Determinants Of Audit Quality In Small And Medium Enterprises Firms Of Audit

Framing the Study

Overview of Research

Auditor plays important role in the enhancement of confidence and trust in capital market and facilitating the growth of economy. The audit quality issues and audit values have been the prime interest of the researchers and practitioners (Elmagrhiet al. 2017). Maintenance of high level of audit quality has now become the highest priority of firms. Audit quality is the complex process that encompasses key elements and creates an environment that maximizes likelihood that audits are performed with quality on the consistent basis (Adeyemi, Obah and Udofiaa 2015). The auditing quality provides reasonable assurances that presentation of audited financial statements and its related disclosures are not misstated materially and is in accordance with the generally accepted accounting principles (Ganesanet al. 2017). Audit enhances reliability of the published financial statements information and by doing so; it instills trust and confidence in economic sector (Ali, Mail and Amirul 2019).

The Small and Medium Sized Enterprises helps in representing one of the most important groups in national economies. However, policy makers and firms focus more on the large or listed companies audit in comparison to the SMEs (Al-Shbail and Turki 2017). In relation to SMEs’ auditing quality, there are various professionals and literature that have talked about SME’s quality of financial reporting but less have been talked about the factors that determines auditing quality of SME’s (Al-Najjar 2018).

 Hence, this research is important because highest level of the audit quality is important factor in these days in firms. The practices of accounting in audit market of SMEs are faced with the significant challenges (Bisogno and De Luca 2016). The SMEs auditors are required to be proficient in all the relevant standards as that of the auditors of large publically listed companies (Apadore and Zainol 2014). From the perspective of small and medium sized firms, keeping up with the changing requirements and maintenance of required base of knowledge is great challenge (Huguet and Gandía 2016). Auditors are required to have complete knowledge of the relevant auditing standards and good experience in professional judgments as it is essential for the audit quality and efficiency of SMEs (Beláset al. 2017). Therefore, it becomes important for them to achieve sustainable financial results with the revenues of audit fees, which exceeds full delivering cost of high quality audit services (Carey and Tanewski 2016).The firms that are having better quality of audit, they eventually improve the process of financial reporting and consequently it minimizes likelihood of having qualified opinion (ALshbiel 2017).

Importance of Audit Quality in Firms

Aims and Objective of Research

This research paper aims to find out the determinants of audit quality in small and medium enterprises firms of audit. The findings of this research paper will provide the insights regarding the different factors that affect quality of audit and its impacts on overall industry and country as a whole. This research paper will be contributing towards growing body of literature on auditing quality among SMEs, as there are very less amount of data that is available on this particular emerging issue. Hence, the steps taken to achieve this objective includes examining effect of the audit fee, retention of client and expansion of market drives in the small and medium sized firms of audit on audit quality and long-run relationship. The audit quality in SMEs is the major ongoing issue. Hence, this research paper will help in gaining major insights towards the industry.

Theoretical Review

Agency theory suggests that the appointment of auditors is in interests of management and the third parties. The company is viewed as web of contracts. The various groups, for instance employees, customers, government and others make certain contribution to company for the given price (Gandía and Huguet 2018). The task of management is to coordinate these contracts and attempts for optimizing it. In such relationships, management acts as an agent, who tries to gain contributions from the principals such as shareholders, employees and others (Dasilas and Papasyriopoulos 2015). Audit serves fundamental purpose in reinforcing trust and promoting confidence in the financial information. The agency theory depicts principal-agent relationship, which is important to understand the development of audit. The principal appoints agents and delegates certain authority of decision-making to them. In doing so, trust is placed by agents for acting in best interests of principals. This results in asymmetries of information between agents and principal (Salehi, Fakhri Mahmoudi and Daemi Gah 2019). The differences in principals and trust may lack the trust in agents and it may requires putting mechanism in place for reinforcing trust. The Agency theory is useful economic theory of the accountability that helps in explaining audit development. The problems of agency may leads towards restrictive judgment of auditor, which leads towards the false reporting on respective audit (Rahman et al. 2017).

