The Determinants of External Audit Quality Evidence from Manufacturing Share Companies of Addis Ababa Ethiopia

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Addis Ababa University


Audit quality is a very debatable topic in the area of auditing following the fall of giant companies in the West. One of the issues that gained momentum has been to analyze the external audit quality and the various audit firm-client relationships. The purpose of this study is to investigate the determinants of external audit quality proxied by discretionary (abnormal) accrual based on audit firm specific attributes that are considered vital by regulatory and professional bodies to properly monitor the external audit profession and to maintain trust among the various stakeholders in Ethiopian manufacturing share companies. In light of this objective the study adopted quantitative method of research approaches to test a series research hypothesis. Specifically, the study used documentary analysis of companies’ audited financial statements and personal inquiry with audit directors/officials of audit firms. Then companies were selected based on simple random sampling method to avoid biases and represent firms within manufacturing companies. Consequently, the study selected a sample of twelve (12) companies for the period of five years (2009-2013) with the total of 60 observations. The results of panel least square regression analysis show that audit firm industry specialization and certified audit professionals ratio have statistically significant and positive relationship with manufacturing share companies’ external audit quality. On the other hand, the joint provision of audit and non-audit service has a negative and statistically significant relationship with manufacturing share companies’ external audit quality. However, the relationship for audit firm size and audit firm tenure is found to be statistically insignificant. Therefore, this is a clear signal to all manufacturing share companies in Ethiopia that they cannot ignore audit firm characteristics while hiring of an audit firm for their audit service. Keywords: external audit quality, audit-firm specific attributes, earning management discretionary (abnormal) accrual.



External audit quality; audit-firm specific attributes; earning management; discretionary (abnormal) accrual.