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Auditor Independence and Audit Quality

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Introduction

The quality of audit totally depends on the auditors, whether it is a small or a large audit firm. This project will throw some light on some of the key areas which directly involves the audit quality. A framework which depicts all the factors that affect audit quality is described afterward along with a model. The factors include Auditor's independence, auditor tenure, and audit fees which directly affect the audit quality. This assignment entails the details of each factor and their properties which affect the quality adversely.

Framework depicting the factors affecting the auditor’s quality by the help of three articles

 

There are several factors which can directly or indirectly create an impact on audit quality. This assignment will basically entail in the classification of those factors which impact on the audit quality.

These include the following:

Size

 

The article "A review of audit quality factors" depicts the size as the most important factor affecting the audit quality. The link between the audits to large firms and the audit services totally depends on the agency theory and as well as the links in the auditor size and the auditor quality. Hence clients need to choose the best auditor for getting the highest output. As a result, they are much interested in selecting larger audit farms rather than selecting smaller ones. Higher the company, more the reputation, the more is the accuracy as because inaccurate audit reports may decline the name and fake of the organisation. As opined by Hosseinniakani (2014, p.32), a decrease in the reputation may decrease in attracting clients, as a result, it leads to a decrease in the audit fees. Large audit farms suffer distinct losses as compared to small auditors. This also enhances the larger farms towards issuance of a reliable audit report in order to maintain their reputation.

A few more factors which include auditor’s qualification, professional competence and supporting technical information can undoubtedly be found in large audit farms. These factors are taken into consideration during assessing the influence of the size of the audit farm and quality of audit in order to entertain the detection of errors if made (Abdullah et al. 2017, p.333). That is the only reason for the performance of the larger audit farms which contains auditors with a higher degree and also higher technical knowledge too. Most importantly, the continuous education being provided in the larger audit farms helps in boosting the knowledge of the auditors and also makes them competitive in the whole world (Abbott et al. 2016, p.23). Moreover, the proper utilisation of high-quality auditors confirms that large companies prefer to choose a high-quality level auditor who also has high technical knowledge. As a result, when the farm becomes large, it also enhances higher audit quality and also enriches monitoring and bonding activities. This type of creativity by adopting such strategies also helps the client though it may incur some additional cost.

Since the past years, several studies had adjudged the relationship between the auditor size and audit quality. According to Alzeban (2015, p.66), many of the studies confirm that the larger the size of the farm, the more is the resources. On the other hand, it also confirms that there is basically no difference between a large audit farm and a small audit firm because, at the end of the day, a customer will only look into the quality of the audit. That totally depends on the person who is auditing (Christensen et al. 2017, p.12). So if a small firm keeps some good auditors, it can help them in achieving the goals.

The framework of auditor tenure and audit fee as the factor affecting the audit quality by the help of three articles

Auditor tenure

 

There are basically two opposing aspects of the auditor tenure. One of the aspects includes lengthening the relationship among the clients. In other words, the auditor becomes more familiar with the clients and thereby and works more likely in favor of the management (Abdullah et al. 2017, p.333). The other aspect includes the lengthening the auditor tenure where the audit is seemed to increase the understandings of the work given by clients and as a result, they develop their expertise while working on the audit which also results in higher quality of the audit. However, there is a very limited existence on the client's part, the existing pieces of evidence suggest that clients receive long auditor tenure usually. By the increased service tax, it ensures longer tenure benefits the auditor only.

Moreover, the members also should be able to perform the works professionally and can be able to meet the specified requirements and obviously can meet the requirements of the client (Christensen et al. 2016, p.1648). In an audit fee sitting all the members need to consider various things. Moreover, these considerations are also intended in providing certainty to the clients and public accountants where the audit fee highlights the risk of public accountants and level of responsibility too. Most of the empirical findings are seemed to be much consistent with prolonged auditor tenure, thereby not furnishing in small financial reporting quality. It has also been noted by the researchers that the client size matters a lot when it comes to the relation between financial reporting quality and auditor tenure.

A few researchers furnish some conflicts on the findings of the association between the auditor’s behavior and the auditor tenure (Tepalagul and Lin, 2015, p.111). The auditors say that the incentives provided to the individual audit partner altogether, these results also imply that an audit firm has much strengthening reputation incentives to order to remain independent. Most importantly, all the partners believe that the quality of audit generally suffers from retraining, which also states that the accelerated rotation of the partners may create a negative impact on the quality of the audit.

