The integrity of financial reporting is seen by practitioners and scholars as the key to protecting stakeholders interest in the capital markets. It requires a commitment on the part of audit firms to be dedicated to the continuous improvement of audit quality. It is argued that an offering of high quality audits means a greater credibility to audited financial statements.
Critically evaluate the above comments. Support your answer with relevant academic literatures.
a) Identify and discuss what you consider are the key elements that can impact audit quality.
b) How is audit quality assessed?
c) What recommendations can be implemented in order to enhance the quality of an audit?
Drivers of Audit Quality
Auditing is the process to conduct a formal inspection on the financial and accounting statements of the companies. For this reason, business organizations consider auditing as one of the major drivers for success for their business organizations. It is the responsibility of the auditors to make it sure that the financial statements of the companies are free from any kind of material misstatement (Arens, Elder and Mark 2012). In the audit process, the auditors are required to maintain the quality of audit and this is an important aspect. In order to maintain the quality of audit, the auditors are required to conduct audit assessment plan for the business organizations. In this context, it is needed to be mentioned that certain factors create impact on the quality of audit in the corporations. These factors are crucial factor and thus, the auditors are required to consider all these factor at the time of assessing the audit quality (William Jr, Glover and Prawitt 2016). The audit quality assessment process can be seen in both internal and external audit processes. Hence, the main objective of this study is to conduct an analysis and evaluation of various factors related to audit quality and audit quality assessment.
There are certain factors that have major impacts on the audit process of the business organizations. These factors are considered as the Drivers of Audit Quality.
Figure 1: Drivers of Audit Quality
(Source: ifac.org 2017)
From the above figure, it can be seen that there is a certain framework for audit quality. According to the above figure, it can be seen that there is an interrelation among process, input and output. The above discussion also shows the fact that there are certain contextual factors affecting the quality of audit process. All these major factors are discussed below:
The first factor is Business Practice and Commercial Law. Different kinds of business practices have their impacts on the quality of audit processes. The formal way in which the businesses are undertaken affect the audit quality of the companies. On the other hand, it can be seen that various commercial laws use to affect various procedures of audit operations. It needs to be mentioned that the auditors have to comply with various business and commercial laws for conducting the audit operations. The second important factor is Laws and Regulations related to Financial Reporting. Various statutory laws and regulations have direct impact on the quality of audit processes (archive.treasury.gov.au 2017). In this process, it needs to be mentioned that the auditors of the companies have to conduct the audit operations of the companies by complying with the regulations and laws. For this reason, the auditors have to undertake certain procedures for conducting the audit operations. For this reason, the quality of audit process can be affected. The next major factor is the Financial Reporting Framework. Financial reporting framework is considered as a critical factor in case of maintaining the quality of audit processes. It needs to be mentioned that the auditors are able to take effective audit decisions in the presence of clear and sound financial reporting framework. At the same time, a complex financial reporting framework makes it difficult for the auditors to understand various accounting and financial requirements of the companies. Due to this reason, the quality of audit can be affected. Another major factor is Corporate Governance. Corporate governance is considered as a major driver for audit quality. Effective corporate governance strategy helps the organizational managers to disclose accurate and reliable financial information and this information is a great helps for the auditors to make effective audit opinion. In the absence of effective corporate governance in the companies, organizational managers will not be able to get access to the true and reliable financial information of the companies. Due to this, the quality of audit can be affected.
Assessment of Audit Quality
Another important factor is Organizational Information System. It is required to have sound information system for the auditors to maintain the quality of audit program. At the time of maintaining the audit operations, the auditors needs true and fair financial as well as accounting information of the companies. Effective information system provides the auditors with required true and fair financial information. In the absence of effective information system, the auditors are not able to make effective audit opinion as they lack true and fair financial information. Thus, the audit quality can be affected. Another major factor is the Timetable of Financial Reporting (frc.org.uk 2017). The specific timetable in which financial reporting of the companies needs to be completed affects the audit quality. The auditors can get completed financial information in case the financial reporting is done before the audit process. All the financial information along with different press release help the auditors in gathering important financial information. This particular aspect helps the auditors in maintaining the quality of audit processes. The next important factor is Broader Cultural Factors. It needs to be mentioned that national culture has impact on the quality of audit processes in the companies. In this aspect, a major factor is transparency. It is easy for the auditors to maintain the good quality of audit in case there is proper transparency in the financial statement and information of the companies. Thus, based on the above discussion, it can be said that the above-discussed factors are the major drivers of audit quality in the business organizations.
