This paper analyses factors affecting an auditor's work and criteria used for assessing the quality of an audit in regards to the determination of audit quality.
Criteria used to asses audit reports
The quality of an audit is a widely debated but very little is understood. Although there have been several decades of research, there is still little agreement on how to measure and define the audit quality. According to Chritensen (2016) measuring and defining the quality of an audit makes the parties interested to gauge if the quality of the audit is improving with time, and this enables them to identify lower quality audits while offering incentives to the firms to allow them to invest in methods that will enhance the quality of their audit. The programs that try to measure, define and assess the quality of the audit includes the Public Company Accounting Oversight Board (PCAOB), the International Auditing and Assurance Standards Board (IAASB), the Center for Audit Quality (CAQ),the American Institute of Certified Public Accountants (AICPA), and the firms (KPMG). The primary assessment of an audit's quality happens during the process of iterative review that starts with reviews of real-time through the audit, then goes to internal investigation of the firm which is done by the partner from engagement review and probably extra interior quality control assessment, and ends with evaluation by PCAOB and / or by peer firms. The government inspection that is the PCAOB and peer reviews are the fundamental methods for reinstating trust in auditing through attaining the quality of audit by confronting recurrent challenges in financial reporting. Government inspections and peer reviews serve as external modes of controlling the quality of an audit that aims to asses if the audit firms have the required procedures and policies for managing the quality of audit and whether the procedures and policies get implemented as per the professional accounting and standards for auditing. The programs asses the firms selected audit engagements and evaluates their system of internal quality control. Fung (2017) states that as per PCAOB's mission of enhancing the audit qualities of organizations under the United States public securities, the PCAOB mandates all the auditors both United States and foreign auditors of the United States listed public companies to engage in registration with PCAOB, and be subjected to constant inspection of the given audit engagements, and for the companies quality level controls for complying with the boards standards and regulations. PCAOB protects investors in the United States listed firms in that these inspections strengthens the company's level of the quality of audit control, resulting to a positive externality which means that the firms improve the audit quality given to the non-United States listed alien clients by the foreign auditors, saying that the assessment of the firms by PCAOB determines the audit quality which is higher.
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According to Löhlein (2016), experimental work on peer reviews shows that they utilize alternative assessments like the inspections outcomes which are done by the authorities, GAAP compliance and enforcement actions by SEC to explain how peer reviews affect the quality of an audit. Lohlein (2016) adds that studies show that firms engaging in peer reviews engage in higher audit quality as compared to those non-reviewed firms, and also the firms get minimal SEC sanctions and portray fewer GAAP standards violations, showing that using peer reviews determines the quality of the audit. Furthermore, studies on PCAOB shows that it utilizes client specific measures to evaluate how inspection contributes to the general quality of the audit.
Löhlein (2016) says that the outcomes show that PCAOB views differentiate the quality of earnings and that audit firms with the distinguished deficiencies mostly give going concerns view. Also, the client's levels of abnormal accruals by the audit firms reduce as a result of the PCAOB inspection and therefore managing audit firm using PCAOB improves the quality of an audit (Löhlein, 2016).
As said by Johnson (2018), the assessment of audit firms by PCAOB covers a wide range of controls facilitating the quality of an audit. This evaluation consists of procedures, policies, compliance with PCAOB requirements, training, auditing performance practices, retention and acceptance of clients, and the formation of policies and procedures. The board also covers controls on corporate governance which consists of the tone of the company at the top as it relates to the quality of the audit, management of the partner, and company's practice on self-monitoring. When a higher control quality issue gets noticed, inspector of PCAOB defines the matter in Part II report that is confidentially given to the audit company. The audit firm later responds to the PCAOB report in regards to the identified control matter in the report within twelve months from when it was given, if reply does not satisfy the PCAOB that the firm solved the issue, then the Board releases to the public the Part II report, or else the report never gets released. Therefore, the evaluations procedures, policies, compliance with PCAOB requirements, training, auditing performance practices, retention and acceptance of clients, and the formation of policies and procedures determine the quality of audit reports in regards to the PCAOB.
According to Knechel (2012), a conventional method of assessing the quality of an audit is to consider the financial reporting's overall quality or the quality of earnings. Because there is no measure of the quality of earnings in existence, various methods of earning quality have undergone testing like neutrality, earnings conservatism and the credibility of the earnings which determines the audit quality. As stated by Christensen (2016), the accruals of the audited entity also determine the quality of an audit. The level of the discretionary accruals gets utilized to substitute for the quality of earnings. Lower discretionary accumulations show higher audit quality.
