Impact of Audit Partner Rotation
The auditors play a very important role in ensuring that the quality of audit is proper as, on the basis of these reports, the investors can take valid and informed decisions. The quality of the audit supports the data and facts mentioned in the financial reports and because of this, the investors rely on the independent assessment undertaken by the auditors. Audit quality is directly related with the fundamental objective of auditing that is, to ensure that the financial reports are free from any kind of misstatements or there is no misrepresentation of facts. It is the duty of the auditors to ensure that the deficiencies detected in the financial reports are addressed by the auditors in the audit report. This objective is also in accordance of the Australian Accounting Standards. Hence, it becomes the duty and responsibility of auditors to undertake quality audits (ASIC, 2014). Following are some of the initiatives that have been adopted in order to improve audit quality.
The audit partners play a significant and direct impact on the quality of audit. Many researchers have proved that audit partner rotation, in countries like Italy and Brazil has proved beneficial for audit quality improvement. On the basis of this, researchers undertook many studies to find out the impact of increased tenure of audit partners on the improvement of audit quality. Hence, on the basis of the research conducted, it has been found out that the increase in the tenure of the audit partners have a significant positive impact on the audit quality (Geiger & Raghunandan, 2002). Johnson, Khurana, & Reynolds (2010) have mentioned that, there research has proved that longer audit tenure does not result in any reduction in the quality of audit. On the other hand, shorter and medium audit tenures result in lower audit quality and reduced quality of the financial reports of a company. Hence, the results of such rotation have put a question mark on the decision regarding mandatory audit firm rotation. It is believed by many that because of the mandatory audit rotation, the company can improve the quality of its auditing and financial reporting (Johnson, Khurana, & Reynolds, 2010). Peter and Roger (2006) are also of the opinion that on the basis of the research conducted by them on the organizations that have not adopted mandatory audit firm rotation and who have a long tenure relation with the audit firms reflects that, there is no reduction in the quality of audit. It has been mentioned that because of the long relationship, the auditors have a great idea about the organization, and as a result understands every situation of the company. Because of this, they are able to reflect the company in a better manner through their financial statements (Carey & Simnett, 2006). Manry, Mock, & Turner (2016) also support this argument that the increase in the tenure of the audit partner has a positive impact on the audit quality. Hence, it can be said that the organizations that do not follow the mandatory audit firm rotation can also reflect increased quality in its auditing and in its financial reports.
Organizational Culture and its Impact on Audit Quality
It has been believed that organizational culture has a direct impact on the auditing process as well as on the quality of audit. This is so because the culture of an organization highly influences the manner in which the employees of the company behave and the departments of the company behave towards their performance. Because of this reason, it is believed that organizational culture impacts the audit environment and the outcomes of auditing process. In the last few years, it has been seen that a lot of importance is being given on quality adherence as well as quality standards related to auditing (Alzeban, 2014). In order to comply with this, it is important to adopt this behaviour in the organizational culture so that quality can be encouraged in every activity. The main motive behind adopting this in the organizational culture is to assure that the audit products being offered by the company are in accordance with the international standards and practices. This also ensures that the stakeholders’ needs and demands and are taken into consideration in the auditing process. Organizational culture is reflected in the organizational activities. The result of these organizational activities is reflected in the audit reports and hence, in order to improve the quality of the audit, it is very important to work on organizational culture (Salih & Hla, 2016). Hence, it is not wrong to state that organizational culture has a very important role to play in the audit quality.
Project management is important in completing the audit with high quality that has the ability to fulfil the objectives of the audit within the stipulated time as well as budget. It has been proved that different principles of project management help in improving the quality of the audit. Principles like planning, developing realistic timelines as well as budgets for undertaking auditing. Apart from this, project management will help in managing time in an efficient manner. With the help of project management techniques, the auditors will be able to compare the past experiences and learn from past. Planning will help in deciding over the team of auditors that will undertake the auditing process. This will also help in the segregation of different activities of auditing process and on the basis of this the task will be allotted with the time required. Identification of audit objectives is an important part of project management. With the help of this planning how and where time should be spent becomes clear. The triple constraint triangle which includes scope, cost and schedule should be managed properly. Any changes in one of the constraint may impact the other resulting in poor audit quality (Miller, 2015). With the help of project management, the different findings of audit can be observed properly and will be able to provide recommendations to overcome any issue by providing corrective action. Because of this, the pressure of deadlines will be resolved as any issue in ending phase of the allotted time will not appear resulting in the completion of the audit work within time and with better quality (Morphy, 2008). There are different project management techniques that can be utilized by the auditors to improve their audit quality. Project management will also help in reviewing the different audit findings and the frameworks and auditing standards that are required to be followed in the auditing process and that will have significant impact on the quality of the audit (Bold, 2018).
