Topic of Research
Effect of audit reports on Annual financial reporting quality of an organisation
Aim and objective of the study
The aim of the research study is to augment quality of audit and overall reliability of financial reporting. Particularly, this study intends to
-Examine the relationship between audit quality in association to financial reporting quality of business concerns in Australia
Research Question
1) What is the nature of association between audit quality and overall quality of financial reporting in Australia?
Research Problem
The global financial crises, various failures of corporate and financial scandals worldwide raise doubts and questions regarding the efficacy of financial reporting as well as quality of auditing. Several auditing firms, certified and regulatory bodies are therefore under fire and encounter immense pressures to refurbish confidence in particularly auditing (Sirois et al., 2018). In essence, regulatory and certified bodies attempted to uphold quality of audit to restore tarnished image as well as to enhance their legitimacy along with standing. Thus, this study intends to analyse whether superior audit quality directs the way towards superior quality of financial reporting that subsequently is a mechanism to avert financial crises.
Section: Literature Review
Introduction
The current section presents articles along research papers cope with control on and dimensions of quality of financial reporting, as regards focus, concerns, as well as findings. Essentially the section on review includes different elements of quality of financial reporting, auditing and influence of auditing on financial reporting.
Measures of Financial Reporting Quality
Components of Quality
As righty put forward by Lennox et al., (2016), the important principle of evaluating the financial reporting quality can be associated to faithfulness of overall objectives along with quality of divulged information in financial reports of a business enterprise. In essence, these qualitative characteristics augment facilitation of process of reviewing the effectiveness of financial statements. This can show the way to superior level of quality. In order to attain this level, different financial reports have the need to be faithfully reflected, comparable, understandable, well timed and verifiable (Gaynor et al., 2016). Therefore, the stress is on getting transparent financial assertions in place of misleading financial pronouncements. In this connection it can also be said that there is also significance of preciseness along with predictability as indicator of a superior quality of financial reporting.
According to the Conceptual Framework for the purpose of accounting, there are various agreed upon components of superior quality financial pronouncements. In essence, different qualitative characteristics of pecuniary reporting include faithful representation, relevance, timeliness, verifiability understandability as well as comparability. In actual fact, these are also divided into different fundamental qualitative characteristics along with enhancing qualitative features (Badolato et al., 2014). In essence, a theoretical illustration for the said terms help in stressing and focussing on significance as qualitative characteristics, and also indicates towards various qualities that are regarded to be fundamental among various structures.
Relevance
As rightly mentioned by Abbott et al., (2016), relevance can be said to closely related to terms of usefulness as well as materiality. In particular, relevance depicts ability of undertaking various business decisions bya users of information presented in the financial reporting. As such, at the time when information is presented in the financial assertions also exert influence on economic decisions. This information is said to have the quality and characteristic of relevance. In addition to this, at the time when this specific information aids various users to analyse, correct and at the same time substantiate current as well as previous incidents. The effectiveness of framing a decision that is a significant part of the quality of relevance is said to be consistent with the framework presented by the conceptual framework. As suggested by Brasel et al., (2016), fair value can be regarded as one of the most important indicators or signs of relevance. Utilizing fair value in a business entity, as a foundation for the enumeration can be regarded as an important sign of higher level of relevance in the financial reporting information. Essentially annual declarations have an important role in the process of ascertainment of level of relevance by divulging specific information regarding opportunities of business along with risks. This can help in delivering feedback on the way major market incidents and important business transactions can affect operations of business entities (Pucheta?Martínez & García?Meca, 2014).
Reliability
As correctly put forward by Robert Knechel et al., (2015), reliability can be considered to be an important facet of quality of financial reporting. In particular, in case of financial reporting, specific information has the need of quality of specifically reliability in a bid to be effective. In essence, this quality can be attained at the time when information that users depend upon is free from primarily bias as well as material errors.
Comparability
Cohen et al., (2013) suggests that comparability can be considered to be an important theme of permitting various users to ascertain financial health and position, flow of cash and performance of business entity. In essence, this process of comparison can help in the process of carrying out comparisons across different time period and among different other corporations during the same period of time. Particularly, comparability calls for the need that similar incidents in the two different situations need to be represented by identical accounting facts as well as numerals (Abbott et al., 2010). There are essentially different events that can be represented by diverse accounting facts as well as figures in a manner that can quantitatively represent the variances in both a comparable and at the same time and interpretable way.