Factors that affect the work of the auditor
According to Knechel (2012), the inputs affect the quality of an auditor's work, in that the needed audit resources depend on the availability of personnel for engagement, the audit firm's capabilities and expertise, and the technology and methods used for auditing. The nature of the process used for auditing means that the effort level of an auditor needs to be directed to each customer within the primary method of auditing as the auditor applies it using his/her judgment. The ability of the auditor to generate sound judgments determines the audit quality, therefore the better the engagement personnel, the better the quality of the audit. Auditor's judgment quality gets affected by the loss of a client, retention incentives from clients, economic incentives that depend on individual actions and possible litigation costs which affects the auditor's judgment, and in return affect the quality of work. Also, professional skepticism affects the judgment of an auditor which affects their work in that, auditors taking part in professional skepticism of higher levels easily gets to confront clients or engage in additional procedures when tackling high-risk irregularities, they easily detect fraud, demonstrate high quality valuation of the evidence and trust clients less and therefore invest in higher levels of audit. The knowledge and expertise also affect audit quality in that knowledge that is domain specific results to greater judgment from the auditor and takes part in developing the auditor's expertise. For instance, an auditor having domain-specific knowledge generates decisions having higher levels of consensus and professional standards. As said by Knechel (2016) that what an auditor knows, the manner in which they analyse a situation, and the ways in which they reach a conclusion, determine their expertise value, and that is complying with the regulations helps but the judgment of an auditor is irreplaceable, and this determines the auditor's quality of work.
According to Tanyi (2014), the features of an auditor like the auditor tenure and size determine the audit quality in that the relationship in years in which the auditor and the client have known each other impacts on nature of the audit. Christensen (2016) says that an auditor who associates with a more extensive audit firm results in higher audit quality. Meaning that audit firm sizes plays a crucial role in determining the quality of an audit report, and therefore a larger firm effects to a higher quality an auditor's work.
According to Christensen (2016), the quality of an auditor's work gets determined by the process in that, timely completion of the procedures used for planning results to a higher quality of an auditor's work. Timely planning shows that the auditor has examined the risks of the client and that the procedures utilized for auditing got chosen to address the client's risks, the revelation of such information by PCAOB or firms gives essential information about the quality of the audit. Also, Knechel (2016) says that the auditing process should be client idiosyncratic in that, it should get focused on the specific client's threats, controls, dealings, systems and their situations determining the audit quality. Lastly, Knechel (2012) states that the quality of the work of an auditor depends on the auditing process that involves internal control assessment, testing, risk assessment, and review. The evaluation of risks by auditors is crucial because it determines the planned procedures' nature and timing. Different factors have compromised the quality of valuation of risks by auditors. For instance, auditors use different methods in assessing risks like assessing fraud risks gets understood when utilizing holistic methods rather than approaches that asses fraud risks separately, therefore when an auditor uses the right methodology in assessing the risks, their audit quality becomes higher. Also, getting and evaluating the audit evidence determines the work quality of an auditor as stated by Knechel (2012). The systems that support auditing enables the process for audit and apply the methods utilized in the auditing firm. Nevertheless, systems for supporting decisions and programs for standard auditing can limit the decisions of an auditor, possibly reducing the auditor's quality of judgment. For instance, standardized checklists and decision aids can limit the performance of an auditor by making them to excessively depend on the recommendations for help when the work requires professional judgment, hence using the right approach increases the quality of the audit. Knechel (2012) goes on to say that negotiations between an auditor and client also affect the quality of an auditors work in that it affects the process. The negotiations are affected by circumstantial features like external circumstances and constraints like GAAP, relational factors for example incentives, the characteristics of an auditor like their experience in negotiating, features of a client like inherent risk and other factors relating to the environment. For instance, the performance of an auditor during negotiation improves their negotiation experience which results in a positive outcome and minimized influence from the preferred position of a client, hence leads to a positive outcome, therefore determining audit quality. Laitinien (2015) states that a higher audit quality is an audit report which involves a good execution of the planned audit process by well trained and motivated workers, who have the knowledge and understanding of the nature of the audit uncertainty, and suitably adjust to the client's unique conditions, and therefore the audit process determines the audit quality.
According to Tanyi (2014), the busyness of the audit committee chair and financial experts affects the quality of the audit reports generated. The new SOX (Sarbanes-Oxley Act) has increased the responsibility of the committee members that is the financial expert, the chair of the audit committee, and audit committee accounting. The many different demands of the committee's financial expert and the chair of the audit committee take most of their time making them busy. Therefore, the audit committee chair and financial expert's role of serving on various audit committees and the resultant workload demands affect the ability of the board to oversee the discretion of the management over financial reporting. These results to a managerial oversight that is less effective and therefore the management may utilize the lack of monitor by the financial expert and the chair of the audit committee, and take part in activities related to managing the earnings that impact on the quality of the audit, therefore the busyness of the financial expert and chair of the audit committee determines the audit quality.
Keywords
Auditors, Audit, Audit quality, Audit committee, the Public Company Accounting Oversight Board (PCAOB)
References
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