The Key of Auditing & Financial Report Writing - Accounting Assignment Help

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IntroductionAuditing is the key element in contributing the reliability of the financial position they are reporting. The effectiveness of the company’s internal control can be evaluated through auditing. To achieving the business objectives, it is very important to have an effective internal control system in order to maintain reliable financial reporting, preventing fraud and misappropriation and to minimize the cost of capital.
In auditing profession, audit quality is one of the most important topic which plays an important role to the business organization, stakeholders and shareholders. It is also well known fact that add value to all the business organization. The general public and the stakeholders decision to invest in the particular business also depends upon the quality of audit report as they put their faith in the quality of audit like whether the public fund is utilized in ethical manner or not and also know how the business is performing. According to Palmrose (1988), cited in Patrick, Vitalis & Mdoom (2017), define audit quality as “the level of assurances - the probability that financial statements contain no material omissions or misstatements”. The audit quality depends upon the performance and capability of the auditor on discovering the misstatement in the financial statement of the client adopting the audit procedures for the specific audit.
The main objective of audit is to give an independent opinion on the company’s financial position whether it is reflected in true and fair view in the company’s account. Auditor independence is considered to have a major impact on audit quality, so the auditor should be independent from the agency in order to demonstrate his task independently in an objective manner. The impeded autonomy of an examiner result in poor review quality and takes into account more noteworthy profit administration and lower income quality and the detection of existing material misstatement in the financial statement during the process of auditing and reporting is considered of a high quality. Therefore, to conduct an audit to meet the sensible desire of clients of audited financial statements, it is indispensable the job has to perform with full dedication to have good quality report. The audit firm should not bargain quality to accomplish money related advantages. The capacity to accurately survey and measure audit quality is of significance to audit firms, financial statement users, controllers, standard-setters and society at large.
Framework depicting the factors affecting the audit qualityAuditor independence and audit quality works in same line and it’s inseparable. Many researcher and scholars have argued that the audit quality is effected by the audit independent. The review of concept ideally gives the stage about the topic and clarify some areas of confusions using available articles and attempts to reflect the findings of the journal articles through the interpretative abilities of reviewing the factor impacting the audit quality. Some factors impacting the audit quality reviewed in journal articles are listed in figure 1 below with which to measure the impact on audit quality.
560070174625Audit Quality
Audit Tenure
Auditors’ Independence
Client Importance
Auditor Partners (gender)
Factor impacting audit Quality
Auditors’ Fee
0Audit Quality
Audit Tenure
Auditors’ Independence
Client Importance
Auditor Partners (gender)
Factor impacting audit Quality
Auditors’ Fee

