were chosen for the study because the NSW Department of Local Government
identified finance professionals and internal auditors as being the most appropriate
people to evaluate the quality of audit services provided by the incumbent auditor
because they liaise closely with the external auditors during the audits of the councils’
financial statements.

4.2 Design
The questionnaire comprised two questions. The first question provided respondents
with a list of 48 individual items reflecting audit service quality. This list was
developed by reviewing the audit service quality literature to identify the individual
items of audit service quality that have been proposed or examined in prior literature.
These items were then theoretically matched to the 14 audit service quality attributes
used in the hypothesis testing. Table I shows the individual items and their derivation.
Column 1 lists the 14 audit service quality attributes used in the hypothesis; Column 2
lists prior studies that have examined these attributes; Column 3 lists the individual
items of audit service quality used in the prior studies; and Column 4 shows the items
used in the questionnaire.
Respondents were requested to assume they had been asked to evaluate the quality
of audit services provided by their incumbent auditor. Respondents were asked to

Table I.
derivation
study and their
and individual audit
Audit quality attributes
quality items used in this
Attributes for this study based on
Carcello et al. (1992) and
Behn et al. (1997)1
Audit team and firm experience
with the council (council
experience)
Industry expertise (industry
expertise)
Audit firm responsiveness to
council needs (responsiveness)
Audit firm compliance with
general audit standards – technical
competence (technical
competence)
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Studies examining the attribute
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Behn et al. (1997);
Behn et al. (1999); Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Davis (1995);
Behn et al. (1997); Warming-Rasmussen and
Jensen (1998); Behn et al. (1999); Pandit (1999);
Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Sucher et al. (1998); Warming-Rasmussen and
Jensen (1998); Behn et al. (1999);
Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Davis (1995);
Behn et al. (1997); Sucher et al. (1998);
Behn et al. (1999); Pandit (1999);
Chen et al. (2001)
21,2
ARJ
102
Survey
Specific items and literature source Items used in survey questionnaire
Item
The engagement partner has been on the audit for at least the past three The audit engagement partner has been on the audit for at least two 3
years (Carcello et al. 1992) to three years
The senior manager has been on the audit for at least the last two years The audit manager has been on the audit for atleast two to three 43
(Carcello et al. 1992) years
The manager has been on the audit for at least the last two years The audit supervisor has been on the audit for at least two to three 44
(Carcello et al. 1992) years
The CPA firm has been performing the audit for at least three years The audit firm has been performing the audit for at least two to 1
(Carcello et al. 1992) three years
The CPA firm conducting the audit has other clients in the industry The audit firm is considered to be a specialist in local government 2
(Carcello et al. 1992) audit
The audit firm conducting the audit has other local council audit 20
clients
The senior manager and manager assigned to the engagement are very The audit manager and supervisor assigned to the engagement are 45
knowledgeable about the industry (Carcello et al. 1992) very knowledgeable about the industry
-The senior assigned to the engagement is very knowledgeable about The partner assigned to the audit engagement is very knowledgeable 4
the industry (Carcello et al. 1992) about the industry
-The partner assigned to the engagement is very knowledgeable about
the industry (Carcello et al. 1992)
The CPA firm is agreeable to completing the audit by a date the client The audit firm is agreeable to completing the audit by a date the 15
has set (Schroeder et al. 1986; Carcello et al. 1992) client has set
The CPA firm is skillful in devising acceptable account ting treatments The audit firm is skilful in devising acceptable accounting treatments 8
for transactions that generate results that management wishes to obtain for transactions that generate results that council management wants
(Carcello et al. 1992)
-The auditors are mindful of how busy the CFO and controller are and The auditors are mindful of how busy the council’s key finance staff 46
contact these individuals only to the extent necessary (Carcello et al. are and contact these individuals only to the extent necessary
1992; Chen et al. 2001)
-Amount of disruption caused by the audit (Sucher et al. 1998)
The CPA firm keeps management informed during the year about The audit firm keeps council management informed during the year 23
accounting and financial reporting developments that may affect them about accounting and financial reporting developments that affect
(Carcello et al. 1992) the council
There is frequent communication between the audit team and There is frequent communication between the audit team and 22
management (Carcello et al. 1992); Chen et al. (2001) council management
-The auditor adds value to the entity (Davis 1995) The auditor adds value to the entity in terms of generating useful 41
- Generation of useful ideas for improvement (Sucher et al. 1998) ideas for improvement
The external auditors cooperate with the internal auditors (Davis 1995) The external auditors co-operate with the internal auditors 47
The auditors recommendations on internal contro are useful (Davis The audit firm reports internal control deficiencies and the auditors’ 29
1995) The auditors report internal control deficiencies (Davis 1995) recommendations on internal control are useful
The personnel on the engagement below the senior level have passed The personnel on the engagement below manager level have passed 26
the CPA exam (Carcello et al. 1992; Chen et al. 2001) the professional bodies’ exams
-The senior on the engagement is a CPA (Carcello et al. 1992) The audit partner on the engagement is a CA/CPA 27
-Technical competence of partner (Sucher et al. 1998)
The auditors’ assigned to the engagement are very knowledgeable The auditors assigned to the engagement are very knowledgeable 16
about the accounting and auditing standards (Carcello et al. 1992; about accounting and auditing standards
Davis 1995; Behn et al. 1999; Pandit 1999)

