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The purpose of this paper is to investigate the direct and indirect links between book-tax differences (BTDs) and audit quality using accounting conservatism (proxy of earnings quality). Hence, this paper seeks to extend prior audit quality research.

This study uses a sample of Tunisian listed firms on the Tunis Stock Exchange and operating in the industrial and commercial sectors during 2005-2012. This investigation is motivated by structural equations system models that specify both a direct link and an indirect link that is mediated by information reflected in BTDs.

The results show that for the Tunisians companies, firms with large BTDs are associated with higher audit quality implies that such BTDs represent an observable proxy for earnings quality that affects auditor decisions. The authors find statistically an indirect link between abnormal BTDs and audit quality that is mediated by earnings quality. The current study also provides evidence that information reflected in BTDs can improve audit quality.

The findings may be of interest to the academic researchers, practitioners and regulators who are interested in discovering the informational value of BTDs in the audit process.

This paper extends the existing literature by examining the mediation effect of information reflected in BTDs on relationship between BTDs and audit quality.