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Fig. 1 Factors impacting audit quality
2.1 Audit Tenure and the impact on audit qualityAccording to Tepalagul and Lin (2017), it states that 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, works more likely in favor of the management, thus decreasing the audit quality. The other aspect includes the lengthening of 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 will results in higher quality of the audit report. However, the longer the audit tenure, the stronger the relation become between auditor and client which reduce the independence of the auditor and may result in reducing the probability of reporting misstatement which ultimately reduce the audit quality.
Taking into consideration of audit quality, the rotation of auditor is adopted in many countries which is one of the main fundamental approaches that has been implemented to deal with concerns about audit quality. Audit alternation can be either mandatory or voluntarily. The mandatory rotation is the changing of the auditor after a specific period of time which is required by the audit firm whereas, the voluntary rotation is an optional and it fully depends on the discretion and choice of the management regardless of the time period. As per Mdoom, Patrick & Vitalis 2017, stated that “Auditor tenure has two aspects: the tenure of individuals engaged in the audit, particularly the engagement partner, and the tenure of the audit firm”. The need for rotation is necessary either through the audit-firm rotation which needs listed firms to change or rotate their audit companies’ within a time frame (say after 5 years) or otherwise, through the rotation of audit team who is responsible for the audit decision making. If the same audit team keeps on reviewing the financial statement of the same company for longer duration, then the auditor to client relationship will become strong and there is every possible chances of getting involved into corrupt practice which ultimately lead to compromise the audit quality.
However, on the other hand, long examiner residency can enhance the capability of reviewers as they can construct their choices with respect to the broad learning that they have created over the time period and enhance the audit quality, or it can harm the independence of the auditor on the grounds that the long-standing relationship encourages closeness amongst administration and auditor which impact audit quality.
The auditor rotation within a time frame will provide a fresh perception to the client’s financial report in view that the auditing exercise totally depend on employers’ skills. Serving for lengthy years for the same organization can decrease the acuity of his professional judgment which lead to decrease the audit quality. According to Mohamed & Habib (2013), it suggested that, it will help in improving the race among audit firm thereby, small companies will be inspired to grow and develop greater area of interest as rotation places all the audit firms on the equal position offering them the same opportunities. As per Wahdan (2005) cited in Mohamed & Habib (2013), stated that “given the structural changes in the market for audit services, it is beneficial for rotation to be adopted especially in markets with relatively few new client opportunities (thin audit market) which is the case in Egypt. The adoption of rotation is economically desirable since the improved incentives for independence outweigh the additional cost associated with understanding of a new client’s system upon rotation”.
On the other hand, the auditor rotation will cause some financial impact to both audit firm as well as to the client because when rotation taking place, the start-up and switching cost will increase comparing to the existing audit firm because of creation of new learning curve as the audit team is new to the organization, thereby, audit fee will be high which will have financial impact to the client. The new auditor will also have a possibility of undermining the capability of inspection in light of the fact that the auditor may have lack of knowledge about the organization in the early years of reviewing. Hence, the mandatory rotation of auditor tenure will result in decreasing audit quality.
2.2 Client importance and the impact on audit quality Organization pays to auditor for scrutinizing their financial statement. Financially Imperative client convey more noteworthy load in an auditor's portfolio. Consequently, an auditor may possibly seek for higher motivating force from the bigger clients thereby, trading off independence. In the interim, worries over prosecution and notoriety may counter this danger.
In this manner, regardless of whether review quality is disabled for the client is an experimental inquiry. Much research has been led on this subject. Concentrates on the utilization through demonstrating methods give solid hypothetical grounds to document and trial think about it. Nonetheless, exact confirmation is blended.
If there is a positive correlation between client and the auditor, one could argue that an auditor facing the client can have a mind set to negotiate his independence resulting in an extended auditor to client relationship. The constructive association of client with auditor provides that there is need of auditor rotation, otherwise, the audit quality will be hampered. On the other side, it is core assets for the audit firm because with the long-lasting relationship with client the auditor will have better performance in the field of their objectivity with then knowledge of their prior studies leading to have higher audit quality with good reputation.
2.3 Auditor independence and the impact on audit qualityAuditor should be independence from client having financial interest in the business being audited. The strategy of objective approach and Integrity is required to the audit process. Auditor have to carry out his/her work independently in unbiased manner. In auditing profession, the independence plays a vital role, because of the detection of misstatement and have to stand against clients attempt to influence the audit report. Patrick (2017), describe independence as “an auditor’s unbiased mental attitude in making decisions throughout the audit and financial reporting process”. In addition to the definition he argues that if the auditor lake independence, the auditor may not report the breach detected in the course of auditing. The auditor to client relationship and the fee perceived by the auditor for audit service is the main threat to reviewer autonomy of the auditor independence. If the auditor lack independence there will be poor audit quality which will result into lower earning quality. As the auditor to client relationship increases and become closer to each other, the auditor may favour the management which result in the reduction of audit objectivity and audit quality.
Independence and objectivity should be maintain by the auditor and that independent should be exercise in terms of facts and appearance where the auditor should exercise while giving a review or some other confirmation benefit. When the auditor remain independent, the auditor can take right financial decision therefore, stakeholders and general public will gain more confident on the financial report.
The auditor independence can be affected by the ownership of the investor and the person who hires the auditor or any person holding the key economic positions at the client’s business. It is understood fact that the audit quality depends on the auditors’ independence. If the auditor is not able to maintain the independence, it will surely deteriorate the audit quality as it will hamper from carrying out his responsibilities and will not able to detect any material misstatement from the financial record of the client. The audit quality isn't basically a direct task of auditor capability and independence, but moreover on the showcase discernment around the esteem of the auditors’ report which the result is of auditors’ competence and independence. Therefore, auditor should issue the reputable quality of audit report, however, the quality of audit report will be governed by auditor to client relationship.
2.4 Auditors’ partners (gender) and the impact on audit qualityGender has a substantial impact on the audit quality through which the information is collected and processed. As per DeFond and Francis (2005), cited in Hardies et al. (2014), suggest that recent analysis has touched on the far side of the analysis of audit firm into the direction of individual audit practices. Since auditing is, to the extent, based on the professional judgment and it's not likely that audit quality at intervals audit companies is undiversified. Therefore, it's possible that the quality of audit is mediate or tempered by varied characteristics of each auditors and the audit method is affected by the particular auditor who the task is performed. Moreover, the connection between the audit engagement associate and the client is also essential due to the fact that the linking between the audit agency and the client considering auditor independence. Independence depends for the most part on judgements created by audit team where the quality of audit depends upon (Hardies, Breesch & Branson, 2014).
The likelihood of issuing the modified audit opinion made by the male and female auditor were of no difference, however, Hardies et al. (2014), argued that client were expected to receive a going-concern opinion if all the audit team were female. It is also opposed that female auditor are more ethical than male auditors and it's recommended that the actions of female auditors is additionally line up with the quality-orientated, whereas that of male auditors is aligned with the revenue oriented profession. Female auditors find more workable misstatements than male auditors, even though they take less threshold and analyze the misstatements in a less accurate manner than male auditors. They also work more successfully in complicated decision making situations and they make correct decisions as they will be very much careful in decision making. Thereby, audit quality can be consistently associated with auditor sex and it shows there is impact on the audit quality with the audit partners.2.5 Auditor fees and the impact of audit qualityThe amount charged by the auditor or audit firm for the assignment carried out to express the opinion on the clients’ financial statement. There are lots of reasons which create a stronger relationship between the audit quality and the auditor fees. Higher the audit fee, the better will be the audit quality and lower the audit fee, lower will be the audit quality. As per O’Sullivan (2000), Ghosh and Pawlewicz et al. (2008), cited in Mohamed & Habib (2013), if audit firms were paid high audit fee, the audit team will put their full effort in reviewing the documents and the financial statement of the company by assigning experience staffs and spending more hours to detect fraud and misappropriation from the financial position of the company which lead to good quality of audit report. Otherwise, the auditor will reduce working hours, substantive testing and may assign less experienced staff which leads to low audit quality.
Auditor fee is important factor of quality audit. 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). Most importantly, the reputation of the audit firms highly gets influenced by the high-risk clients 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.
 

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