Drivers of Audit Quality
In modern times, the role of auditing is inevitable amount the business organizations. It can be inferred that with effective auditing of financial statements, the organization will meet the needs and requirements of its stakeholders (Chan &Vasarhelyi, 2018). If the audit quality is at par with the financial reporting standards, then the firm can sustain in the long run. The objective of the research is to identify the importance of audit quality and how auditor’s independence has an impact on audit quality. The organizations have witnessed changes in corporate governance structure due to increase of competition. Therefore, the role of an effective audit framework is inevitable. The audit committees mainly focus on effective stewardship.
Therefore, the structure of the research will be to identify audit quality, how it is assessed, impact of auditors independence and expectation gap on audit quality.
The term audit quality mainly comprises of regulations, standards set up by the firms. The purpose of audit is to increase the confidence of the stakeholders of the financial statements by providing sufficient audit elements and as per the aspects of financial reporting framework (Christensen et al. 2016).An audit quality can be referred as the probability that the auditor will uncover and report the breaches in the financial statements. It is the important for an auditor to identify and report all the breaches to the top management of the respective organization.
The audit quality can be based upon the following factors:-
- Understanding of the auditors about the operations and business risk of the respective organization
- The accountability of the auditors in engaging the partners of the firm
- The manner in which the auditor’s report is reviewed and monitored.
The indicators of audit quality are as follows:-
- Turnover of audit personnel
- Industry expertise of audit personnel
- Audit hours worked and identification of the risk areas
- Allocation of different phases of audit
- Timely reporting of the weakness that are existing in internal control
- Quality ratings and compensation (Christensen et al. 2016).
From the above points, it can be highlighted that there are several indicators of audit quality. For example, if the auditor have expertise for that particular industry, they, it is expected that the audit quality will be good. However, if the auditor is not from the industry, then, it will have a negative impact on audit quality.
It is the primary responsibility of an auditor to maintain quality throughout the audit procedure. For this, an auditor needs to report the weaknesses that are existing in internal control to the board of directors of the organization. The auditor must carry out his work independently and this will reflect through their audit hours worked and identification of the risk areas and Allocation of different phases of audit(Alles,Kogan&Vasarhelyi, 2018).
Audit quality forms the basis of corporate governance and risk management of the business organizations. If the corporate governance and risk management of the firm is strong, then, it can be said that the audit quality of the firm is at par with the industry standards. The role of internal auditor focusses on the areas having highest risk. The quality of the audit can be assessed with the help of external review with the help of audit quality assessment review (Ruhnke& Schmidt, 2014). An effective quality assessment review helps the organization to improve their respective audit procedure. There are several steps in order to ascertain audit quality of the respective organization which are as follows:-
- To identify whether internal audit is adding value to the respective organization
- To analyze whether the internal audit procedure is aligned with risk assessment and compliance policies of the organization
- To identify whether internal audit has ever had an external review and if yes then what steps were taken (BowlinHobson &Piercey, 2015).
Impact of Audit Quality on Firm Sustainability
It is of crucial importance for the organizations to assess the audit quality in a timely manner. This will further help the organizations to attain their aims and objectives. It depends upon the board of directors to push internal audit function into a quality assessment review. Another important part of audit quality assessment review is taking feedback of the senior managements and members of audit committee in order to judge the steps of quality assessment (Cameran, Prencipe&Trombetta, 2016).
The success of the auditors depend upon the independence of the respective auditor.
The key responsibilities of an auditor is as follows:
- To evaluate whether the financial statements of the organization is at par with the financial reporting standards
- To undertake the procedure of audit in accordance to the respective audit standards
- Providing declaration to the directors in their respective report (Abbott et al. 2016)
The auditor’s independence refers that the auditor needs to be impartial while performing the respective audit procedure. An auditor needs to present an unbiased point of view towards the financial statements of the respective organization. The independence of the auditor can be categorized in three different categories. These are Programming independence, Investigative independence and reporting independence. All of these play an important part to analyze whether the auditor is working independent or not and whether any factor is affecting their independence or not. It can be inferred that the value of auditing depends upon the perception of the stakeholders regarding the independent nature of the auditor. However, it has been often seen that many of the auditors have sacrificed their respective independence. If it is seen that that any particular auditor has a possibility to earn in any financial incentive in order to retain that particular client, then, they can sacrifice their independence. In that case, the respective audit quality will be compromised (Alles, Kogan&Vasarhelyi, 2018).