Audit firm compliance with
general audit standards –
independence (independence)
Audit firm compliance with
general audit standards –due care
(due care)
Audit firm commitment to quality
(quality commitment)
Audit firm executive involvement
(executive involvement)
Table I.
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Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Behn et al. (1997);
Warming-Rasmussen and Jensen (1998);
Sucher et al. (1998); Behn et al. (1999);
Pandit (1999)
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Behn et al. (1997);
Warming-Rasmussen and Jensen (1998);
Sucher et al. (1998); Behn et al. (1999);
Pandit (1999)
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Davis (1995) Behn et al.
(1997); Behn et al. (1999); Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Davis (1995);
Warming-Rasmussen and Jensen (1998);
Behn et al. (1999); Pandit (1999);
Chen et al. (2001)
The CPA firm that is conducting the audit performs no consulting
services for the client (Carcello et al. 1992; Chen et al. 2001)
The percentage that the audit fee represents to total billings of the
CPA firm is material (Chen et al. 2001)
-In all your dealings with the CPA firm, and with individual audit
team members, the CPA firm and its representatives never engaged in
any actions that would compromise its/their independence either in
fact or in appearance (Behn et al. 1999)
-The CPA firm has rarely been found negligent in lawsuits brought
against it (alleging inadequate audit performance) (Carcello et al. 1992)
-The overall reputation of the CPA firm is positive (Schroeder et al.
1986; Carcello et al. 1992; Chen et al. 2001)
-The CPA firm is a member of a famous international accounting firm
(Chen et al. 2001)
The audit team members as a group always exercised due care
throughout the engagement (Behn et al. 1999)
-Before accepting a new client the CPA firm conducts a background
search on the senior management of the prospective client
(Carcello et al. 1992)
-Before accepting a new client, the CPA firm conducts a
pre-engagement investigation and goes through risk control
procedures (Chen et al. 2001)
-The CPA firm participates in the peer review process, and its most
recent peer review report was a clean one (Schroeder et al. 1986;
Carcello et al. 1992; Aldhizer et al. 1995)
-The CPA firm has a policy on the maximum number of hours per day
and per week that its staff can work (Carcello et al. 1992)
-The CPA firm does not encourage its auditors to work overtime
(Chen et al. 2001)
-The CPA firm has strict guidelines against signing off on audit steps
that are not completed (Schroeder et al. 1986; Chen et al. 2001)
-Provisions to keep auditors up-to-date technically (Schroeder et al.
1986)
-The CPA firm actively encourages staff members to take courses and
examinations in fields where they have major clients (Carcello et al.
1992)
The senior auditors supervise junior audit staff (Davis, 1995)
Whether the audit report and workpapers received a second partner
review (Aldhizer et al. 1995)
The engagement partner and senior manager make frequent visits to
the audit site (Carcello et al. 1992)
The audit firm that is conducting the audit performs no consulting 7
services for the client
The percentage that the council audit fee represents to the total audit 25
fee revenue of the audit firm is not material
In all your dealings with the audit firm and individual audit team 33
members, the audit firm and its representatives never engage in any
actions that would compromise its/their independence either in fact
or in appearance.
The audit firm has rarely been found negligent in lawsuits brought 36
against it (alleging inadequate audit performance)
The overall reputation of the audit firm is positive 31
The audit team members as a group always exercised due care 17
throughout the engagement
Before accepting a new client, the CPA firm conducts a 28
pre-engagement investigation and goes through risk control
procedures including the conduct of a background search on senior
management of the perspective client
The audit firm participates in the peer review process, and its most 5
recent peer review report was a clean one
The audit firm has a policy on the maximum number of hours per 9
day and per week that its staff can work
The audit firm has strict guidelines on the procedures that must be 34
completed before signing the audit report
The audit firm actively encourages staff members to take courses 6
and attend seminars in fields where the firm has major clients
The work performed by inexperienced members of the audit team is 32
supervised by the audit team manager
The audit report and work papers receive a second partner review 40
The audit engagement partner and manager make frequent visits to 24
the council during the conduct of the audit
Audit service
103
quality in CAT

Table I.
Conduct of audit field work (field
work conduct)
Involvement of audit committee
(audit committee)
Individual team member
characteristics (ethical standards)
Audit firm maintains skeptical
attitude (skepticism)
Maintain freshness of perspective
(freshness of perspective)
Degree of individual responsibility
(individual responsibility)
1 The shortened version of these attributes are in italics
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Schroeder et al. (1986); Carcello et al. (1992);
Aldhizer et al. (1995); Davis (1995);
Behn et al. (1997); Sucher et al. (1998);
Behn et al. (1999); Pandit (1999);
Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Behn et al. (1997); Behn et al. (1999)
Carcello et al. (1992); Davis (1995)
Warming-Rasmussen and Jensen (1998); Behn
et al. (1999); Pandit (1999); Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Behn et al. (1997); Behn et al. (1999); Pandit
(1999); Chen et al. (2001);
Schroeder et al. (1986); Carcello et al. (1992);
Davis (1995) Behn et al. (1997); Chen et al. (2001)
Schroeder et al. (1986); Carcello et al. (1992);
Behn et al. (1997); Chen et al. (2001)
21,2
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104
The audit team members conducted the audit field work in an The audit team members conducted the audit field work in an 38
appropriate manner (Behn et al. 1999) appropriate manner
The CPA firm makes extensive use of micro-computers in conducting The audit firm makes extensive use of computers in conducting the 13
the audit (Carcello et al. 1992; Pandit 1999; Chen et al. 2001) audit
The CPA firm makes extensive use of statistical techniques in The audit firm makes extensive use of statistical techniques in 39
conducting the audit (Carcello et al. 1992; Pandit 1999; conducting the audit
Chen et al. 2001)
The CPA firm conducts a thorough study of the clients system of The audit firm conducts a thorough study of the client’s system of 12
internal control (Carcello et al. 1992; Pandit 1999; Chen et al. 2001; internal control
Davis 1995)
The auditors had an understanding of the council’s business The audit team members had an appropriate understanding of the 37
(Sucher et al. 1998) council’s business
-The CPA firm develops stringent time budgets for each audit area and The audit firm develops stringent time budgets for each audit area 10
expects its personnel to adhere to them (Carcello et al. 1992; and expects its people to meet them
Pandit 1999; Chen et al. 2001)
-The CPA firm requires auditors to observe stringent budget targets
and cost control measures
The cost of different audit procedures is the major criterion as to The cost to the audit firm of different audit procedures, in terms of 35
whether the procedure is used (Carcello et al. 1992; Pandit 1999; time expended, is the major criterion as to whether a procedure is
Chen et al. 2001) used
-The time needed to complete the audit (from beginning of fieldwork The number of hours spent by the audit team to complete the audit 48
to the audit report date (Aldhizer et al. 1995) (from the beginning of field work to the audit report date)
-Hours spent by the audit team on the audit (Aldhizer et al. 1995)
-Overall efficiency of the audit (Davis 1995)
There is frequent communication between the audit team and the audit There is frequent communication between the audit team and the 19
committee (Schroeder 1986; Carcello et al. 1992; Behn et al. 1999) council’s audit committee
The auditors assigned to the engagement have very high ethical The audit staff assigned to the engagement have very high ethical 18
standards (Carcello et al. 1992; Behn et al. 1999; Pandit 1999; standards
Chen et al. 2001; Davis 1995)
The CPA firm’s attitude is one of a skeptic, not one of clients advocate The audit firm’s attitude is one of a skeptic, not one of a client 14
(Carcello et al. 1992; Chen et al. 2001 advocate
Audit team members are rotated off the audit periodically Audit team members are rotated off the audit periodically 21
(Carcello et al. 1992; Schroeder 1986; Chen et al. 2001)
The CPA firm suffers from a high auditor turnover rate The audit firm has a high audit staff turnover rate
11
(Chen et al. 2001)
The size of the CPA firm in terms of total revenue and number of The size of the audit firm in terms of its total revenue and number of 42
auditors is much larger than the average size in the region auditors is much larger than the average size in the region
(Chen et al. 2001)
Location and sizes of audit firms offices (Schroeder et al. 1986) The audit firm tends to have decentralised offices rather than 30
centralised offices
 indicate, for each of the 48 individual items, whether they agreed or disagreed that the Audit service
audit service quality item affects their evaluation of the audit services provided. The
scale was a seven-point Likert-type scale ranging from strongly disagree (2 3) to
quality in CAT
strongly agree (þ 3). The 48 items were randomized both within and across the 14
attributes (to the extent possible) to avoid halo effect and order effect biases which
could potentially occur if all the items comprising a particular attribute were clustered
together in the question order. Randomization also helped guard against social 105
desirability response bias (SDRB) to the extent that the attributes were not obvious to
respondents through clustering of the items for each attribute. (Column 5 of Table I
shows the order number for each of the 48 items in the questionnaire.) Anonymity for
respondents also helped guard against SDRB.
The second question asked respondents to consider the incumbent auditor who
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provided their most recent audit. Respondents were asked to indicate to what extent
they were satisfied with the quality of their most recent audit in terms of:
.
satisfaction with the audit firm; and
.
satisfaction with the audit team.

