Does Chinese individual auditors’ issuance of modified audit opinions reflect their audit conservatism?

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Abstract

This study is motivated by the aim of assessing the effectiveness of using modified audit opinions (MAOs) as a widely adopted measure of audit quality in existing research. We examine whether individual auditors’ propensity to issue MAOs (PIMAO) is mainly attributable to their audit conservatism or client quality. We select a sample of client-year observations with no modified audit opinions (non-MAO clients) from China and perform a series of regression analyses on individual auditors’ PIMAO using five different client quality measures: the predicted probability of receiving MAOs, signed abnormal accruals, absolute abnormal accruals, small profit, and non-operating income. We find that clients of individual auditors with high PIMAO (high-PIMAO auditors) exhibit higher signed and absolute abnormal accruals and higher non-operating income than clients of individual auditors with low PIMAO (low-PIMAO auditors). In addition, the predicted probability of receiving MAOs and the likelihood of small profit are not lower for clients of high-PIMAO auditors compared to clients of low-PIMAO auditors. These findings indicate that clients of high-PIMAO auditors generally exhibit lower quality, consistent with the notion that Chinese individual auditors’ PIMAO is mainly attributed to client quality rather than audit conservatism. Our study provides implications for both auditing research and practice.

Keywords: Individual Auditors, Modified Audit Opinions, Audit Conservatism, Client Quality

Authors’ individual contribution: Conceptualization — G.L. and J.S.; Methodology — G.L. and J.S.; Formal Analysis — G.L. and J.S.; Writing — Original Draft — G.L. and J.S.; Writing — Review & Editing — G.L. and J.S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M41, M42

Received: 06.11.2024
Accepted: 21.02.2025
Published online: 25.02.2025

How to cite this paper: Liu, G., & Sun, J. (2025). Does Chinese individual auditors’ issuance of modified audit opinions reflect their audit conservatism? Corporate Ownership & Control, 22(1), 68–79. https://doi.org/10.22495/cocv22i1art5