In a bid to point out towards this point, specific notes presented in financial statement have the need to divulge as well as illustrate all the requisite alterations in the policies of the accounting (Carcello & Nagy, 2014). In addition to this, notes also need to present the implications of the alterations and applications of accounting principles as well as principles. Furthermore, the present accounting period also have the need to compare with the ones from prior ones. Finally, presentation of financial index along with financial ratios can contribute towards comparison to other corporations.
Understandability
Understandability is one of the essential qualities of information in financial reports. Achieving the quality of understandability is through effective communication. Thus, the better the understanding of the information from users, the higher the quality that will be achieved (Robert Knechel et al., 2015). It is one of the enhancing qualitative characteristics that will increase when information is presented and classified clearly and sufficiently. When annual reports are well organized, users can comprehend what their needs are (Robert Knechel et al., 2015). Usage of graphs and tables helps to present information clearly, and the usage of language and technical jargon can be followed easily.
Timeliness
As recommended by Krishnan et al., (2016), timeliness can be considered to be enhancing qualitative features. In a bid to illustrate specific information in a well timed manner there is need to present financial information to decision makers before losing its authority as well as appropriate influences. Therefore, in a bid to assess overall quality of financial reporting in a yearly financial reporting, timeliness can be analysed utilizing the time period between year-end and issuing date of report of auditor.
Faithful Representation
Christ et al., (2015) says that faithful representation can be referred to as the notion of representing the actual economic position of financial information that is presented in the reports. In essence, this notion has the value of illustrating the way the obligations as well as economic resources, counting real economic position of financial information, transactions, and various incidents are entirely represented in financial reports. Furthermore, this specific quality has neutrality has a theme that is regarding objectivity along with balance. As recommended by Bowlin et al., (2015), scholars concluded that reports of the auditor can necessarily add value to the entire financial reporting by delivering reasonable assurance regarding degree to which yearly pronouncements an reflect specific economic phenomenon.
Additionally, how business organizations are controlled and directed affects the faithful presentation quality; this, in fact, is represented as a corporate governance factor when there is extensively disclosed information on corporate governance issues in the annual report (Rezaee et al., 2018). Besides, the annual report clarifies assumptions and estimates and explains the usage of the accounting principles in the company clearly. It also highlights positive and negative changes and events by discussing them in the annual results. The last important factor that strengthens this quality is having an unqualified auditor‘s report in the annual report (Berger et al., 2017).
Influence of Auditing on quality of financial reporting
Definition of auditing
Auditing is an independent verification that enhances financial statement reliability and usefulness. Since auditing is an integral part of the system, the inclusion of auditing variables better reflects overall financial reporting quality. As rightly put forward by Aobdia et al., (2015), auditing can be regarded as an assessment of various books of accounts along with vouchers of a business by a specific independent individual who need to be qualified for specific jobs, in a bid to determine the level of accuracy. As correctly indicated by Hayes (2014), the primary objectives of auditing include verification of various accounts along with statements, detection of errors along with fraudulent actions and prevention of various errors along with frauds.
Kausar et al., (2016) suggests that auditors are provided free hand to particularly books, various accounts along with statements that can enable auditors to verify the same. In case if they get satisfied then they can substantiate that the books are appropriately drawn up and reflect a true as well as fair view of financial position of the corporation. As such, auditors provide special attention to different directions of mistakes/errors that might be intentionally or else unintentionally committed. However, the auditor can find out the unintentional mistakes by way of vouching various business transactions and by way of comparing as well as tallying different balances between as well as among different books of accounts. Nonetheless, in case of intentional mistakes, errors can be categorised as frauds since it directs the way towards defrauding different proprietors. Chen et al., (2016) recommends that frauds can be recognized by way of detailed assessment of the books along with documents namely cash books, various invoices, documents on wage sheet and many others.