The scale was a seven-point Likert-type scale ranging from very dissatisfied (2 3) to
very satisfied (þ 3)[6].
The study followed the Dillman (2000) Tailored Design Method as closely as
possible to ensure the questionnaire was clearly formatted and visually appealing to
respondents. An incentive for completion was provided in the form of a $10 charity
donation that the researcher made to the respondent’s preferred charity on receipt of
the completed questionnaire. The questionnaire was anonymous. The draft
questionnaire was pre-tested by potential respondents, staff of the NSW Department
of Local Government Finance, and academics. The content, ordering and terminology
were revised accordingly.
4.3 Administration
Different procedures were used to administer the survey questionnaires to the finance
professionals and the internal auditors. For the finance professionals, as noted
previously, the survey was administered at a local government conference in 2006. The
surveys and accompanying information statement were distributed during the
conference and respondents were instructed to return their questionnaire to a
confidential ballot box maintained by the researchers during the conference. The booth
offered respondents a convenient mechanism to lodge the questionnaire, as well as
providing access to the researchers if questions arose.
The survey questionnaire was mailed to each of the 35 NSW internal auditors. Prior
to mailing, all councils were phoned to confirm the contact details of their internal
auditors. Three follow-ups were conducted at fortnightly intervals, two by mail and
one by phone. For the mail follow-ups a complete mail-out was necessary as the
responses were anonymous and unidentifiable. Prior to the third mail-out however,
each internal auditor was phoned to ask if they had received the questionnaire and if
they had responded. Those that had responded were removed from the mailing list.
4.4 Dependent variable
The dependent variable in the hypothesis is the overall satisfaction with the quality of
audit services provided by the audit firm. Overall satisfaction with audit service
 ARJ quality was measured as the sum of the response scores for the two items in the second
21,2 question in the questionnaire; that is, the measure of overall satisfaction was obtained
by adding together the scores for satisfaction with the audit firm and satisfaction with
the audit team. This is consistent with Behn et al.’s (1997) measure of overall client
satisfaction with audit service quality and based on their argument that overall client
satisfaction comprises both satisfaction with the audit firm and satisfaction with the
106 audit team (Behn et al., 1997, pp. 10-11). The Cronbach a measure was 0.82 indicating
good scale reliability[7].

5. Results
5.1 Response rate
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Of the 235 finance professionals attending the conference, 207 responded[8]. Of the 207,
22 were excluded because they were from states other than NSW, resulting in 185
responses from NSW finance professionals. Of the 35 internal auditors, 28 responded.
Hence, overall, 213 responses were received giving a response rate of 86 per cent
(213/248). Given the high-response rate, non-response bias was not considered to be a
threat to the validity of the results.

5.2 Descriptive statistics

Section 1 of the questionnaire asked respondents to indicate, on a scale of 2 3 (strongly
disagree) to þ 3 (strongly agree), the extent to which they agreed or disagreed that each
of the 48 audit service quality items impacted on their evaluation of the quality of audit
services provided by their incumbent auditor. The results are presented in Table II[9].
Table II shows the distribution of responses to the 48 items, as well as the mean and
standard deviation for each item (ranked in order from the item with the highest
reported impact on evaluation of audit service quality to the lowest). The “n” column
shows the number of responses for each item. For 39 of the 48 items, n is 213 (185
finance professionals plus 28 internal auditors), while for the remaining nine items n is
slightly below 213 reflecting some incomplete responses.
There were two items with a large number of NA responses; item 19 (there is
frequent communication between the audit team and the council’s audit committee)
and item 47 (the external auditors co-operate with the internal auditors) with 35 and 50
NA responses, respectively. The high NA response here reflects the fact that not all
councils have internal auditors and/or audit committees. These two items are included
in Table II to show their importance ranking for the respondents who did score these
items, and to allow their inclusion in the analysis for RQ1. However, they are excluded
from the analysis for RQ2; that is, the relationship between audit quality attributes and
satisfaction with incumbent auditors.

