Audit Quality – Meaning and Factors Affecting It

The major accounting scandals occurred worldwide has brought the focus of public to the audit profession and the audit quality. Enron and WorldCom cases in United States and Parmalat case in Europe are the example of major scandals as a result of the failure of audit services. These examples of corporate and accounting scandals that happened worldwide have indicated that the audit quality of the audit profession is not at an appropriate and acceptable level.

Over years, the audit quality issue has been discussed and debated globally. Several actions have been taken by international and domestic authorized agencies to address the audit quality issue. For example, the government of United States has introduced and enacted the Sarbanes-Oxley Act in 2002 as a response to the audit failure in big major corporations, such as Enron and World Com. In addition, the Center for Audit Quality has been established in United States as one of the steps to enhance the audit quality of audit profession.

Generally, the function of auditing is to provide reasonable assurance that the financial statements are prepared and presented in a true and fair view and free from material misstatements. The audit reports and audited financial statements will be widely used by the various groups of stakeholders for decision making. Hence, audit quality is an important factor that affects the credibility of the audited financial statements as perceived by the stakeholders. In other words, high audit quality is necessary criteria to build up stakeholder’s confidence on the audit profession.

There are five important steps that should be followed to produce a quality audit. Firstly, auditors should plan the audit thoroughly after clearly understanding the objectives and directions of auditing and clearly define the agenda of audit. Next, auditors should perform the audit procedures according to the scope and goal set in the earlier step and continuous measure the performance of the audit works in order to avoid any unnecessary variances happened during audit process. The third step is to record the result of performance, including any errors and problems and report appropriately the result to the management level. Subsequently, improvements should be made on the audit process by solving any detected problems. Lastly, follow up audit should be conducted for the control purpose to avoid any recurring of problems.

Factors Influencing Audit Quality

According to the Audit Quality framework developed by Financial Reporting Council (FRC) of UK in 2008, there are five key drivers that affect the audit quality. These five key drivers are the culture within an audit firm, the personal qualities and skills of audit partners and staff, the effectiveness of audit process, the audit reporting’s reliability and usefulness, and the factors outside the control of auditors.

An audit firm’s culture is significantly affects the ways of how audit works and processes being performed. A strong and positive culture will directly increase the audit quality of an audit firm. The top management of audit firm should create a positive environment that encourages the audit staff to achieve high quality in audit works. In addition, proper time and resources should be available for every audit works to enhance and maintain the audit quality. Financial considerations should not be the main focus or factor that affects the allocation of time and resources. An appropriate control and monitoring system should be designed and put in place to safeguard the quality of audit too.

Audit is a service rather than a product. The quality of audit service may vary when the audit is performed by different people. Hence, human factor is important in determining audit quality. Audit partners and staff should equip with necessary skills, knowledge and professional skepticism in order to provide high quality audit works. It is important for auditors to understand well the environment of the client’s business and adhere to the relevant auditing principles and ethical standards. Proper training should be given to auditors to develop their competency and capabilities. The works of junior auditors should always be monitored and reviewed by senior auditors or partners to ensure the quality of audit.

The audit process is one of the key drivers to audit quality too. Appropriate audit methodology and tools should be applied in audit according to situation. Audit partners and senior auditors should be always involve in the audit process to provide adequate support and monitor on audit process. In addition, auditors should gather sufficient and relevant audit evidence to support the judgment and conclusion reach throughout the audit process. Proper audit documentation should be put in place too. Furthermore, it is important to consider and maintain the level of independence, objectivity and integrity of auditors in the audit process to ensure the audit quality.

The way how an audit being reported will affect the quality of an audit too. Audit reports should be prepared in an appropriate form that follow the guidance of relevant standards. Audit reports should be written by using clear language without ambiguous words. Proper opinion and conclusion should be provided in audit reports regarding the true and fair views of the financial statements. In addition, proper and clear communication with audit committee is necessary and such action will provide a positive impact on the audit quality.

Factors that outside the control of auditors also play an important role in the quality of audit. For example, the corporate governance of an organization is important to enhance the audit quality. An adequate and good corporate governance within an organization directly assists the auditors in performing audit and hence increase the audit quality. The another example of factors outside the auditors’ control is the role and behavior of audit committee. An audit committee should always actively address the issues identified throughout the audit process. Other examples of factors outside the control of auditors include the role of shareholders and the audit regulatory environment.

Audit Quality and Audit Fees

Audit quality is something that is intangible and unobservable. Generally, there is strong positive relationship between audit fees and audit quality.

In order to achieve higher audit quality, it is necessary to conduct more investigation and audit procedures on the financial statements. This resulted in more audit hours and higher audit fees. In addition, the use of more senior auditors and specialized auditors also is required to achieve higher audit quality. This resulted in higher audit fees too. Hence, it can be concluded that higher audit fees should be an indirect evidence to reflect higher audit quality because more resources and efforts has been put in to provide reasonable assurance that financial statements are free from material misstatement.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.