Categories of audit
As suggested by Christensen et al., (2014), auditing can be categorised into two different types namely continuous or else detailed audit and periodical/final audits. Lennox et al., (2016) suggests that continuous audit is necessarily effective in case of big business enterprises with large corporations that have scope for maintaining the audit staff engaged and business throughout the year. The auditors might perhaps attend to auditing at different intervals that are fixed and carry out an interim audit. As such, in this specific case, routine business operations can be carried out all at once with the work of audit. On the other hand, the periodical auditing refers to a audit work that is carried out continuously till the period of completion. As such, this can be regarded as the system that can be referred to be the most satisfying from the viewpoint of the auditors (Gaynor et al., 2016)
Audit Processes for detection of fraud
Badolato et al., (2014) says that there are various processes of audit that can help in detection of fraud. Whilst audits are not formulated to root out all the possibilities of fraudulent actions, assessors have the accountability to recognize material misstatements in financial assertions of business enterprises caused by fraudulent actions or else error. As suggested by Brasel et al., (2016), audit engagements teams have the need to undertake brainstorming sessions at the start of audit. Essentially, this session directed by the partner liable for audit, is formulated to deliver time for the entire audit team to take into account the way business enterprises can commit fraud. In addition to this, brainstorming meeting can be necessarily utilized to establish a specific tone of professional scepticism in the process of audit. In particular, fraud specialist also attend meetings to deliver deep insight into different forms of fraud committed by various business enterprises and recognizes diverse risk factors of the client. Audit process also helps in the process of testing of audit. Detection of fraud of material misstatement in financial statements calls for the need of undertaking adjustments in financial records (Pucheta?Martínez & García?Meca, 2014). In this case, assessors would test the journal entries of the firm for any kind of adjustments and manipulations. In addition to this, in a bid to carry out the test, after acquiring a clear understanding regarding the controls as well as procedures of the business enterprise, the evaluator has the need to select from the journal entries of the business concern. Furthermore, auditors also have the need to typically choose different entries that are particularly large and designed by upper management of firm and posted in particular accounting period. Once the process of selections has been carried out, the evaluator can think about presenting supporting documentation that can substantiate each and every entry.
As suggested by Cohen et al., (2013), another probable place for fraudulent actions is in the estimates for accounting. As accounting estimates are necessarily subjective concepts, management might perhaps be able to exert influence overall accounting estimates for the purpose of manipulations of the financial assertions. First, evaluators have the need to complete an entire look back processes for the purpose of ascertainment in case if the methods for completing accounting approximations has altered from previous years. Again, alterations in the methods can be a sign of manipulation. Evaluators can also properly asses overall directionality of approximations as a whole (Christ et al., 2015). For instance, in case if around all the approximations in the previous years of declining earnings and approximations in the present year were of declining earnings, assessors might perhaps be concerned that the business enterprise is shifting overall earnings from a specific period to another period.
Audit Committee
As rightly indicated by Abbott et al., (2010), audit committee is said to have the accountability for carrying out the activities of hiring, assessment of performance and compensating various external assessors in business entities. In addition to this, the audit committee accountable for overseeing as well as supervising different financial assertions as well as various disclosures of the corporation can help in maintenance of financial reporting quality (Abbott et al., 2010). Essentially, audit committee formed in a specific business entity can help in the process of tracking different selected policies, principles of accounting and diverse internal controls that the management of business concerns have utilized.
As presented in the prior literature, audit committees of various business concerns have contributed towards the process of enhancement of overall quality of firm’s financial pronouncements (Hayes, 2014). Self-governing, competent, and qualified audit committees have better capability to recognize material misstatements in particularly financial assertions, and cam help in avoiding different opportunities of the management of the corporation to carry out manipulations. Therefore, audit committee of a business concern exerts fundamental influences of quality of financial reporting along with inputs of audit. in addition to this, alterations in the committee for audit governance can be linked to augmentation of quality of financial reporting. Prior scholars have delivered specific substantiations that recommend a relationship between existence of a financial expert on particularly committee of audit and superior level of quality of financial reporting. Nevertheless, the significance of including financial accounting expert in the firm’s committee for audit can help in leading to superior quality of financial declarations (Chen et al., 2016). Thus, financial expertise might perhaps be wide, and have the need to mention the significance of including financial accounting specialist in the committee for audit. Essentially having a financial accounting expert in the committee for audit can help in the process of the forecasting accurately. Therefore, in this connection it can be said that there exists a positive association between financial accounting expert and forecast accurateness. In addition to this, there is said to be a negative association between qualified financial accounting specialist and the forecast dispersion (Lisowsky et al., 2017).
As regards audit influences it can be mentioned that there exist a positive as well as considerable influence on quality of financial reporting founded on overall size of auditing corporations, fees disbursed to different external assessors.