Project Management and its Implication on Audit Quality
Impairment of non- financial assets is a concept in which the asset in the balance sheet of the company is reflected more that the market value of that asset. If this situation continues, then there are chances that the company’s market price may fall and may experience financial crisis (Mazars, 2009). This is usually experienced because of the lack of business plan. The checking of this impairment is done by the auditors of the company, so that the company does not face any negative consequence in the long run. In order to keep a check on this, focus groups can be developed that will monitor the market value of the asset and accordingly, make changes in the value of that particular non- asset in the balance sheets of the company. The direct impact of this will fall on the quality of the audit and audit reports that are used by stakeholders to take decisions regarding the stakeholders (Amiraslani, Iatridis, & Pope, 2018). Another option that can be used by the organizations to improve the audit quality is to provide necessary training to the audit team. It is very important that the auditor’s team get training on a regular interval so that their efficiency is maintained. Another important reason for providing training is that the auditors will be able to learn about new changes in the standards and regulations and how it can be implemented in the organization effectively. Also, training sessions should be conducted with the accounting department of the company so that if any fresh talent is there in the organization, they can be an active participant of the audit team of the company (Tysiac, 2017). Training and retaining the highly skilled staff is very important for the organization, as it poses a serious challenge in front of the company. Once the company is able to stand a highly skilled audit team, its direct impact is seen on the improved quality of the audit reports and the auditing practice of the company. Therefore, it is believed that it has the ability to improve the efficiency of the audit staff (Wolters Kluwer, 2017).
Directors play a very important role in ensuring the quality of the audit. This is so because the board of directors are the members of the Audit Committee of an organization and undertakes the activity of ensuring the integrity of the financial reports of the company. Hence, it is believed that the directors can play a very important role in supporting as well as promoting the quality of audit. Directors and audit committees can improve the quality of audit with the help of certain education and training towards this improvement of the audit quality. If the directors are educated related to activities like communicating with the auditors; providing the auditors with the necessary and required independence; helping in the facilitation of the auditing process, continuous assessment of the audit quality, etc. are some of the measures that can be adopted by the directors and the management of the organization to ensure audit quality within organization (ASIC, 2014). Director’s education or knowledge over the financial reporting process as well as the audit process will help in improving the quality of auditing. A well informed director or management of the company with higher education level will use effective communication skills to interact with the auditor of the company. The two way communication and greater engagement with the audit process will help to improve the quality of audit, which will benefit the directors and the auditors of the company. Also, if the directors will have the necessary knowledge related to auditing, it will help in facilitating planning between the auditors and the directors and management of the company (Abate, 2018).
Impairment of Non-Financial Assets and Its Impact on Audit Quality
- Internal control reviews should be strengthened so that its use can be increased and its direct impact can be seen on the quality of audit and financial reports of a company.
- Re-evaluation of the decisions made in previous audits will also help to a great extent to analyze the financial information of the company reflecting over the improved audit quality.
- Continuous efforts towards audit independence and training and guidance of the auditors will support them to take informed decisions
- Encouragement Quality Control Reviewer (EQCR), should be encouraged, as it helps the auditor to know about the business, its employees and other risks associated to the business in order to support the auditors’ understanding
- Coaching during the audit process should be introduced in order to challenge the decisions taken by the audit team, to find out about the analytical procedures used by the team.
- Introduction of the real time reviews by an external audit expert, of the important areas of audit before the finalization of the audit reports. This will help in gaining an additional expert view over the financial reports of the company and hence, will help in improving the quality of audit.
- Training and development is the best suggestion that can be adopted by any company or audit firm in order to improve the efficiency of the auditors, which will be reflected in the reports prepared by them.
