Assessing Audit Quality, Impact Of Auditor’s Independence And Audit Expectations Gap

Factors Affecting Audit Quality

The audit quality is a process which ensures that there is continuous improvement in the key elements of quality. There are a variety of fundamental audit quality and such include the following as is discussed below.

Process

The application of quality control procedures and a rigorous audit process which follows the regulations, laws, and standards applicable by an organization’s auditors ensure that there are quality audits (Bills, Swanquist and Whited, 2016 p.300).

Inputs

In the input element, the quality audits often entails, having adequate knowledge, experience and skills to enable an individual to perform quality audit work(Bills et al.2016 p.300). Additionally, the process of quality audit constitutes a display of appropriate attitudes, ethics, and values while carrying out an audit work in a particular firm. 

Outputs

It is expected that the quality audits often is as a result of outputs which are considered to be timely and useful to particular interested parties. The outputs are typically explained in regards to the financial reporting supply chain (Baah and Fogarty, 2016 p.50). They also constitute those outputs from the auditors, audit regulators, business enterprise and the audit firm. Some of the key examples of outputs include information and reports which have been prepared and provided to another party by one particular party. Further, the outputs may originate from the process of auditing which may not be visible to the external parties of an organization who could also be audited

Contextual Factors

The contextual factors usually have an effect on the quality and nature of financial reporting and this may also be on the audit quality. The contextual factors may include, the corporate governance, regulations and existing laws which regulates various business activities.

Interactions

In every particular organization, there are stakeholders who play a major role through the support of financial reporting which is of high quality. Such stakeholders therefore often interact and such an interaction could greatly impact the audit quality (Baah and Fogarty, 2016 p.50). The policy of every particular organization is often aimed at promoting an increased interaction among the stakeholders.

The audit quality can be assessed through a variety of ways by the companies. For example, the audit quality can be assessed through a review of the audit plan. The review aims at looking at some of the audit planning judgments such as the timing, staffing, audit hours and risk assessment (Malsch and Salterio, 2015 p.20). Often some of these judgments are aimed at bringing down the risk of audit failure to an acceptable level which would typically help in attaining a quality audit. The review of the audit plan also enables the auditors of a particular company to identify some of the risk areas during the auditing process.

Assessing Audit Quality

The other technique to use in assessing the audit quality involves adjustment of the entries in the journals and reviewing of the accounting disclosures and policies at the end of every particular financial year of an organization. The review of the accounting policies is aimed at identifying the certain errors which may be disclosed in the audit reports by an auditor and this is because any particular error would undermine the faith bestowed upon the auditor (Ghosh and Tang, 2015 p.100). 

The quality audit can also be assessed through the provision of business process advice by the relevant auditors. The advice on the business process would entail those relating to the running of the business enterprise in a better way which would enable it to become more profitable. Further, in regards to tax advice, an organization has to be conservative and not to use the aggressive tax schemes which would undermine its key operations (Krishnan, Krishnan and Song, 2016 p.150). In the provision of pieces of advice, the auditor could also asses the audit quality by providing advice on the ways to enhance tax and internal controls. Such an advice should focus on the improvement of the corporate governance, staff capabilities, and the controls. An improvement in the internal controls would typically result in the provision of the quality audit report.

The audit quality is often affected by an auditor’s independence such that the more independent an auditor is, the audit quality will typically increase. There are a variety of theories which have been used to explain the key implications of independence of an auditor on the quality of audit work. Often the particular firms create a demand for audit services by having auditors who are typically independent and competent to carry out audit work (Tepalagul and Lin, 2015 p.110). Additionally, the perception of the public on the auditors’ independence generally affects the value of auditing work. It can be noted that the more positive particular individuals are concerning an audit duty, the more the quality of such an audit procedure in the company.