Different advantages of auditing financial reports
As correctly mentioned by Lisowsky et al., (2017), auditing has different advantages that helps in enhancement of overall quality of financial reporting. Sirois et al., (2018) suggest that auditing facilitates the process of detection of errors as well as frauds with recommendations for the prevention. However, in order to avert the mistakes to be committed, the accounts can be maintained and upgraded on a regular basis. In addition to this, the parties in this case might also feel confident regarding report of the audit as it was carried out by a specific independent individual or a body. Again, financial accounts after audit stand to be authentic. As such, the people carrying out work of audit in the field of accounts are qualified and proficient enough to deliver advice in the management of business enterprises (DeFond et al., 2016). However, in case of joint stock corporations, the director of the firm gets no opportunity of acquiring undue benefits. Apart from this, auditing accounts also helps in the process of settlement among diverse parties.
Effectiveness of particularly internal auditing with regard to financial reporting
With the increasing complication of the necessities of financial reporting with regard to internal control and management of risk and mounting pressure on board to comprehend the wide range of value-added internal auditing actions in particularly governance, research concentration has shifted to the empirical contributions of internal auditing (IA) and recognizing criteria for analysis of performance of IA Robert (Knechel et al., 2015).
In an important body of research, it is necessarily documented that effectual internal audit function is related to augmented financial reporting with respect to assurance regarding quality of internal control in financial reporting, low levels of management of earnings and low incidence of fraud. Robert Knechel et al., (2015) observed that internal audit function as a vital mechanism to safeguard overall reliability of yearly accounts. Also, this study reflected that executing IA as a specific function in particularly corporate governance and their coordination with effectual audit committee could contribute towards minimization of earnings management.
There are numerous scholars who have empirically confirmed the fact that dynamics replicating positive influence of internal audits on the procedures of financial reporting. Rezaee et al., (2018) suggests that corporate governance mainly relies on the definition of different role as well as accountabilities of internal audit function, suitable positioning and lines of reporting along with professional proficiency. Furthermore, Pucheta?Martínez & García?Meca (2014) emphasized the significance of training of different internal auditors as per alterations in working procedures and the working environment. In addition to this, awareness of the top management regarding significance of internal control and management of risk for the successful management of the corporation has a vital role in ascertaining the effectiveness of internal audit function. Again, more recurrent meetings particularly between audit committee and the internal audit function can contribute towards exchange of pertinent information and elaborate discussion regarding any issue identified in a well-timed manner (Lisowsky et al., 2017).
Quality of financial reporting
As rightly indicated by Lennox et al., (2016), the primary purpose of general purpose financial reporting is to deliver effective accounting information to different external users for the purpose of economic decision making. Essentially, relevance as well as faithful representation of particularly financial information that in itself reflect comparability, timeliness, understandability as well as verifiability can make pecuniary reports effective to different users. However, individual users have diverse perceptions regarding usefulness of information along with their perceptions concerning quality of financial assertions. Therefore, evaluating decision usefulness of diverse financial assertions cannot be observed directly with straightforward process. Krishnan et al., (2016) mentioned that power of communication of financial reports would not exclusively analyse as diversity of financial information requests of a broad range of users of financial assertions. In addition to this, there is subsistence of different alternatives of choice and engages accounting approximations along with professional judgements in the reflection of the impacts of business transactions along with incidents. Therefore, illustrating determinants of quality of particularly financial information and the manner of quantification can be considered to be fundamental areas of concern in research on accounting.
As rightly put forward by Kausar et al., (2016), majority of empirical studies intended to evaluate decision usefulness of pecuniary reports utilizing quantitative dimensions that concentrate on particular attributes of financial reporting dimensions. Essentially, the instances of such facets are quality of earnings, specific proxies of value relevance, particular financial/non financial information divulged in the yearly reports. Conversely, Hayes (2014) suggests that diverse dimensions of specific information utilizing financial/non financial along with mandatory as well as voluntary disclosures in pecuniary assertions of corporations have the need to be analysed simultaneously for suitable analysis of decision usefulness of financial reporting information. Therefore, they made use of conceptual based tools of measurement for mainly comprehensive analysis of financial reporting quality. However, in this regard, it can be said that the scholars have formulated a quality index consisting of 21 items with respect to fundamental as well as enhancing features presented in the conceptual framework of International Auditing Standards Board. In essence, this tactic of enumerating financial reporting quality can be used (Gaynor et al., 2016).