- Survey should be conducted to analyze the staff of the company and the organisational culture so that efforts can be taken towards any improvement if required
- Feedback from the audit team is the best alternative available to work towards improvement and assess the organizational culture that will help in boosting the improvement of the audit quality (ASIC, 2018).
Conclusion
In the end, it can be concluded that in the past many efforts have been taken towards increasing or improving the quality of audit. Though, a lot of scope is still left to take further efforts towards improving audit quality. Some of them include using the help of additional external audit expert, conducting survey to improve organizational culture and getting feedback from the audit teams to introduce improvement wherever required. The past efforts taken towards improving the audit quality has been discussed in detail in the above section, which includes organizational culture and its impact on audit quality, director’s role towards improvement of audit quality, introduction of project management in audit process as well as increasing the tenure of the audit partner. The other initiatives suggested above can be used by the organizations as well as by the auditors in order to improve the quality of financial accounting and reporting. Audit reports play a very important role for the organizations, as depending upon these reports the investors of a company as well as other stakeholders take decisions. Hence, it can be said that audit reports have great influence on the decisions of any company. Therefore, it is important to take continuous efforts towards the improvement of auditing process which will result in improved audit quality. Training the staff as well as adopting focus groups has proved to be one of the best options to improve the audit quality of a company and hence, it enhances the quality level of audit reports of the organization.
References
Abate, T. (2018). How Management Contributes to Audit Quality. Retrieved from www.ifac.org: https://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/how-management-contributes-audit-quality
Alzeban, A. (2014). The Impact of Culture on the Quality of Internal Audit. Journal of Accounting, Ausiting & Finance, 30(1), 57-77.
Amiraslani, H., Iatridis, G. E., & Pope, P. F. (2018). Accounting for asset impairment: a test for IFRS compliance across Europe. City University London.
ASIC. (2014). Audit quality – The role of directors and audit committees. Retrieved from asic.gov.au: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit-quality-the-role-of-directors-and-audit-committees/
ASIC. (2014). Directors and financial reporting. Retrieved from asic.gov.au: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/
ASIC. (2018). Improving and maintaining audit quality. Retrieved from asic.gov.au: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/improving-and-maintaining-audit-quality/
Bold. (2018). Audit Project Manager Responsibilities and Duties. Retrieved from www.greatsampleresume.com: https://www.greatsampleresume.com/job-responsibilities/audit-project-manager-responsibilities/
Carey, P., & Simnett, R. (2006). Audit Partner Tenure and Audit Quality. The Accounting Review, 81(3), 653-676.
Geiger, M. A., & Raghunandan, K. (2002). Auditor Tenure and Audit Reporting Failures. Auditing: A Journal of Practice & Theory, 21(1), 67-78.
Johnson, E., Khurana, I. K., & Reynolds, J. K. (2010). Audit?Firm Tenure and the Quality of Financial Reports. Contemporary Accounting Research, 19(4), 637-660.
Manry, D. L., Mock, T. J., & Turner, J. L. (2016). Does Increased Audit Partner Tenure Reduce Audit Quality? Journal of Accounting, Auditing & Finance, 23(4), 553-572.
Mazars. (2009). mpairment of long-term non-financial assets – Key points of IAS 36 in 40 questions and answers. Retrieved from Mazars.com: https://www.mazars.com/Home/News/Our-publications/Mazars-Insights/norme-IAS-36
Miller, S. (2015). Project Management Techniques for Efficient Audit Projects. Portland Regional Training.
Morphy, T. (2008). Project Management, project planning, templates and advice. Retrieved from Stakeholdermap.com: https://www.stakeholdermap.com/project-management/project-audit.html
Salih, W. K., & Hla, D. T. (2016). Impact of Organizational Culture to Improve Audit Quality Assurance in the Public Sector Waleed. IOSR Journal of Business and Management, 18(9), 121-124.
Tysiac, K. (2017). How firms can continue to improve audit quality . Retrieved from Journalofaccountancy.com: https://www.journalofaccountancy.com/news/2017/dec/how-cpa-firms-can-improve-audit-quality-201718017.html
Wolters Kluwer. (2017). 6 Habits of Highly Effective Audit Teams. Retrieved from Pppradhan.com: https://www.pppradhan.com/wp-content/uploads/2017/05/6-habits-of-highly-effective-audit-teams-white-paper.pdf
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