5.3 Research question 1: attributes important in evaluating audit service quality

The first research question is what audit service quality attributes are perceived to be
important to NSW local council finance professionals and internal auditors when
evaluating the quality of their audit services? The data to address this question were
the responses to the first question in the questionnaire; that is, the importance ranking
of the 48 individual audit service quality items provided by the respondents, based on
the mean response to each item[10].
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Distribution of responses (frequency)

Rank Attribute number Description n 23 22 21 0 1 2 3 NA Mean SD

1 4 The partner assigned to the audit engagement is very

knowledgeable about the industry 213 1 2 1 9 56 143 1 2.58 0.753
2 2 The audit firm is considered to be a specialist in local
government audit 213 1 2 4 15 53 138 2.49 0.872
3 27 The audit partner on the engagement is a CA/CPA 213 1 3 12 6 56 135 2.43 0.976
4 1 The audit firm has been performing the audit for at least two to
three years 213 1 2 6 16 62 125 1 2.41 0.880
5 20 The audit firm conducting the audit has other local council
audit clients 213 1 10 17 60 124 1 2.40 0.862
6 3 The audit engagement partner has been on the audit for at
least two to three years 213 1 1 3 6 18 62 122 2.35 0.986
7 16 The auditors assigned to the engagement are very
knowledgeable about accounting and auditing standards 213 1 1 5 4 21 74 107 2.25 1.010
8 33 In all your dealings with the audit firm and individual audit
team members, the audit firm and audit team members never
engaged in any actions that would compromise its/their
independence, either in fact or in appearance 213 2 6 17 105 81 2 2.22 0.787
9 18 The audit staff assigned to the engagement have very high
ethical standards 213 12 19 99 82 1 2.18 0.820
10 31 The overall reputation of the audit firm is positive 213 1 8 22 104 78 2.17 0.818
11 45 The audit manager and supervisor assigned to the engagement
are very knowledgeable about the industry 212 2 2 5 2 22 88 91 2.15 1.074
12 17 The audit team members as a group always exercised due care
throughout the engagement 213 1 3 4 19 125 60 1 2.09 0.803
13 34 The audit firm has strict guidelines on the procedures that
must be completed before signing the audit report 213 1 2 11 26 102 69 2 2.05 0.906
14 32 The work performed by inexperienced members of the audit
team is supervised by the audit team manager 213 4 4 7 21 103 74 2.05 1.024
15 38 The audit team members conducted the audit field work in an
appropriate manner 212 2 8 3 18 114 66 1 2.05 0.975
(continued)

service quality attributes

Audit service

of audit service quality

in impacting evaluation
The importance of audit
107
quality in CAT

Table II.
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21,2
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108

Table II.
Distribution of responses (frequency)
Rank Attribute number Description n 23 22 21 0 1 2 3 NA Mean SD

16 29 The audit firm reports internal control deficiencies and the

auditors’ recommendations on internal control are useful 213 3 4 4 3 37 83 79 1.97 1.195
17 37 The audit team members as a group have an adequate
understanding of the operations of the council 213 2 4 11 4 28 85 78 1 1.92 1.257
18 15 The audit firm is agreeable to completing the audit by a date
the client has set 211 2 2 6 11 30 97 63 1.88 1.134
19 43 The audit manager has been on the audit for at least two to
three years 213 4 5 11 18 27 67 81 1.74 1.448
20 12 The audit firm conducts a thorough study of the client’s
system of internal control 212 9 11 3 38 92 58 1 1.74 1.266
21 36 The audit firm has rarely been found negligent in lawsuits
brought against it (alleging inadequate audit performance) 213 1 2 6 40 13 68 70 13 1.73 1.306
22 22 There is frequent communication between the audit team and
council management 213 4 4 12 8 41 85 58 1 1.67 1.341
23 47 The external auditors co-operate with the internal auditors 213 1 2 5 25 28 59 43 50 1.61 1.239
24 13 The audit firm makes extensive use of computers in
conducting the audit 213 3 8 8 22 32 89 49 2 1.54 1.378
25 23 The audit firm keeps council management informed during the
year about accounting and financial reporting developments
that affect the council 213 5 8 10 19 37 71 62 1 1.53 1.494
26 41 The auditor adds value to the entity in terms of generating
useful ideas for improvement 213 3 5 12 10 60 74 49 1.52 1.309
27 46 The auditors are mindful of how busy the council’s key finance
staff are and contact these individuals only to the extent
necessary 213 5 6 14 9 40 95 43 1 1.50 1.399
28 44 The audit supervisor has been on the audit for at least two to
three years 213 7 7 9 26 29 73 61 1 1.48 1.547
29 24 The audit engagement partner and manager make frequent
visits to the council during the conduct of the audit 213 4 2 14 19 48 80 44 2 1.47 1.321
(continued)
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Distribution of responses (frequency)

Rank Attribute number Description n 23 22 21 0 1 2 3 NA Mean SD

30 19 There is frequent communication between the audit team and

the council’s audit committee 213 6 3 9 25 32 68 35 35 1.35 1.447
31 5 The audit firm participates in the peer review process, and its
most recent peer review report was a clean one 213 2 8 3 40 38 71 36 15 1.33 1.332
32 39 The audit firm makes extensive use of statistical techniques in
conducting the audit 213 3 12 41 50 72 34 1 1.31 1.199
33 48 The number of hours spent by the audit team to complete the
audit (from the beginning of field work to the audit report date) 211 2 8 51 49 60 25 16 1.19 1.144
34 6 The audit firm actively encourages staff members to take
courses and attend seminars in fields where the firm has major
clients 213 2 12 7 38 49 61 35 9 1.17 1.405
35 25 The percentage that the council audit fee represents to the total
audit fee revenue of the audit firm is not material 212 6 4 12 48 37 58 40 7 1.15 1.471
36 8 The audit firm is skillful in devising acceptable accounting
treatments for transactions that generate results that council
management wants 213 8 14 21 30 37 64 38 1 0.97 1.663
37 26 The personnel on the engagement below manager level have
passed the professional bodies’ exams 213 4 9 14 49 46 72 16 3 0.92 1.357
38 40 The audit report and work papers receive a second partner
review 213 11 19 54 43 51 29 6 0.92 1.384
39 10 The audit firm develops stringent time budgets for each audit
area and expects its people to meet them 213 4 18 18 46 43 52 26 6 0.77 1.541
40 28 Before accepting a new client, the CPA firm conducts a
pre-engagement investigation and goes through risk control
procedures including the conduct of a background search on
senior management of the perspective client 213 5 9 14 68 34 45 24 14 0.75 1.445
41 42 The size of the audit firm in terms of its total revenue and
number of auditors is much larger than the average size in the
region 213 8 15 27 63 32 38 26 4 0.50 1.588
(continued)
Audit service

109
quality in CAT

Table II.
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110

Table II.
Distribution of responses (frequency)
Rank Attribute number Description n 23 22 21 0 1 2 3 NA Mean SD