Audit Quality and Quality of Financial Reporting
The worldwide financial crisis, failures of corporate and scams in numerous nations raise noteworthy questions regarding the efficacy of financial reporting as well as quality of auditing. Several auditing firms, certified and regulatory bodies are therefore under fire and encounter immense pressures to refurbish confidence in particularly auditing. In essence, regulatory and certified bodies attempted to uphold quality of audit to restore tarnished image as well as to enhance their legitimacy along with standing (Abbott et al., 2016). Thus, it is anticipated that superior audit quality directs the way towards superior quality of financial reporting that subsequently is a mechanism to avert financial crises. Abbott et al., (2010) identify quality of financial reporting as particularly a precision with which different pecuniary assertion conveys required information regarding operations of the firm, specifically its anticipated flows of cash that let equity investors know about financial health of the firm. Also, their characterization is consistent with directives laid down by Financial Accounting Standards Board (FASB) that mentions that the main objective of financial assertions is to notify present as well as potential financiers so that they can frame rational decisions as regards investment and can evaluate the anticipated flows of cash of the reporting entity (Aobdia et al., 2015).
Nevertheless, quality of audit is not openly observable; for that reason, it is quite complicated to assess and quantify the same empirically. Yet, there are several proxies to enumerate quality of audit. Fundamentally, accrual measure can be considered to be one of most important proxies for ascertainment of quality of audit. Superior quality assessors are more probable to identify irregularities in accounting, oppose to the employment of different questionable practices of accounting, as well as restrain discretion specifically over accrual choices for diverse client corporations (Badolato et al., 2014). As rightly indicated by Berger et al., (2017), there are five different theoretical constructs that can be used to examine audit quality. These five different constructs that can be used for assessment of quality of audit include audit size, audit tenure (experience of auditor, that is to say, industry specialism), and fees for audit, specific demographics, and category of local government. Bowlin et al., (2015) highlights that that there are two important characteristics of the financial reporting arrangement are that an appraisal is particularly mandated for different publicly traded corporations. Fundamentally, audit needs to be carried out by professional and expert accountants who are necessarily independent in nature (that is to say, to have a specific objective in mind) and in appearance as well. In itself, both of these magnitudes of independence can be assumed to be vital for purpose of attainment of superior quality of audit.
Brasel et al., (2016) suggests that quality of audit refers to appropriate detection, correction as well as revelation of any kind of material omission else wise misstatements particularly in the financial assertions. In this regard, Carcello & Nagy (2014) mention that a two-dimensional illustration of quality of audit hypothesized has set a standard for discussing this specific issue. Chen et al., (2016) says that a material misstatement essentially needs to be identified, as well as the detected material misstatement also needs to be appropriately reported. As per the viewpoints of Christ et al., (2015) there are two different major drivers of quality of audit, counting costs of litigation as well as loss of reputation. DeFond et al., (2016) argue that taking into consideration huge investment on developing reputation as well as brand equity, the big audit corporations undoubtedly have an inducement to lessen litigation risk and defend reputational capital by means of delivering more convincing and trustworthy financial assertions. Basically, these arguments can be considered to be consistent with the theme that size of the audit firm can be regarded to be a crucial determinant of quality of audit. Essentially, huge size of audit corporations has two different consequences. As such, large sized audit firms facilitate audit corporations to spend considerable amount of money on different training programmes and enhancement of technology used for audit. Essentially, this can help in enhancing their level of competence, and enable to resist pressure of auditee to present a clean opinion in audit as they are not reliant on any specific individual client.
Research Methodology
This section elucidates in detail about the research design together with the research methodology used for the research project.
Research design
The current study has undertaken a descriptive research design that presents a complete set of mechanisms along with processes that explains variables while postulates that a specific descriptive design of a research is basically concerned with method of determination of frequency with which specific things are associated between different variables (Gaynor et al., 2016).
Target Population
Particularly, the population that is of interest in this study at hand contains different business corporations operating in Australia.