Assessment of audit quality is the process of evaluating the quality of audit programs of the companies. In this context, it needs to be mentioned that different processes are followed while assessing the audit quality of internal audit and external audit. The processes are described below:
In case of the assessment of internal audit, certain steps are required to be followed. In this step, the first process is Internal Assessment. In this particular process, the auditors of the companies have to undertake certain processes; some of them are engagement planning, supervision, working process standardization, engagement planning and others (theiia.org 2017). The major advantage of this process is that it helps the internal managers to identify major strengths and weaknesses of internal control system of the companies. Apart from this, it helps the auditors of the companies in the process to comply with the statutory rules and regulations of the companies. The next process is called Ongoing Monitoring (na.theiia.org 2017). For many years, the internal auditors of the companies have been using the technique of ongoing monitoring for the measurement of the performance of internal control system of the companies. However, it is required for the internal auditors to follow certain steps. First, the internal auditors are needed to establish the necessary activities for assessing the internal audit. After that, there is a need for routine practice for the assessment of internal control system of the companies. In this particular process, the internal auditors are required to implement effective system of supervision in the companies. Another most important part is to assess the performance of internal control with the help of key performance indicators (KPI). These are the main steps under ongoing supervision. The next process is called Periodic Self-Assessment (na.theiia.org 2017). With the help of this process, the internal auditors of the companies can make sure the fact that the internal audit process of the companies are complied with the rules and regulations. It can be seen that the internal auditors have take major techniques under periodic self-assessment. One of such major techniques is survey guide. With the help of survey guide, internal auditors are able to monitor the input of company shareholders in the internal audit process.
Ways to Improve Audit Quality
In case of the assessment of external audit, some specific stages can be seen. Planning is considered as the first step. Under this particular step, external auditors set the scope and objectives of the whole audit assessment process. The second step is called Off-Site Work. Under this step, the external auditors review the audit-planning document along with all the necessary audit documents. In addition, the external auditors also review all the responses from the auditing survey. After this, the next step is called On-Site Work (na.theiia.org 2017). This is considered as a crucial step in the process of external audit assessment. In this step, the external auditors take interview of the staffs, clients and stakeholders of the organizations. After the interview process, the external auditors of the companies do a thorough review of all the necessary audit documents of the companies for the development of audit opinions. After that, the last stage is called Evaluation and Report Development (na.theiia.org 2017). In this step, the external auditors of the companies do the evaluation or assessment of the total external audit process against the resources of the companies. After this process, the external auditors develop the draft report of their audit opinion for the making of effective recommendations regarding the improvement of overall external audit process. Hence, from the above discussion, it can be observed that the assessment process of both external and internal auditors is different from each other.
There are many ways to improve the quality of an audit. In the business organizations, the senior audit member need to know how to led the audit team. Thus, it is recommended that there needs to be effective leadership in the audit process of the companies. It implies that the senior members of the audit team needs to make it sure that all the auditing staffs have proper access to the required resources for conducting the audit operations (aicpa.org 2017). After that, it is recommended to the senior members of the audit team to communicate all the necessary auditing rules, regulations and code of conducts to other members of the audit team. As a result of this, the team members of the audit team will be able to engage with the audit issues more effectively. Before engaging with the audit operations of the companies, the auditors are recommended to do sufficient background check of the audit clients (aicpa.org 2017). This aspect will provide the auditors with more specific knowledge about their client and this process helps in enhancing the audit quality (frascanada.ca 2017). After that, it is recommended to the business organizations to hire renowned and reputed audit firms to conduct their audit operations. It has been seen the large reputed audit firms have the ability to perform different advance audit tests for the making of audit opinions. This process will enhance the quality of audit operation of the companies. In addition, it is also recommended that there needs to be a quality control department in the companies to maintain the good quality of audit engagement in the companies (ifac.org 2017). Thus, from the above discussion, it can be see that the above are the major techniques for enhancing the audit quality of the companies. However, it needs to be mentioned that there are many other ways to enhance quality of an audit.
The main objective of this report is to conduct analysis on various aspect of audit quality and assessment of audit quality. The above discussion shows the fact that there is a particular framework for quality of audit. According to that framework, there are some major drivers for the quality of audit; they are business practice and commercial law, laws and regulations related to financial reporting, framework for financial reporting, corporate governance, organizational information system and others. The above-mentioned factors have major effects on the quality of audit process. According to the above discussion, it is clear that there are different processes for the quality assessment of both internal and external audit. In both of the cases, the auditors are seen using some major techniques to evaluate the effectiveness and quality of audit process. In case of internal audit quality assessment, the major steps are internal assessment, ongoing monitoring and periodic self-assessment. The steps in external audit quality assessment are planning, off-site work, on-site work and evaluation along with report development. The study also discusses some of the steps to enhance the quality of an audit. Some of them are implementation of effective audit leadership, sufficient background check, hiring of reputed audit firms and others.
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