42 7 The audit firm that is conducting the audit provides no

consulting services for the client 213 18 35 21 27 26 47 37 2 0.41 1.994
43 21 Audit team members are rotated off the audit periodically 212 8 17 26 61 39 47 12 2 0.40 1.494
44 11 The audit firm has a high-audit staff turnover rate 213 18 43 20 28 27 41 34 2 0.24 1.998
45 9 The audit firm has a policy on the maximum number of hours
per day and per week that its staff can work 213 9 24 25 93 24 19 7 12 20.08 1.348
46 35 The cost to the audit firm of different audit procedures, in
terms of time expended, is the major criterion as to whether a
criterion is used 212 15 30 24 69 37 16 13 8 20.10 1.561
47 14 The audit firm’s attitude is one of a skeptic, not one of a client
advocate 213 23 45 30 39 29 29 16 2 20.26 1.816
48 30 The audit firm tends to have decentralised offices rather than
centralised offices 212 29 29 24 76 21 23 7 3 20.39 1.620
 Table II shows that the ten items most likely to impact on respondents’ evaluation of Audit service
local council audit service quality are dominated by items from the attributes of quality in CAT
Industry Expertise (three items), Council Experience (two items) and Technical
Competence (two items). The seven most important items are from these three
attributes. Specifically, the three most highly rated items are (with the attribute to
which they are related shown in parentheses after each item):
(1) the partner assigned to the audit engagement is very knowledgeable about the 111
industry (Industry Expertise);
(2) the audit firm is considered to be a specialist in local government audit
(Industry Expertise); and
(3) the audit partner on the engagement is a CA/CPA (Technical Competence).
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The next four items are:

(4) the audit firm has been performing the audit for at least two to three years
(Council Experience);
(5) the audit firm conducting the audit has other local council audit clients
(Industry Expertise);
(6) the audit engagement partner has been on the audit for at least two to three
years (Council Experience); and
(7) the auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (Technical Competence).

The remaining three items in the ten most important are:

(8) in all your dealings with the audit firm and individual team members, the audit
firm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance
(Independence);
(9) the audit staff assigned to the engagement have very high-ethical standards
(Ethical Standards); and
(10) the overall reputation of the firm is positive (Due Care).

It can also be observed from Table II that, overall, the items least likely to impact on
evaluation of audit service quality (those ranked as the ten least important items) relate
to the audit service quality attributes of Field Work Conduct (two items), Quality
Commitment (two items), Degree of Individual Responsibility (two items), Freshness of
Perspective (two items), Independence (one item), and Skepticism (one item).
Specifically, the items (and attributes to which they are related shown in
parentheses) from the tenth least important item to the least important are:
(1) the audit firm develops stringent time budgets for each audit area and expects
its people to meet them (Field Work Conduct);
(2) before accepting a new client, the audit firm conducts a pre-engagement
investigation and goes through risk control procedures including the conduct of a
background search on senior management of the prospective client (Quality
Commitment);
 ARJ (3) the size of the audit firm in terms of its total revenue and number of auditors is
21,2 much larger than the average size in the region (Degree of Individual
Responsibility);
(4) the audit firm that is conducting the audit provides no consulting services for
the client (Independence);
(5) audit team members are rotated off the audit periodically (Freshness of
112 Perspective);
(6) the audit firm has a high staff turnover rate (Freshness of Perspective);
(7) the audit firm has a policy on the maximum number of hours per day and per
week that its staff can work (Quality Commitment);
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(8) the cost to the audit firm of different audit procedures, in terms of time expended,
is the major criterion as to whether a criterion is used (Field Work Conduct);
(9) the audit firm’s attitude is one of a skeptic, not one of client advocate
(Skepticism); and
(10) the audit firm tends to have decentralized offices rather than centralized offices
(Degree of Individual Responsibility).

5.4 Research question 2: attributes important in evaluating satisfaction with audit

service quality
The second research question is what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by local
council incumbent auditors. This question was formulated into the hypothesis
developed in Section 3. This hypothesis related council finance professionals’ and
internal auditors’ perceptions of each of the 14 audit service quality attributes to their
evaluation of overall satisfaction with their auditors. The data to address this question,
and to test the hypothesis, were the responses to the first question in the questionnaire
(the importance ratings of the 48 individual audit service quality items as perceived by
the finance professionals and internal auditors) and the responses to the second
question (the evaluation of overall satisfaction with the audit service quality of their
incumbent auditors).
The 48 items were factor analysed using confirmatory factor analysis. That is, factor
analysis was applied to the items theoretically related to each of the 14 attributes. The
factors were then used as independent variables in an OLS regression model explaining
overall audit service quality satisfaction. As noted previously, overall satisfaction with
audit service quality was measured as the sum of the scores for satisfaction with the
incumbent audit firm and satisfaction with the incumbent audit team (Behn et al., 1997).
The factor analyses and multiple regressions use 155 complete responses. Again as
noted previously, items 19 and 47 were excluded because of their high number of NA
responses. Also excluded were all other NA and incomplete responses.
Table III presents the results of the confirmatory factor analysis performed using
the Principal Components extraction method with Varimax (Kaiser Normalisation)
rotation. Table III shows that 12 factors were extracted, based on extraction criteria of
a Scree Plot analysis and an absolute value coefficient cut-off of 0.45. Factors were not
extracted for the attributes of executive involvement, ethical standards and skepticism
because these attributes consisted of only one item. Ten of the 12 factors were
 Attribute no. Attribute description
Audit service
quality in CAT
Factors (per cent)
Council experience (54.03 per cent)
43 The audit manager has been on the audit for at least two to three years (0.840)
44 The audit supervisor has been on the audit for at least two to three years (0.804)
1 The audit firm has been performing the audit for at least two to three years 113
(0.640)
3 The audit engagement partner has been on the audit for at least two to three
years (0.632)
Industry expertise (53.99 per cent)
4 The partner assigned to the audit engagement is very knowledgeable about the
industry (0.850)
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2 The audit firm is considered to be a specialist in local government audit (0.835)