Data Collection
The learner has employed both secondary data as well as primary data for undertaking this research. Essentially, primary data is collected from people working in corporations listed under the Australian Stock Exchange by using a questionnaire. Essentially, questionnaires are distributed to 50 chief financial officer as well as chief executive officer or else individuals operating in equivalent positions with a request for response. The questionnaire (refer to appendix) containing pertinent questions are mailed to the target respondents with a request for reply. The responses to the questionnaire framed are rated on a 5 point likert scale. The responses range between Strongly Agree (numerically rated as 5), Agree (rated as 4), Neutral (Rated as 3), Disagree (rated as 2) and Strongly Disagree (rated as 1). The responses collected are thereafter analysed using the software Microsoft excel.
Basically, these can be regarded as the individuals directly engaged in dealing with different financial facets in the firms (Hayes, 2014). Additionally, secondary data is collected from yearly audited reports declared by the corporations, various official websites, prior academic journals, article, magazines as well as report.
Qualitative Analysis technique of collected data
Analysis of Prior cases
As correctly mentioned by Hayes (2014), the typical agency issue existent between shareholders as well as corporate managers endorses the hiring of different assessors to deliver independent assurance to varied financiers that the financial assertions of reporting entities is as per respective regulatory directives. Nevertheless, worldwide financial crisis, corporate collapse and financial scams in different nations raised concerns and doubts regarding efficacy of auditing. However, several attempts have been made to reinstate confidence in work of audit by means of diverse regulatory actions. In essence, passage of different Acts is believed to enhance quality of audit. For instance, Hayes (2014) observe that the course of SOX directs the way to sharp decline in the total number of small sized audit corporations functioning in the market. As per reports, it can be hereby mentioned that approximately 50%, that is around 607 out of 1,233 small sized audit corporations that were on the go during the period 2001 to 2008 exited to all intents and purposes the market and records mention that most of these exits happened during the period 2002 to 2004, concurring particularly with passage of rules of SOX, along with the advent of registrations rules of PCAOB, and commencement of inspections (Kausar et al., 2016). Analysis of this specific case also reveals that existence of smaller number of small sized assessors concurs with a doubling of particularly mean number of clientele of every small sized audit corporations. Therefore, they register a considerable transformation in the overall market composition of small sized assessors after the process of adoption of particularly SOX. Further, they also argue that inferior quality assessors are more probable to consider it to be more cost beneficial, specifically at the margin, to walk out the market for mainly public corporation audits for the fresh regulatory environment executed under SOX. Analysis of the present case reflected the fact that the passage of specific Acts enhanced quality of audit in case if size of audit was thought to be a specific proxy for quality of assessment. Furthermore, Kausar et al., (2016) mentions that it is anticipated that superior audit quality show the way to superior quality of financial reporting. Nevertheless, the passage of Acts can be considered to be an important factor that leads to enhancement of overall quality of preparation as well as presentation of financial assertions.
As rightly put forward by Gaynor et al., (2016) perceptions regarding credit analysts as well as financial analysts in connection with association between efficacy of audit committee, auditing firm size and as well as quality can be considered by studying the same in context of Bahrain. The case on Bahrain shows that results by survey of around 300 credit analysts as well as financial analysts. This study throws light on four major findings. The case highlights the finding that both credits with financial analysts perceive trustworthiness and reliability of financial statements to be a function of the size of the auditing firm. The findings of the prior study conducted reflect the fact that both the groups suppose that the features of Big-Four accounting units permit them to deliver superior-quality assertions than varied non-Big accounting corporations (Lennox et al., 2016). Also, findings of the study suggest that non-audit services exert impact on independence of auditor and thereby impair quality of audit. In addition to this, findings of prior research study also suggest that there are large groups of analysts who are of the view that effectual audit committee can augment overall quality of audit assertions. Furthermore, financial analysts also perceive pecuniary pronouncements to be more plausible in comparison to different credit analysts. Lennox et al., (2016) state that results of the survey regarding the associations between different auditor mergers, quality of audit as well as audit fees. Enumerating quality of audit by means of earnings quality of different clientele they necessarily reflect in the period of post-merger, complete discretionary accruals of different big-X customer firms declined in comparison to different non-big-X client corporations, reflecting less amount of management of earnings. Also, these indicate that during the postmerger period, proceeds of different big-X clients are necessarily more linked to different stock-market returns, reflecting that quality of income has enhanced during this period.
Quantitative Analysis technique of collected data
Correlation analysis is used for evaluation of gathered data. In essence, the current study at hand is both quantitative as well as qualitative in nature. For the purpose of the present study, quality of audit is regarded as the independent variable and financial reporting quality as the particular independent variable.