The threats of auditors’ independence can be evaluated with the help of the following points:-
- Importance of the client
- Tenure of the respective auditor
- Non-Audit services (BowlinHobson &Piercey, 2015).
These threats also have an impact on audit quality as well. In addition to this, it can be also inferred that if the independence of the auditor increases then the audit quality will improve automatically. However, there are other factors as well effecting the audit quality which are outside the control of auditors. These are as follows:-
- Changes in corporate governance structure
- Problems in audit committees
It is important for an auditor to perform the audit procedure with quality. Their responsibility is to identify frauds and misinterpretation in the financial statements and take steps according to that. This is not possible without their independence. Therefore, it can be referred that more independent the auditor is and more will be audit quality for the respective organization. It can be also inferred that variations in auditor monitoring can be reflected through the faithfulness of information published in the financial statements of the respective firms (Tepalagul& Lin, 2015).
Factors Affecting Audit Quality
The difference between the actual and expected performance of an auditor can be inferred as audit expectation gap. It can be also defined as a difference between the expectations of financial users from the auditors and what auditors themselves believe their responsibilities are. It can be inferred that if the expectations of the stakeholders of financial statements are higher, the lower is the credibility of the respective auditor. Therefore, the existence of auditors’ expectations gap can be complicated in nature due to the nature of audit function. In case of the organizations Enron and WorldCom, the auditors failed to meet the expectations of the society and this had a considerable impact on audit quality as well. In addition to this it can be said that it is primary responsibility of an auditor to distinguish the perception of the society along with its own perception. The auditor needs to know how much effort is required and what steps are required to be taken in order to detect fraud in financial steps. However, the stakeholders of financial statements expect the auditors to detect frauds (Alles, Kogan&Vasarhelyi, 2018). If any fraud goes undetected and later if it is disclosed by accident then it declines the brand image of the organization. Due to this reason, it is important for an auditor to understand and minimize the expectation gap. There are several reasons due to which a fraud may go undetected. These are as follows:-
- Lack of awareness
- Lack of experience
- Personal relationships with the respective organizations (Abbott et al. 2016)
The audit expectations gap have two major variables which are in the form of auditors’ effort to detect fraud and auditors ability to get fraud. For example, if an auditor is not able to detect the fraud due to the required expertise issue, then it will fall under the category of auditor’s ability to get fraud. On the other hand, if the auditor do not give satisfactory effort to detect the fraud, then it will fall under the category of auditors’ effort to detect fraud.
Both these variables will broaden the expectations gap and thus effecting audit quality. Therefore, it is the responsibility of the auditor to reduce the audit expectations gap. This can be done by prompt efforts to reduce frauds, proper auditing plans, several brainstorming sessions and increasing the personal competencies of the auditor. Therefore, it can be said that audit expectations gap has negative influence on audit quality as well as reputation of the auditors as well as the respective organization (Bedard et al. 2012).
Conclusion
It can be concluded that auditing process have several impacts on the stakeholders of the financial statements. It is the accountability of an auditor to ensure audit quality in the audit process and follow the rules and norms of financial reporting standards. In addition to this, they should be independent enough to carry out the audit process and ensure that it does not have any impact upon audit quality. The auditors need to take appropriate measures in order to nullify the expectation gap so that it does not have any impact on audit quality. Apart from this, steps must be taken to detect frauds and increase audit quality that will have a positive impact on brand image of the organization.
References
Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.
Alles, M. G., Kogan, A., &Vasarhelyi, M. A. (2018). Putting continuous auditing theory into practice: Lessons from two pilot implementations. In Continuous Auditing: Theory and Application (pp. 247-270). Emerald Publishing Limited.
Bedard, J. C., Sutton, S. G., Arnold, V., & Phillips, J. R. (2012). Another piece of the “expectations gap”: What do investors know about auditor involvement with information in the annual report?. Current Issues in Auditing, 6(1), A17-A30.
Bowlin, K. O., Hobson, J. L., &Piercey, M. D. (2015). The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), 1363-1393.
Cameran, M., Prencipe, A., &Trombetta, M. (2016). Mandatory audit firm rotation and audit quality. European accounting review, 25(1), 35-58.
Chan, D. Y., &Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), 1648-1684.
Ruhnke, K., & Schmidt, M. (2014). The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business research, 44(5), 572-601.
Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