Rotation of auditors has been hard done in the past years, but it solely depends on the nation. As opined by Miko and Kamardin (2015, p.656), the possibility of an auditor to the lawful deeds does not at all correlate with his tenure. Accruals are decreased by the tenure of the auditor. At the same time, similar studies reflect the association between the tenure of the auditor and the abnormal accruals.

There can be a slight influence on the audit tenure on the quality of the audit. As opined by Rahmina and Agoes (2014, p.325), audit tenure is that engagement time which lies between the KAP and the same auditee. The issue of the tenure of the audit is basically linked with the effect of the auditor independence. Research conducted by the above-mentioned authors results in the increase in audit quality along with the length of the audit tenure. The audit fee is defined by the fee which is collected by a public accountant from the client (Amahalu and Beatrice, 2017, p.13). This whole amount thus collected can vary a lot depending on several factors which include the complexity of the services, level of the expertise required, Public Accountants Firm's cost structure, a risk of assignment and other considerations.

A framework of audit fees as the main factor shown by three articles

Audit fee

 

There are lots of reasons which create a stronger relationship between the audit quality and the auditor fees. Due to the involvement of more audit procedures and more investigations, (requires more audit hours too), it leads to much cost and it results in the higher audit fees. At the same time, the huge amount paid by the client enables the auditor to largely depend on the client (Mostafa Mohamed and Hussien Habib, 2013, p.123). This also enhances the auditor to become more economically dependent on them too. It leads to being more reluctant during the audit which also helps him to inquire the client without having the fear to lose them.

Auditor fee is a much vital factor of quality audit, which had been used in various studies especially in examining the link between the audit quality and the size (Rahmina and Agoes, 2014, p.325). If there are lots of qualified auditors, then automatically there is a chance of greater audit fees. Instead of spending larger audit fees, some clients are keen on using larger audit firms. The clients are also aware regarding the capability of the larger audit firms. The larger audit firms have a vast network, therefore have a large circle of greater bonding and also monitoring too (Tepalagul and Lin, 2015, p.113). In terms of the specialisation and competence of the auditor, which include continued education and technical information too, larger audit firms have a tendency to hire good quality professionals as compared to the smaller audit firms (SANGANİ et al. p.2048). Most importantly, the reputation of the audit firms highly gets influenced by the high-risk clients too and for this reason, these large firms charge much higher audit fees. In order to maintain a good reputation, the auditors of these firms also wish to provide an acceptable audit work.

In simple words, higher audit fees result in greater quality of audit, through increased efforts in audit as well as with the utilisation of high-quality auditors too. In contrast, these large audit firms do not have any incentive to receive fee premium or higher fees as these large firms always try to preserve their name and fame across the country.

The audit fee is also highly linked with the degree of the complexity of the auditee. This complexity adversely affects the cost of time because the auditing requirements are highly involved in the complex degree of engagement (Kikhia, 2014, p.42). Moreover, big companies require considerable investment and capital. Hence, they tend to keep a record of lots of transactions. As a result, the auditors need to work more auditing procedures which end with high audit fees.

Auditee risk reflects the risk in an audit. There is a high risk involved, as there is an involvement of considerations when determining the fees for the audit. This can directly affect the responsibility of the auditor. In this case, the more the risk, the greater is the responsibility, which also deserves much higher fees in order to compensate for taking such risks. However, this degree of the risk involved here totally depends on the company nature of tackling the business (Amahalu and Beatrice, 2017, p.32). Moreover, a risky company is also expected to bear the risk getting audit failure. This results in the higher audit fees with a higher level of client risk along with an increase in the effort of the auditor. Generally, large firms have more good reputation than the smaller ones.

There is such a significant difference in between the users of services and the auditors too which create an adverse impact on the characteristics on the auditor's audit quality (Christensen et al. 2017, p.12). Moreover there also lies a significant contrast in between the users of the audit services and the auditors based on which the impact of entity aspects audit quality.

Conclusion

 

This assignment highlights the conflict between the audit quality with several other factors like auditor's independence, auditor tenure, and audit fees. The auditor's independence also analyses the factors such as the size which directly affects the audit quality. The clients also depend on larger audit firms stating that the quality of work is much more dependable as compared to the smaller ones. Auditor tenure is also given special stress as it is directly involved in the relationship among the client and the auditor. Audit fees are a key important term which specialises the quality of audit a firm generally produces. It highlights the health of the firm whether it’s good or not. An audit firm can be large, but it may not contain key resources which directly affects the output of the farm. However, a larger audit farm always tries to give quality output as it tries to defend its name and fame.

