The effect of audit digital transformation on audit quality: evidence from digital bank confirmations

Digital transformation is pivotal to the high-quality development of the audit profession in China. This paper examines the impact of digital bank confirmations on audit quality as part of this transformation. We find that digital bank confirmations significantly improve cash flow audit quality. The effect is particularly pronounced when auditors assess a higher risk of material misstatement, possess greater industry expertise, or face heavier workloads. Further analysis reveals that digital confirmations improve the persistence of cash flow components of earnings and mitigate the cash flow anomaly, thereby enhancing market pricing efficiency. Additionally, digital bank confirmations may have spillover effects on other high-risk audit items. This study provides empirical evidence on the economic consequences of the digital transformation in auditing and contributes to the literature on audit quality and its influencing factors. The findings provide valuable insights for the implementation of digital bank confirmations in future audit practices.