The Number and Type of Audit Qualification Paragraphs: Examining Audit Partners’ Characteristics as Differentiation Surrogates

This study examines the role of audit partners’ characteristics (e.g., experience, primacy, multi skilling and IAO’s background) on the number and type of AQP. 

723 firm-year observations collected from the annual financial reports of listed firms on Tehran Stock Exchange between 2011 and 2019 have been examined through multiple regression.

Only partners’ multi skilling and primacy (experience) have a positive and significant association with AQPs about failure to comply with consolidated financial statements’ standard (failure to receive a response to third-party ‘confirmation letters’) and partners’ primacy (Iran Audit Organization’s background) is positively (negatively) associated with “unspecified” AQPs. Only partners’ “background with IAO” has a negative and significant relationship with the number of AQPs and the non-repetitive AQPs. None of the four characteristics of audit partners examined by this study are significantly associated with non-recognition of costs, incorrect measure of cost of goods sold, contingent liabilities, misclassification of accounting numbers in financial statements, and repetitive AQPs.

The findings of this study do not provide evidence about supporting or rejecting “learning by doing”, “demands-abilities fit” and the “multi skilling” theories. However, the findings of present study provide weak evidence supporting the negative consequences of “hierarchical organizational culture” view. Thus, such results reject the applicability of the audit partners’ characteristics as differentiation surrogates by client firms.

Contribution:

This study, for the first time, examining the role of partners’ experience, primacy, multi skilling and with IAO’s background on the number and type of AQPs.