20 The audit firm conducting the audit has other local council audit clients (0.616)
45 The audit manager and supervisor assigned to the engagement are very
knowledgeable about the industry (0.600)
Responsiveness (61.84 per cent)
Responsiveness 1 (37.07)
23 The audit firm keeps council management informed during the year about
accounting and financial reporting developments that affect the council (0.861)
22 There is frequent communication between the audit team and council
management (0.816)
41 The auditor adds value to the entity in terms of generating useful ideas for
improvement (0.734)
29 The audit firm reports internal control deficiencies and the auditors’
recommendations on internal control are useful (0.708)
Responsiveness 2 (24.77 per cent)
8 The audit firm is skillful in devising acceptable accounting treatments for
transactions that generate results that council management wants (0.806)
46 The auditors are mindful of how busy the council’s key finance staff are and
contact these individuals only to the extent necessary (0.652)
15 The audit firm is agreeable to completing the audit by a date the client has set
(0.628)
Technical competence (47.77 per cent)
16 The auditors assigned to the engagement are very knowledgeable about
accounting and auditing standards (0.782)
27 The audit partner on the engagement is a CA/CPA (0.645)
26 The personnel on the engagement below manager level have passed the
professional bodies’ exams (0.637)
Independence (38.50 per cent)
25 The percentage that the council audit fee represents to the total audit fee revenue
of the audit firm is not material (0.760)
33 In all your dealings with the audit firm and individual audit team members, the
audit firm and audit team members never engaged in any actions that would
compromise its/their independence, either in fact or in appearance (0.757)
7 The audit firm that is conducting the audit provides no consulting services for the
client (2 0.065)
Due care (58.74 per cent)
31 The overall reputation of the audit firm is positive (0.832)
17 The audit team members as a group always exercised due care throughout the Table III.
engagement (0.785) Confirmatory factor
(continued) analysis
 ARJ Attribute no. Attribute description
21,2
36 The audit firm has rarely been found negligent in lawsuits brought against it
(alleging inadequate audit performance) (0.673)
Quality commitment (33.55 per cent)
5 The audit firm participates in the peer review process, and its most recent peer
114 review report was a clean one (0.695)
34 The audit firm has strict guidelines on the procedures that must be completed
before signing the audit report (0.615)
6 The audit firm actively encourages staff members to take courses and attend
seminars in fields where the firm has major clients (0.613)
28 Before accepting a new client, the CPA firm conducts a pre-engagement
investigation and goes through risk control procedures including the
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conduct of a background search on senior management of the perspective

client (0.601)
40 The audit report and work papers receive a second partner review (0.550)
32 The work performed by inexperienced members of the audit team is supervised
by the audit team manager (0.512)
9 The audit firm has a policy on the maximum number of hours per day and per
week that its staff can work (0.431)
Field work conduct (50.31 per cent)
Field work conduct 1 (28.79 per cent)
37 The audit team members as a group have an adequate understanding of the
operations of the council (0.809)
38 The audit team members conducted the audit field work in an appropriate
manner (0.775)
12 The audit firm conducts a thorough study of the client’s system of internal
control (0.633)
39 The audit firm makes extensive use of statistical techniques in conducting the
audit (0.631)
13 The audit firm makes extensive use of computers in conducting the audit
(0.438)
Field work conduct 2 (21.51 per cent)
35 The cost to the audit firm of different audit procedures, in terms of time
expended, is the major criterion as to whether a procedure is used (0.759)
10 The audit firm develops stringent time budgets for each audit area and expects
its people to meet them (0.612)
48 The number of hours spent by the audit team to complete the audit (from the
beginning of field work to the audit report date) (0.523)
Freshness of perspective (57.29 per cent)
11 The audit firm has a high audit staff turnover rate (0.757)
21 Audit team members are rotated off the audit periodically (0.757)
Individual responsibility (56.63 per cent)
42 The size of the audit firm in terms of its total revenue and number of auditors is
much larger than the average size in the region (0.752)
30 The audit firm tends to have decentralised offices rather than centralised offices
(0.752)
Notes: Each of the 14 attributes in the taxonomy in Table I was factor analysed. The number in
the parentheses after the factor label is the variance accounted for by the factor. The numbers in
parentheses after the original attribute descriptions are the factor loadings from the pooled factor
analysis. The extraction method is principal components analysis. The orthogonal
rotation method used is Varimax with Kaiser Normalisation. The factor loading co-efficient
Table III. cut-off is 0.45
 one-factor solutions consistent with the theoretical taxonomy of audit quality Audit service
attributes that was based on Carcello et al. (1992). Two factors were extracted for the quality in CAT
attributes of Responsiveness and Field Work Conduct.
The factors and the three attributes of Executive Involvement, Ethical Standards
and Skepticism were included as independent variables in the OLS regression model
explaining overall audit service quality satisfaction. The results of the hypothesis
testing are presented in Table IV. Table IV shows that the OLS regression model is 115
significant (F ¼ 6.821, p # 0.000) with an adjusted R 2 of 34.6 per cent. The coefficients
of the factor scores for the attribute groupings Council Experience (t ¼ 2.518,
p , 0.013), Independence (t ¼ 2.136, p , 0.034), Responsiveness 1 (t ¼ 2.998,
p , 0.003) and Responsiveness 2 (t ¼ 2.675, p , 0.008), as well as the coefficient for
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the Ethical Standards attribute (t ¼ 1.781, p , 0.077) are, as expected, positive and
significant. The coefficient for Skepticism was, as expected, negative and significant
(t ¼ 2 2.564, p , 0.011)[11].
Table V presents a summary of the hypothesis testing using confirmatory factor
analysis. Table V shows that the hypothesis was supported for five of the audit service
quality attributes, specifically Council Experience, Responsiveness, Independence,
Ethical Standards and Skepticism. Hence, overall satisfaction with audit service
quality in the NSW local council context is a positive function of the experience of the
audit firm and the audit team with the council, the independence of the audit firm from
the council, the extent to which the audit firm is responsive to the council’s needs, and
the ethical standards of the audit team, and a negative function of the skepticism of the
audit team members.