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. https://paper-download.com/wp-content/uploads/2017/03/147-Internal-Audit-Quality-and-Financial.pdf

Abdullah, A.M., Naser, K. and Al-Enazi, N., 2017. An Empirical Investigation of Factors Affecting Audit Fees: Evidence from Kuwait. International Advances in Economic Research, 23(3), pp.333-347. https://link.springer.com/article/10.1007/s11294-017-9649-5

Alzeban, A., 2015. The impact of culture on the quality of internal audit: An empirical study. Journal of Accounting, Auditing & Finance, 30(1), pp.57-77. http://journals.sagepub.com/doi/abs/10.1177/0148558X14549460

Amahalu, N.N., and Beatrice, E., 2017. Determinants of audit quality: Evidence from deposit money banks listed on Nigeria Stock Exchange, pp.32 https://www.researchgate.net/profile/Amahalu_Nestor/publication/318663385_Determinants_of_Audit_Quality_Evidence_from_Deposit_Money_Banks_Listed_on_Nigeria_Stock_Exchange/links/59768467a6fdcc8348aa5852/Determinants-of-Audit-Quality-Evidence-from-Deposit-Money-Banks-Listed-on-Nigeria-Stock-Exchange.pdf

Amahalu, N.N., and Beatrice, E., 2017. Determinants of audit quality: Evidence from deposit money banks listed on Nigeria Stock Exchange, pp.13 https://www.researchgate.net/profile/Amahalu_Nestor/publication/318663385_Determinants_of_Audit_Quality_Evidence_from_Deposit_Money_Banks_Listed_on_Nigeria_Stock_Exchange/links/59768467a6fdcc8348aa5852/Determinants-of-Audit-Quality-Evidence-from-Deposit-Money-Banks-Listed-on-Nigeria-Stock-Exchange.pdf

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. https://onlinelibrary.wiley.com/doi/full/10.1111/1911-3846.12212

Christensen, B.E., Smith, K., Wang, D., and Williams, D., 2017. Small audit firm mergers in the United States: Determinants and consequences, pp.12 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2635605

Hosseinniakani, S., Inácio, C.H. and Mota, R., 2014. A review of audit quality factors, (pp.32) http://ria.ua.pt/bitstream/10773/13342/1/Article_24_A_Review_on_Audit_Quality_Factors1.pdf

Kikhia, H.Y., 2014. Determinants of audit fees: evidence from Jordan. Accounting and Finance Research, 4(1), p.42. http://sciedu.ca/journal/index.php/afr/article/download/6030/3592

Miko, N.U. and Kamardin, H., 2015. Impact of audit committee and audit quality on preventing earnings management in the pre-and post-Nigerian corporate governance code 2011. Procedia-Social and Behavioral Sciences, 172, pp.651-657. https://www.sciencedirect.com/science/article/pii/S1877042815004528/pdf?md5=2a5f6d0d737ca2d1307607d9bbe1ed76&pid=1-s2.0-S1877042815004528-main.pdf&_valck=1

Mostafa Mohamed, D. and Hussien Habib, M., 2013. Auditor independence, audit quality and the mandatory auditor rotation in Egypt. Education, Business, and Society: Contemporary Middle Eastern Issues, 6(2), pp.116-144. https://www.emeraldinsight.com/doi/abs/10.1108/EBS-07-2012-0035

Rahmina, L.Y. and Agoes, S., 2014. Influence of auditor independence, audit tenure, and audit fee on audit quality of members of capital market accountant forum in Indonesia. Procedia-Social and Behavioral Sciences, 164, pp.324-331. https://www.sciencedirect.com/science/article/pii/S1877042814059035/pdf?md5=1875299203ce8eeccce1b8ae471bfc5d&pid=1-s2.0-S1877042814059035-main.pdf&_valck=1

SANGANİ, M.H., HADJİ, S. and NONAHAL-NAHR, A.A., 2015. Identification and ranking of the factors affecting audit quality based on the views of independent auditors and users of audit services. Cumhuriyet Science Journal, 36(3), pp.2039-2048. http://dergi.cumhuriyet.edu.tr/cumuscij/article/viewFile/5000119433/5000114386

Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121. https://nnov.hse.ru/data/2015/02/09/1091916176/Auditor%20Independence%20and%20Audit%20Quality.pdf

 

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