The independence of an auditor is of significance especially in the reputation of the auditing profession and this is because it is considered as a trusted player for the auditing services in the market since it generally affects the quality of auditing work presented by a particular auditor. Often the audit reports provided by certified public accountants are considered as more reliable by the society because it is believed that they have no financial interest in the particular audit work (Lobo, Paugam, Zhang and Casta, 2017 p.130). There are certain factors which may expose the independence of a particular auditor to various threats. Such factors may impair the independence of an auditor and this would result in poor audit quality.

Impact of Auditor’s Independence on Audit Quality

Also, with a poor audit quality, there will be lower earnings quality and greater earnings by the management. Auditors tenure, for example, may become a threat to the independence of an auditor such that when the auditor client relationship increases, a close relationship will be developed resulting in favoring of the management and hence a reduction in audit quality and objectivity (Bowlin, Hobson and Piercey, 2015 p.1380). The following are the factors which may impair the auditors’ independence and result will typically impact the quality of a particular audit work.

Non-audit Services

According to Prentice, Bills, and Peters, (2018 p.100), the non-audit services in a firm relates to those particular services which are offered by various audit firms and they do not relate to audit work. Such services may include, the tax services, bookkeeping, and management advisory services. Some of the management advisory services constitute, human resource planning, internal audit outsourcing, strategic planning and banking assistance among others. When the auditors perform such non-audit services, they may be taken away from their official duties relating to the checks and balance.  

The various interest of the shareholders may be put at unquantifiable risk. Also, the performance of the non-audit services may result in the creation of inherent conflicts in which they may be incompatible with. The quality of an audit can, therefore, therefore, be affected by the performance of non-audit services and this is because, a lot of attention will be given to the performance of such non-audit services by the auditors (Ratzinger-Sakel and Schönberger, 2015 p.70). Further, the deviation by the auditors from their primary role may lead to the generation of more revenues based on the audit relationship with the client and this would result in the interference with the independence of an auditor. The quality of an audit will, therefore, therefore, be lowered by such actions of the auditor. 

Tenure of an Audit Work

The audit tenure can be defined as the length of time in which an audit firm can hold a particular client and this is always in terms of the number of years which a client has been audited. There are two aspects of audit tenure which have an impact on the quality of the audit. Such elements entail, the audit firm tenure and individuals tenure with the firm. Often the audit tenure affects the audit quality in a diverse manner (Dhaliwal, Lamoreaux, Lennox and Mauler, 2015 p.600). For example, when the audit tenure increases, the quality of audit increases and at the same time it will decrease with time. However, there is often a positive correlation between the audit quality and audit partner tenure and this is in relation to the estimation of the discretionary accruals. Further, when there is a compulsory Imposition of partner rotation, the tenure of an audit partner will be limited and this may lead to a decrease in the audit quality.

Audit Expectations Gap

The audit expectation gap refers to the differences which are as a result of belief of the financial statements users and the public on the responsibilities of the auditors and what the auditors themselves think is their responsibility. Such a difference has a great impact on the quality of audit report provided by the auditors (Christensen, Glover, Omer and Shelley, 2016 p.1670). The audit quality has often been considered as one of the fundamental expectations of the professional groups. There are therefore a variety of features relating to the expectation gap which greatly impact the quality of an audit. Some of the characteristics of the expectation gaps are as explained below.

Adequate Knowledge of Audit Partner of the Customer’s Industry

According to Ruhnke and Schmidt (2014 p.580), an auditor who understands the proper use and particular activity of auditing will typically assist a particular firm to evaluate its internal controls, identify key problems, prepare an audit plan, carry out an audit work effectively and identify the various risks in the organization. Based on the above-mentioned points, it can be concluded that the expectation gap relating to the auditors having adequate knowledge will typically result in an increased audit quality. However, an auditor with no proper knowledge of auditing will prove a low-quality audit work to an organization.

Adherence to the Professional Ethics

It is expected of the auditors to comply with the professional ethics while carrying out their duties. Some of the ethical requirements for quality audit work entails the professional conduct which has the most impact on the quality of audit work (Litjens, van Buuren and Vergoossen, 2015 p.270). Such professional conduct includes secrecy, professional care, professional competence, integrity, and impartiality. The above mentioned professional ethics typically increases the quality of an audit work carried out by the particular auditors.

