Question

In: Accounting

Summary: Brown (1989) stated that “whenever the advance of civilization brought about the necessity of one...

Summary:

Brown (1989) stated that “whenever the advance of civilization brought about the necessity of one man being entrusted to some extent with the property of another the advisability of some kind of check upon the fidelity of the former would become apparent.” Thus, as Schleifer and Vishny (1997) argue the need for 'some kind of check' ensures governance mechanisms are needed to make sure that agents do not “steal” or otherwise “misuse” the capital the principals’ supply.

Auditing is one such governance mechanism that serves principals (the company owner) by providing a reasonable assurance that management’s (agent) financial statements are free from material misstatements. And by reducing information asymmetry and agency costs, auditing potentially benefits both the principal and agent (if agent is honest). Merely conducting an audit, however, does not necessarily ensure the agent will 'abuse' their position and extrapolate wealth from the principal. Rather, it is the quality of the audit that will determine the effectiveness of the auditing process as a governance mechanism.

Some researchers (e.g., Holm and Thinggaard, 2014) and regulators (European Commission, 2010) have suggested the quality of the financial statement audit can be enhanced if conducted by more than a single audit firm. Others (e.g., Deng et al., 2014) have disputed this few whilst others have cited other attributes that would enhance the quality of the audit.

Required:

You are required to write an essay (between 1,200 to 1,500 words (excluding references)) addressing the following key points:

(a) Define and describe what is meant by "audit quality".

(b) What is the difference between a 'solo' and 'joint' audit.

(c) Evaluate why a 'joint audit' may or may not enhance audit quality.

(d) Aside from 'joint audit', identify at least four other factors/properties that may influence audit quality, and describe how these factors/properties may influence audit quality.

The essay should be structured properly (e.g., introduction, main body, conclusion) with the appropriate use of sub-headings and referencing. The first page of the essay is to be a cover page with your name, student identification number, the title of the course, the title of your essay and the date submitted. This is essay is to be an individual and original piece of work. If you make reference (i.e., quote, paraphrase) to work undertaken by others then you must accurately reference the source using an appropriate many.

The essay must be submitted only as an MS Word document.

Solutions

Expert Solution

Introduction

This essay comprises of all important aspects required to address points of discussions including audit quality, difference between sole auditor and joint auditor, effect of joint auditor on audit quality ( quality enhancement or not) and last but not the least factors that may influence audit quality. The information is collected from different sources. All the relevant points are tried to achieve and simple format.  

Audit Quality includes the key elements that makes the environment to maximize chances of quality audits are performed on continuous basis.

Explanation: Quality Audit is said to be achieved by an organization when the team,

  • Properly exhibits values and ethics.
  • Knowledgeable and sufficiently experienced to perform audit work.
  • Comply with all applicable laws, standards and regulations.
  • Provides reports asper the guidelines.
  • Take into consideration various stakeholders' interest.

It involves a systematic exmaination of system that parallels to quality performed by auditor either external or internal. It is typically performed at predefined intevals and ensures that entity clearly defines internal monitoring system that may effect the actions performed or to be performed.

b) Diference Between Solo and Joint Auditor

S.No. Basis of Difference Solo Auditor Joint Auditor
1. Work Performed The audit work, under solo auditor is performed by only one person from review to verifcation of accounts. In case of joint auditors, two or more auditors create audit firm and different audit works are allocated.
2. Division of Work As their is solo performer of audit work, no such division of work. The work instead of division is performed by single auditor. Though he may appoint assisting staff that may help him in performing other functions. But, the auditor will be responsible for all his work. Joint Auditors perform their work by mutual discussion and divide the work the among themselves. Such division may be in terms of assets and liabilities, incomes and expenditures etc.
3. Rights and Duties The duties, responsibilities and rights as an auditor is conferred upon only one person. In case of joint audit, there is a relationship among joint auditors. Each joint auditor is held responsible and perform his part of duty for the work allocated to him. Also, there is mutual understanding to perform the work by all that is not allocated.
4. Reporting Responsibilities The reporting responsibility is only on the single auditor. He will be solely held liable for any discrepency in performing the audit work. When the sole auditor arrives at a opinion, he reports to respective authority. The joint auditors arrives at an agreed report. After performing their respective functions, they come to a report that is agreed by all. In case, any auditor is in disagreement with the report, then he should express separate report of his own opinion.
5. Coordination There is no need of any coordination as the task to be performed by single person. In the course of work, joint auditors need to maintain coordination of things like :what is to be performed first and what thereafter. Also, the work performed also to be communiacted to all other joint auditors in writing.

c)Joint Audit encompasses two principles of audit quality.

  • Auditor's Competence
  • Independence.

It is always believed that "two heads are better than one", and when the independence of auditor is enhanced it would improve the audit quality. However, if joint audit is performed by one big firm and another small firm, there are consequences of impairment of joint audit.

There is a problem of free-riding, thereby, lowers the evidence precisions.A chance of internal shopping that results in compromise of suditor independence.

There are 5 key elements in the Audit Qualtiy.

Key Elements of Audit Quality
Inputs
Process
Outputs
Interactions
Contextual Factors

Input - The factors such as values and ethics to be performed by the etam of engagement. The other factors include appropriate knowledge and sufficient experience of the team. All these factors are included in the Input element of Audit Quality.

Process - In the processes, auditors need to perform their task as per standards of auditing, audit processes and quality control procedures. Various laws, regulations and rules are to be complied appropriately by the person.

Outputs - Outputs are basically the reports of the auditors that includes information presented formally as well as confidential information not to be provided to person outside audited organization. The outputs should be on time as prescribed in the agreement. The reporting supply chain is :

  • Auditor
  • Audit Firm
  • Organization
  • Regulators of Audit

Interactions - The main responsibilty of quality audit lies on the auditor, however, quality of an audit is best achieved when supported by participants in the environment. Every participant plays an important role for achievement of quality audit. Main participants in addition to auditor includes :

  • Users
  • Management
  • Regulator
  • People assigned with Governance

Contextual Factors - On the collective basis, contextual factors are also responsible for reporting of financial information and, thereby, audit quality. The main elements of contextual factors include

  • Management Information System
  • Corporate Governance
  • Various Cultural Factors
  • Timely of Financial Reporting
  • Talent
  • Litigation/ proceedings environment
  • Proper Regulations of Audit
  • Business Practices and Commercial Laws
  • Rules, Laws and Regulations relating to Finacial Reporting
  • Reporting Framework in the entity

Conclusion

Audit Quality is performed is an essential element to achieved while performing the audit work. Whether audit is performed by solo auditor or joint auditor it is independently an essential component. Auditors are responsible for quality of an audit, however, there are several other factors that influence the enhancement of impairment in quality of an audit. So, in addition to primary duty of auditor to follow all regualtions, he shall also be aupported by required factors and management team to perform it better.


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