A Model to Explain Effectiveness of Audit Committees on Audit Quality based on Structural Equations

Audit Committee is a main component of Corporate Governance and a key factor of the financial reporting process, which increases the reliability of audited financial statements. Agency theory predicts that if the agency problem is severe, management will demand higher supervision on financial statements quality to ensure the quality of financial reporting to shareholders. Therefore, the study investigates the relation of audit committees effectiveness to audit quality based on structural equation modeling approach. The sample consists of 111 firms listed in Tehran Stock Exchange during the years 2013 to 2016. Effectiveness of audit committee is measured through observable variables of financial expert, independence, gender and size of audit committees and the effectiveness of audit quality is measured through observable variables of institutional shareholders, opinion, expertise, industry, size and auditor tenure . The results show that effectiveness of audit committees increases the external audit quality