ADVANCED AUDITING THEORY

Identify Four Auditing Theories - including their Strengths and Weakness

Austin Sams Udeh

Veritas University, Abuja

Commentary on Auditing Theories:

The auditing theories identified are; Policeman theory, Credibility theory, Theory of inspired confidence,
and Agency theory.

A Rundown
My brief comments on the four auditing theories – the strengths and weaknesses / limitations (if
any) of each succinctly highlighted below;

1. Policeman Theory:
• Strengths: This theory emphasizes the auditor's role akin to that of police or financial
watchdog - in deterring fraud and ensuring management accountability. It aligns with the
public's expectation of audits to catch wrongdoing.

• Weaknesses: This theory has a narrow focus on detecting errors and fraud. It does not fully
consider the broader role of audits in enhancing financial reporting quality. Additionally,
the "policeman" metaphor might imply an adversarial relationship between auditors and
management, which isn't always the case.

2. Credibility Theory:

• Strengths: This theory highlights the importance of audits in making financial statements
more reliable and trustworthy for users. This increased users’ faith or confidence facilitates
better investment and lending decisions.

Weaknesses: Credibility theory does not fully address the limitations of audits. Audits
provide reasonable assurance, not absolute certainty. Over-reliance on audited statements
can be risky if users do not understand these limitations.

3. Theory of Inspired Confidence:

• Strengths: This theory highlights the broader impact of a successful audit. It goes beyond
the individual financial statements and suggests that a well-conducted audit fosters trust in
the entire financial reporting system. This increased trust can benefit the overall economy
by encouraging investment and participation. Furthermore, unlike the policeman theory, it
does not focus solely on catching errors or fraud rather, it acknowledges the role of a
successful audit in building confidence in the financial system as a whole.

• Weaknesses: The theory lack of clarity or definition of “what exactly constitutes "inspired
confidence"? and do not clearly state how auditors can directly measure it? This makes it
difficult to operationalize in practice. Again, there is issues of Subjectivity and Over-
reliance on Perception: The concept of "inspired confidence" is subjective and depends
on the audience's perception. A successful audit might not always translate to widespread
 trust, especially in cases of high-profile accounting scandals such as Enron as mentioned
in the paper.

4. Agency Theory:

• Strengths: This theory broadens the perspective beyond just the absentees’ shareholders.
It acknowledges that various stakeholders rely on audited statements, including creditors,
employees, and the general public. This aligns with the increasing focus on corporate social
responsibility and sustainability.

• Weaknesses: Defining and prioritizing the needs of various stakeholders can be complex.
Balancing these needs with the primary focus on shareholder value can be challenging.

Overall

These theories offer valuable insights into the goals, functions and practice of auditing. However,
with the growing emphasis on the public interest and constantly evolving business landscape
driven by factors like technology, globalization, and changing regulations. This evolution presents
both challenges and opportunities for the auditing profession.