OLS regression model relating audit service quality attributes to satisfaction with the overall quality
of audit services provideda,b
Factor score/attribute Coefficient t-statistic p-value (2 tail)

Constant 2.951 5.180 0.000

Council experience 0.427 2.518 0.013 * *
Industry expertise 0.206 0.964 0.337
Responsiveness_1 0.735 2.998 0.003 * * *
Responsiveness_2 0.536 2.675 0.008 * * *
Technical competence 20.181 20.832 0.407
Independence 0.378 2.136 0.034 * *
Due care 0.066 0.295 0.769
Quality commitment 20.051 20.217 0.829
Field work conduct_2 0.030 0.157 0.875
Freshness of perspective 20.123 20.783 0.435
Individual responsibility 0.080 0.473 0.637
Executive involvement 20.134 20.889 0.376
Ethical standards 0.442 1.781 0.077 *
Skepticism 20.224 22.564 0.011 * *
Notes: *Significant at the 10 per cent level; * *significant at the 5 per cent level; * * *significant at the Table IV.
1 per cent level. aThe dependent variable is overall satisfaction with the quality of audit services Audit service quality
provided: bField work conduct_1 is excluded due to multicollinearity. Sample size: 155; F-statistic: attributes and
6.821; significant at the p # 0.000; adjusted R 2: 34.6 per cent satisfaction
 ARJ
Hypothesis
21,2
Council experience (H1)
Industry expertise (H2)
Responsiveness (H3)
Technical competence (H4)
116 Independence (H5)
Due care (H6)
Quality commitment (H7)
Executive involvement (H8)
Field work conduct (H9)
Table V. Audit committee (H10)
Summary of hypothesis Ethical standards (H11)
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Expected direction Significant p , 0.05 Direction
þ U U
þ X
þ U U
þ X
þ U U
þ X
þ X
þ X
þ X
þ Not tested
þ

U U
testing using Skepticism (H12) 2 U U
confirmatory factor Freshness of perspective (H13) þ X
analysis Individual responsibility (H14) þ X

5.5 Research question 2: additional analysis

We also conducted exploratory factor analysis on the 48 individual items of audit
service quality, and used the resulting factors in an OLS regression model explaining
overall audit service quality satisfaction. Using the Principal Components extraction
method with Varimax (Kaiser Normalisation) rotation, factors were extracted based on
an eigenvalue greater than one and an absolute value coefficient cut-off of 0.40,
consistent with Carcello et al. (1992).
Some differences were found between the factor structure developed from the
exploratory and confirmatory factor analyses. In particular, the exploratory factor
analysis produced a 13 factor structure, the first of which was dominated by items
from the Responsiveness and Field Work Conduct audit service quality attributes. This
contrasted with the confirmatory factor analysis where, as noted above,
Responsiveness and Field Work Conduct each split into two separate factors.
For Responsiveness, the first factor in the confirmatory analysis (Responsiveness 1)
comprised four items:
(1) the audit firm keeps council management informed during the year about
accounting and financial reporting developments that affect the council;
(2) there is frequent communication between the audit team and council
management;
(3) the auditor adds value to the entity in terms of generating useful ideas for
improvement; and
(4) the audit firm reports internal control deficiencies and the auditors’
recommendations on internal control are useful.

The second factor (Responsiveness 2) comprised three items:

(1) the audit firm is skilful in devising acceptable accounting treatments for
transactions that generate results that council management wants;
(2) the auditors are mindful of how busy the council’s key finance staff are and
contact these individuals only to the extent necessary; and
(3) the audit firm is agreeable to completing the audit by a date the client has set.
 These two factors are logically different. The first relates to operational aspects of the Audit service
interaction of the audit firm and audit team with the client council that enhance the quality in CAT
quality of the council’s internal control system and its accounting and financial
reporting. The second may be seen as a “client appeasing” component of responsiveness.
While both are legitimate aspects of client satisfaction with the level of audit service
quality, they are different in nature. This difference was apparent in the exploratory
factor analysis. In the exploratory analysis, the items in the first factor (Responsiveness 117
1 relating to operational aspects which enhance quality) loaded not with the items in the
second (client-appeasing) factor (Responsiveness 2), but with items from the attribute
grouping of Field Work Conduct, specifically the items that loaded on the first of the two
factors extracted for Field Work Conduct.
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For Field Work Conduct, the first factor in the confirmatory factor analysis (Field
Work Conduct 1) comprised the attributes:
.
the audit team members as a group have an adequate understanding of the
operations of the council;
.
the audit team members conducted the audit field work in an appropriate
manner;
.
the audit firm conducts a thorough study of the client’s system of internal
control;
.
the audit firm makes extensive use of statistical techniques in conducting the
audit; and
.
the audit firm makes extensive use of computers in conducting the audit.

The second factor (Field Work Conduct 2) comprised the attributes:

.
the cost to the audit firm of different audit procedures, in terms of time expended,
is the major criterion as to whether a procedure is used;
.
the audit firm develops stringent time budgets for each audit area and expects its
people to meet them; and
.
the number of hours spent by the audit team to complete the audit (from the
beginning of field work to the audit report date).

Again, these two factors are logically different. The first (Field Work Conduct 1) relates
to operational aspects of field work, while the second (Field Work Conduct 2) relates to
audit time and cost considerations.
The fact that the exploratory factor analysis placed the items Responsiveness 1 and
Field Work Conduct 1, from the confirmatory factor analysis based on Carcello et al.
(1992), in the same factor is logical. Both relate to operational aspects of interactions of
the audit firm and audit team with the council in the conduct of the audit, leading to
enhanced outcomes in the internal control systems and accounting and financial
reporting of the council.
When used in the OLS regression explaining overall satisfaction with audit service
quality, the factors produced from the exploratory factor analysis showed considerable
similarity in terms of the hypothesis results with those from the confirmatory factor
analysis. Four of the five attributes found to be positively related to overall satisfaction
with audit service quality in the analysis based on the confirmatory factor analysis
 ARJ also dominated the first three factors identified in the exploratory factor analysis.
21,2 These were the attributes relating to Responsiveness, Independence, Ethical Standards
and Council Experience. With regard to the attribute of skepticism, the regression
based on the exploratory factor analysis showed Skepticism to be negatively and
significantly associated with satisfaction, again consistent with the result for the
regression based on the confirmatory factor analysis. The regression based on the
118 exploratory factor analysis found two additional attributes to be positively related to
satisfaction with audit service quality. These were Industry Expertise and Executive
Involvement in the audit.

