Audit Quality Criteria and Their Effect on the Characteristics of Profit Sensitivity and Precision

The quality and sustainability of profitability are critical drivers of increased returns for shareholders. However, it is the quality of auditing that can curb managers’ opportunistic behavior, mitigate agency problems between shareholders and managers, and contribute to the stabilization of profitability. Higher-quality audits can influence the level of discretionary accruals applied by management, as well as the quality and accuracy of reported earnings. This study aimed to examine the effect of audit quality on the precision and sensitivity characteristics of earnings in companies listed on the Tehran Stock Exchange. The analysis covers 10 years from 2012 to 2022 and utilizes data from 105 companies. The research hypotheses were tested using multiple regression with the estimated generalized least squares (EGLS) method, applied to panel data. The results revealed that, among various audit quality criteria, the size of the audit firm, auditor industry specialization, auditor tenure, and auditor independence enhance the accuracy and sensitivity of earnings. However, no significant relationship was found between audit fees and the accuracy or sensitivity of earnings. By improving audit quality and reducing agency costs, auditors can enhance the overall quality of audits, the quality of earnings, and their precision and sensitivity.