Training for the Audit Team on Technical Capability and Information

An audit team is expected to have a certain level of competence and capability such as practical experience in auditing and this should be based on the complexity and nature of audit work. Additionally, they are expected to identify the some of the regulatory, legal and professional requirements will aid them in providing quality audit work. Further, the auditors should have a proper technical knowledge on the various activities of the client to enable him or her to apply professional judgment during the audit work (Ma’Ayan and Carmeli, 2016 p.350). The above-mentioned capabilities and competency levels enable the auditors to provide a quality audit work. The impact of such an expectation gap is that it will typically result in an increase in the quality of audit work. 

Use of Expertise Services

Abbott, Daugherty, Parker, and Peters (2016 p.30), argues that it is expected of the auditors by the public and the financial statement users to make use of the services of an expert and this is especially in areas they may not have knowledge about. The use of an expert’s services generally results in an increase in audit quality and this is because a lot of the clients often require an expert evidence which has been examined by the expert to improve their perception on the value of the audit report. It is therefore concluded that the application of the expert services in the audit work leads to an increase in audit quality.

Expectation Gap on Auditor Rotation

The public expects that the auditors be rotated in various audit firms to enhance the quality of audit work. Research has indicated that there is a positive relationship between the quality of the audit work and the rotation of auditors in different audit companies (Abbott et al.2016 p.30). Often the implications of the auditors’ rotation on the quality of audit work can be examined based on two aspects. For example, the familiarity of an auditor with the specific activities of the particular client will increase his or her professional competence and hence an increase in the audit quality.

Documentation and Auditing Process

The quality of an audit depends on the timely documentation of audit reports by the auditors. The provision of adequate and proper audit documents improves the audit quality and this assists in attaining the results as per the expectations of the public and other financial statement users. 

References

Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.

Baah, G. and Fogarty, T.J., 2016. What auditors think about audit quality-a new perspective on an old issue.

Bills, K.L., Swanquist, Q.T. and Whited, R.L., 2016. Growing pains: Audit quality and office growth. Contemporary Accounting Research, 33(1), pp.288-313.

Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), pp.1363-1393.

Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), pp.1648-1684.

Dhaliwal, D.S., Lamoreaux, P.T., Lennox, C.S. and Mauler, L.M., 2015. Management influence on auditor selection and subsequent impairments of auditor independence during the post?SOX period. Contemporary Accounting Research, 32(2), pp.575-607.

Ghosh, A.A. and Tang, C.Y., 2015. Assessing financial reporting quality of family firms: The auditors? perspective.Journal of Accounting and Economics, 60(1), pp.95-116.

Krishnan, J., Krishnan, J. and Song, H., 2016. PCAOB international inspections and audit quality. The Accounting Review, 92(5), pp.143-166.

Litjens, R., van Buuren, J. and Vergoossen, R., 2015. Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from D utch Bankers, Audited Companies and Auditors. International Journal of Auditing,19(3), pp.267-281.

Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), pp.118-153.

Ma’Ayan, Y. and Carmeli, A., 2016. Internal audits as a source of ethical behavior, efficiency, and effectiveness in work units. Journal of business ethics, 137(2), pp.347-363.

Malsch, B. and Salterio, S.E., 2015. “Doing good field research”: Assessing the quality of audit field research.Auditing: A Journal of Practice & Theory, 35(1), pp.1-22.

Prentice, J., Bills, K.L. and Peters, G.F., 2018. The Impact of Benefit Plan Audits on Financial Statement Auditor Choice and Financial Statement Audit Quality.

Ratzinger-Sakel, N.V. and Schönberger, M.W., 2015. Restricting non-audit services in Europe–The potential (lack of) impact of a blacklist and a fee cap on auditor independence and audit quality. Accounting in Europe, 12(1), pp.61-86.

Ruhnke, K. and Schmidt, M., 2014. The audit expectation gap: existence, causes, and the impact of changes.Accounting and Business research, 44(5), pp.572-601.

Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.