6. Conclusions
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This study addressed two research questions. The first was what audit quality
attributes are perceived to be important to NSW local council finance professionals and
internal auditors when evaluating the quality of audit services provided by their
incumbent auditor? The second was what audit quality attributes are related to, or
associated with, overall satisfaction with the quality of audit services provided by their
incumbent auditor?
With respect to the first question, the study found that the audit quality attributes
perceived as most important in evaluating audit service quality were industry
expertise, council experience, technical competence, independence, ethical standards
and due care. The items comprising these attributes showed that local council finance
professionals and internal auditors perceived a quality audit service when the audit
partner and engagement staff are very knowledgeable about the industry and with
accounting and auditing standards generally, when the audit firm is considered to be a
specialist in local government, when the audit firm and engagement staff have gained
knowledge of and experience with the council in prior years, and where the audit staff
exercise independence and due care. The attribute groupings considered least
important by local council finance professionals and internal auditors included
skepticism, freshness of perspective, the size of the audit firm and the provision of
non-audit services.
With respect to the second question, five audit quality attributes were found to be
related to overall satisfaction with audit service quality. Satisfaction with audit service
quality was found to be higher when the audit firm and team had experience with the
council, were responsive to council needs, were independent, and maintained
high-ethical standards. Satisfaction was higher when the audit firm and team
maintained a low level of skepticism.
These results are consistent with Behn et al. (1997), who also found that experience
with the client and responsiveness to client needs were positively associated with client
satisfaction, and that skepticism was negatively associated with satisfaction, in the
non-CAT context of their study. The results are also consistent with Pandit (1999) who
found that clients’ intention to retain their incumbent audit firm was positively
associated with responsiveness to client needs.
Behn et al. (1997) also found industry expertise and executive involvement in the
audit to be positively associated with client satisfaction. These associations were not
found in this study when the attributes of Carcello et al. (1992) were used as the
independent variables in the hypothesis testing. However, they were found to be
positively associated with satisfaction in the additional analysis when exploratory
 factor analysis was used to generate the independent variables for the hypothesis Audit service
testing. This suggests that the failure to find their significance in the original quality in CAT
hypothesis testing may be a result of the constraints of imposing the Carcello et al.
(1992) factor structure. The Carcello et al. (1992) factor structure may not completely fit
different contexts of study and may fail to reveal some associations of significance in
those contexts. Future research into the association between audit quality attributes
and satisfaction with audit service quality should be mindful of the appropriateness of 119
the Carcello et al. (1992) factor structure in different contexts and with different cohorts
of respondents.
Our study provides several contributions to the literature and to practice. First, the
consistency of our findings in a CAT context with those of Behn et al. (1997) and Pandit
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(1999) in non-CAT contexts, suggests that the concerns that CAT may lead to the
impairment of audit independence and quality may not be founded. Our study has
shown considerable consistency of the importance of audit quality attributes in both
CAT and non-CAT contexts. This suggests that, to the extent that client perceptions of
the importance of audit quality attributes influence client choice of, and satisfaction
with, auditors, those perceptions are similar in the CAT context of our study and the
non-CAT contexts of other studies. CAT has been argued to be a form of audit
procurement that can enhance audit quality by improving the information set available
during the auditor appointment process, and altering the supply of audit firms
available to an organization from which to appoint an auditor (Jensen and Payne, 2005).
Our study suggests that policy-setters may be able to consider the benefits of CAT as a
regulatory form of audit procurement without necessarily incurring audit
independence and quality costs.
A second practical contribution of our study is that it allows audit firms to better
understand the audit service quality attributes valued by local council clients, and,
consequently, to differentiate their promotional and service-provision strategies to
accord with those attributes, as well as to improve their own audit quality in a local
council context and to deliver more satisfaction to local council clients. Audit firms
may be able to focus on a specific and reduced set of audit service quality attributes
that we have found to be most valued by local council clients; in particular, experience
with the council, responsiveness to council needs, independence and the maintenance
of high-ethical standards.
A limitation of the study is that audit quality was measured using perceptions of
audit service quality by local council finance professionals and internal auditors in a
CAT context. The perceptions, therefore, are those of clients as preparers of local
council financial statements, rather than of external parties such as auditors or users of
those statements. As such, the findings might not reflect audit quality as perceived by
other parties interested in local government financial reporting. Future research into
audit quality in local government, and in a CAT context, could well be directed at
non-preparer interest groups such as auditors, government regulatory bodies and other
users of local council financial statements, and could also be directed to different
competitive bidding audit procurement regimes other than the CAT context of NSW
local government.
 ARJ Notes
21,2 1. The marketing literature discusses service quality in terms of the ServQual construct. This
construct consists of five dimensions used to assess service quality; reliability,
responsiveness, assurance, empathy and tangibles (Zeithaml and Bitner, 2000, p. 82).
2. Several of the studies in this literature distinguish between audit firm and audit team
attributes (Schroeder et al., 1986; Carcello et al., 1992; Aldhizer et al., 1995; Behn et al., 1997;
120 Behn et al., 1999), although the attributes comprising the audit firm and audit team
constructs are only operationalised in Schroeder et al. (1986) and Aldhizer et al. (1995).
3. It should be noted, however, that audit firms that become too responsive to the needs of the
client council may compromise their independence, with auditor-client conflicts being
resolved in favour of the council, resulting in a lower quality audit.
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4. However, audit teams that are rotated too frequently are likely to consist of team members
who are unfamiliar with the operations of the council and do not have the experience
necessary to detect errors or irregularities.
5. The NSW Department of Local Government advised that, given the detail of the
questionnaire, the best way to obtain a good response rate from the finance professionals
was to administer the survey at a conference. As it was a national conference however, there
were financial professionals from inter-state councils attending who completed the
questionnaire along with the NSW finance professionals. The responses for inter-state
respondents were excluded from the analysis.
6. Consistent with Schroeder et al. (1986, p. 89), audit quality was not defined in the survey to
avoid demand effects.
7. In terms of sensitivity analysis, three dependent variables were used: (1) satisfaction with the
audit firm; (2) satisfaction with the audit team; and (3) satisfaction with the overall quality of
audit services provided. The results were generally consistent regardless of which
dependent variable was used.
8. The high-response rate is due to the support of the survey by the NSW Finance Professionals
Executive, particularly the chairperson, Michael Sewell, and the NSW Department of Local
Government, particularly the Director, Performance Management and Compliance, Grahame
Gibbs.
9. t-Tests of differences between the two groups showed significant differences at the 5 per cent
level for only two of the 48 items. The responses for finance professionals and internal
auditors were pooled.
10. All NA responses were excluded in calculating the means for ranking.
11. The attribute grouping Field Work Conduct 1 was excluded from the regression because of
high correlations (between 0.506 and 0.593) with some other variables. This attribute
grouping was not significant when included in the regression and its exclusion improved the
significance of some variables.

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Corresponding author
Kym Boon can be contacted at: kboon@efs.mq.edu.au

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