This document discusses audit quality and related concepts. It defines audit quality as the probability an auditor will identify breaches in a client's accounting and report any material errors. Audit quality is influenced by inputs like firm size and outcomes like financial reporting accuracy. It also examines aspects of the audit process and users' perceptions. Transparency reporting and independent inspections aim to close the expectation gap between what audits are expected to achieve and what is reasonable.
This document discusses audit quality and related concepts. It defines audit quality as the probability an auditor will identify breaches in a client's accounting and report any material errors. Audit quality is influenced by inputs like firm size and outcomes like financial reporting accuracy. It also examines aspects of the audit process and users' perceptions. Transparency reporting and independent inspections aim to close the expectation gap between what audits are expected to achieve and what is reasonable.
This document discusses audit quality and related concepts. It defines audit quality as the probability an auditor will identify breaches in a client's accounting and report any material errors. Audit quality is influenced by inputs like firm size and outcomes like financial reporting accuracy. It also examines aspects of the audit process and users' perceptions. Transparency reporting and independent inspections aim to close the expectation gap between what audits are expected to achieve and what is reasonable.
Transparency reporting Independent inspection Audit expectation gap
Definition proposed by DeAngelo (1981):
Audit quality is the market-assessed joint probability that a given auditor will both: (i) identify a breach in the client companys accounting system and (ii) report that breach, that is, that the auditor has both the technical competence to detect any material errors during the audit process, and the independence to ensure that material errors and omissions are corrected or disclosed in the auditors report.
Aspects to Audit Quality:
Inputs (audit firm size, audit fees, audit tenure and industry specialisation) and Outcomes (financial reporting quality and cases analysis) related to audit quality Process (audit procedures, judgement and decision making, and quality threatening behaviour) Perception (users-investors, bankers and shareholders)
Inputs Factors Which May Influence Audit Quality
Characteristics of audit firm: 1. Size 2. Audit fees 3. Non-audit services 4. Audit tenure Characteristics of auditors: 1. Professional attributes 2. Professional values
Outcomes Related to Audit Quality
Financial Reporting Quality: 1. Quality of earnings 2. Accurate financial information 3. Restatements of Financial Statements 4. Accurate audit opinion 5. Regulatory sanctions Audit Failure Cases: 1. Litigation
Literature defines QTB or dysfunctional
behaviour as actions that could impair the ability of the auditor to detect material errors (Kelley and Margheim, 1990). Herrbach (2001) defines dysfunctional behaviour as actions taken by an auditor during an engagement that reduce evidencegathering effectiveness inappropriately. Malone and Roberts (1996) define it as the auditors failure to properly execute audit steps.
Premature sign off
Reducing the amount of work performed below what auditor would consider reasonable Failing to research accounting principles Making superficial reviews of client documents Accepting weak client explanations Bias in sample selection Reduction in sample size Reduction in amount of documentation Failing to research technical issues Reliance on client work more than appropriate
Statutory Auditors Transparency Reporting Project
The Statutory Audit Directive introduced a mandatory requirement for annual transparency reporting by auditors of UK companies with securities admitted to trading on a UK regulated market. The Statutory Auditors (Transparency) Instrument 2008 gives effect to this. In 2008 the FRC reviewed the transparency reports of seven of the 10 largest firms who published a transparency report on a voluntary basis. A further report in 2009/10 reviewed the quality of the first reports prepared to meet the statutory requirements.
Information about the auditors legal
structure and ownership Where the auditor belongs to a network, information about the network and the legal and structural arrangements in the network Information about the auditors governance structure Information about the internal quality control system of the auditor
Details of when the last reviews of the auditor
conducted by an authorised body took place Names of the relevant entities audited Information about the auditors independence practices The auditors continuing professional development policy Financial information for the auditor regarding their audit and non-audit revenue, and Information regarding the basis of remuneration of an auditors partners or directors (nrfia).
The Audit Inspection Unit (AIU) was part of
the Professional Oversight Board, and was responsible for the monitoring of the audits of all listed and other major public interest entities. The AIU was set up following the UK Governments post-Enron review of the regulation of the UK accountancy profession which reported in January 2003
PCAOB inspects registered public accounting
firms to assess compliance with the Sarbanes-Oxley Act, the rules of the Board, the rules of the Securities and Exchange Commission, and professional standards, in connection with the firm's performance of audits, issuance of audit reports, and related matters involving U.S. companies, other issuers, brokers, and dealers.
he Audit Oversight Board (AOB) is established
under Part IIIA of the Securities Commission Act 1993 (SCA) which came into force on 1 April 2010 to promote and develop an effective audit oversight framework and to promote confidence in the quality and reliability of audited financial statements in Malaysia. The key responsibilities of the AOB, amongst others, are: implement policies and programmes in ensuring an effective audit oversight system in Malaysia;
register or recognise auditors of public interest
entities (PIEs); direct the Malaysian Institute of Accountants (MIA) to establish or adopt, or by way of both, the auditing and ethical standards to be applied by registered auditors; conduct inspections and monitor programmes on registered auditors to assess the degree of compliance of auditing and ethical standards; conduct inquiries and impose appropriate sanctions against registered auditors who fail to comply with auditing and ethical standards;
cooperate with relevant authorities in formulating
and implementing strategies for enhancing standards of financial disclosures of PIEs; liaise and cooperate with oversight bodies outside Malaysia to enhance the standing of the auditing profession in Malaysia and internationally; and perform such other duties or functions as the Audit Oversight Board determines necessary or appropriate to promote high professional standards of auditors and to improve the quality of audit services provided by auditors.
The difference between the actual and
expected performance of an auditor. According to the the American Institute of Certified Public Accountants (AICPA) in 1992, the expectation gap could be defined as "the difference between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are.
Porter (1993, p.50) provides an analysis of
the components of the expectation gap: The reasonableness gap: defined as a gap between what society expects auditors to achieve and what auditors can reasonably be expected to accomplish. The performance gap: defined as a gap between between what the public can reasonably expect auditors to accomplish and what they are perceived to achieve.
The audit expectation-performance gap can be
further divided into: The deficient standards gap: a gap between the duties which can reasonably be expected of auditors and auditors existing duties as defined by law and professional promulgations. The deficient performance gap: a gap between the expected standard of performance of auditors existing duties and auditors perceived performance, as expected and perceived by society.