The theory of agency is used with the assumption that high quality of auditing in SMEs allows for the better monitoring of the opportunistic behaviors of management. The traditional agency conflict that arises between shareholders and managers highlights the significant asymmetries between the insiders of firms and other stakeholders (Vander Bauwhede, De Meyere and Van Cauwenberge 2015). The informalities of the management practices characterizes SME’s, affects the level of perceived cost of agency by outside stakeholders such as creditors and non-shareholders managers. Further, there are several studies, which have examined the influence of agency costs in SMEs. Generally, SMEs shows less agency conflicts that relates to separation of management and ownership (Velte 2017).  The companies are more likely to undergo voluntary audits, if they are having greater costs of agency. Moreover, level of agency costs and the contractual constraint that are imposed by the creditors on firms, seems to be key driver for voluntary audits demands in SMEs (van Raaket al. 2019). The other characteristics of the business, for instance incorporation status, age, size and complexity of business is identified as the drivers of demand of voluntary audits (Rahman et al. 2017). The recent literature on the issues indicates that the demand of voluntary audits by SMEs is in response to the conflicts of agency. It serves as powerful tool of management for solving the internal issues or for compensating the lack of strong institutional protection (Sarapaivanich and Patterson 2016).

Challenges of Maintaining High Audit Quality in SMEs

The primacy of the market expansion and client retention on growth and profitability of SME firms of audit is critical for adequate returns for firms. The paths towards expansion and growth for all profit-oriented companies are towards retaining their current clients and expansion of their customer base and share of market (Pichler, Cordazzo and Rossi 2018). The audit quality underscores extent to which output of processes serves useful functions for decision of accounting information system. Therefore, failure in achieving these purposes, compromises on the audit output quality (Parte-Esteban and García 2014). There are number of determinants of audit quality, some of which includes audit partner tenure, audit fee, firm tenure, size of firm and others. The provisions of the non-audit services have the negative impact on quality of audit. In this concern, continuing education of the audit partners helps in improving quality of audit (Palazuelos, Crespo and del Corte 2018). The audit quality is considered contingent upon the interplay among factors such as firm sizes, characteristics of firm, specifications of the subsidiary auditing firms and international differences in the legal system. In the long run, audit quality is impacted by client retention, audit fee and variables of market expansion (Omri and Ben Abdennebi 2014). There are no firms of audit regardless of size, which can render the services of quality without the appropriate fees. The higher fee of audit by SMEs compels the higher quality of audit and the need for expanding market coverage by goodwill and brand name. It constrains the category of auditing firms for improving the audit output quality (Ojalaet al. 2014).

Application of Theory

SMEs are considered as the major contributor in terms of backing up of the economy by giving boost and stability. Itcollectively forms major chunk of economy. The small businesses contribute towards economies, with the help of bringing innovation and growth to community in which business is established (Pichler, Cordazzo and Rossi 2018). Moreover, it also helps in stimulating growth of economy by providing opportunities of employment to the people who might not be employable by the big corporations. The small and medium-sized firm of audit offers competitive services, which are in tune with the best global services as well as in conformity with IAS in order to enhance their growth. Moreover, it enhances the continuous relevance in the expanding and emerging market of audit (Lardon and Deloof 2014). The improvement of audit quality is strategic path towards expansion of market coverage of firm regardless of its sizes. Further, audit enhances reliability of the published information of financial statement, which results into instilling of trust and confidence towards economic sector (Vander Bauwhede, De Meyere and Van Cauwenberge 2015). There are certain SMEs, which grows rapidly over short span of time because they establishes governance framework in order to build resilience. The compliance with the professional standards and maintenance of independence in rendering services of client forms critical factor in market development of SMEs (Mohamad, Zakaria and Hamid 2016).If SMEs follows good audit quality then their business growth continuously. The continuous growth of business brings several opportunities to the business that leads towards achieving good amount of profit. It not only helps in achieving company’s objective but it also helps in contributing towards industry and country. Therefore, improved quality of audit services remains relevant in emerging market of audit, as country traverses path towards global relevance and economic development (Langli and Svanström 2014).

Goals of the Research Paper

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