For the purpose of the present study, the variables that are considered for measurement of audit quality include size of the auditor and tenure of the auditor. In order to examine the research hypothesis, firstly, descriptive statistics and correlation between variables are analysed by using the software Microsoft Excel.
Research hypothesis:
There exists a significant association between quality of audit and financial reporting quality in firms listed in ASX
Sub- hypothesis of research 1: There is a significant association between size of audit firm and financial reporting quality
Sub-hypothesis of research 2: There is a significant association between audit tenure and financial reporting quality
Analysis of the research data
In order to examine the research hypothesis, firstly descriptive statistics is taken into consideration and correlation between identified variables is carried out.
Descriptive statistics:
Descriptive statistics is presented in table 1 below in which the variable audit tenure has less standard deviation in comparison to audit size. Again, financial reporting quality represented as the dependent variable has more standard deviation than the chosen independent variables, therefore has lesser consistency. This result essentially reflects that the audit tenure is said to be more reliable in comparison to audit firm size. In essence, less amount of standard deviation of particularly audit quality in comparison to the figure of standard deviation of particularly quality of financial reporting reflects the fact that quality of financial reporting gets affected by two other factors of audit quality.
Table 1
|
Financial Reporting Quality |
|
Audit tenure |
|
Audit size |
|
|
|
|||||
|
Mean |
3.12 |
Mean |
3.44 |
Mean |
3.28 |
|
Standard Error |
0.168159303 |
Standard Error |
0.14613385 |
Standard Error |
0.153968 |
|
Median |
3.5 |
Median |
4 |
Median |
3 |
|
Mode |
4 |
Mode |
4 |
Mode |
4 |
|
Standard Deviation |
1.189065831 |
Standard Deviation |
1.033322361 |
Standard Deviation |
1.088718 |
|
Sample Variance |
1.413877551 |
Sample Variance |
1.067755102 |
Sample Variance |
1.185306 |
|
Kurtosis |
-0.831211264 |
Kurtosis |
-0.290647753 |
Kurtosis |
-0.30567 |
|
Skewness |
-0.544074127 |
Skewness |
-0.52641873 |
Skewness |
-0.49231 |
|
Range |
4 |
Range |
4 |
Range |
4 |
|
Minimum |
1 |
Minimum |
1 |
Minimum |
1 |
|
Maximum |
5 |
Maximum |
5 |
Maximum |
5 |
|
Sum |
156 |
Sum |
172 |
Sum |
164 |
|
Count |
50 |
Count |
50 |
Count |
50 |
|
Confidence Level (95.0%) |
0.337928764 |
Confidence Level (95.0%) |
0.29366696 |
Confidence Level (95.0%) |
0.30941 |
Correlation between variables
Matrix correlation between the selected variables is essentially presented in the table 2 below. This table shows that there exists string positive correlation between the audit tenure and size of audit. As per the results of correlation, it can be hereby mentioned that audit tenure and financial reporting quality has strong positive correlation implying that the audit tenure exerts a positive influence on the quality of financial reporting. Again, audit firm size is also seen to have strong positive correlation with financial reporting quality. However, audit tenure is said to have stronger positive correlation to financial reporting quality.
Table 2:
Matrix correlation between the identified variables is hereby presented in table 2
|
Financial Reporting Quality |
Audit tenure |
Audit size |
|
|
Financial Reporting Quality |
1 |
||
|
Audit tenure |
0.786636125 |
1 |
|
|
Audit size |
0.619863788 |
0.595738924 |
1 |
Conclusions:
Analysis of the results of the study reveals that the audit tenure is more reliable in comparison to the audit size when considering the audit quality owing to the lesser amount of standard deviation. Essentially, lesser amount of standard deviation of particularly audit quality in comparison to the standard deviation of quality of financial reporting reflects that the financial reporting quality gets affected by different other factors mentioned other than quality of audit. The correlation matrix shows that there exists a strong positive correlation between audit tenure and reporting quality of financial reports and audit size and reporting quality of financial reports. However, audit tenure is observed to have greater amount of positive correlation reflecting greater amount of association between financial reporting quality.
This research was undertaken in order to assess the influence of audit quality on financial reporting in Australia. The study intended to examine, investigate and ascertain the interaction between quality of audit and corporate financial reporting in Australia. Therefore, the study can be considered to be a movement towards enhancement of the quality of audit exercises in Australia.
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