The Independence And Objectivity Of Auditors On Quality Of Audit

Current issues pertaining to IS 200 concerning independence and professional skepticism

Discuss about the Auditing Theory And Practice Of Auditing ISA 200.

The report is prepared to critically evaluate the independence and objectivity of auditors on quality of audit. An in depth review of the current issues pertaining to IS 200 concerning independence and professional skepticism of auditors have been demonstrated in the study. The factors influencing the quality of audit are critically appraised by discussing the benefits of engagement quality control review implementation. The professional skepticism prevailing in the auditing industry by critically analyzing the current threats to independence is also explained in the report. Professional skepticism is likely to be applied by auditors at various points and various stages from the acceptance of clients during the auditing process. It is required by auditors to apply such skepticism when they are forming auditing opinion (Abbott et al. 2016). The given case study is about discovery of accounting regularities of British Telecom that was not discovered by Pwc. Such accounting irregularities have led to threatening of independence of auditors.

The international standard of auditing (ISA 200) outline the requirement for applying the concept of professional skepticism that would help in recognition of circumstances that may exist and causing material misstatement of the financial statements. Such skepticism is related to the team of audit for critically analyzing and obtaining information from the client and third parties. Independence of auditors is regarded as one of the ethical requirement relating to financial statement auditing. It is required by auditors to comply with ethics such as exercising independence when auditing the statements. Independence of auditors is regarded as fundamental precursor and the meaning of professional skepticism is appreciated by independence of auditors (Byrnes et al. 2018).

Since there are many diversified factors influencing audit quality, it is not easy to give any particular definition of audit quality. However, audit quality is defined as a joint probability that is assessed by market that auditor will be able to detect material misstatement in the financial statement that is related with technical capabilities and accordingly reporting the errors that is related to auditors independence. In other words, it can be said that audit quality is the probability that financial statements are not materially misstated. It is the likelihood on part of auditors to report and discover material misstatement by technical capabilities of auditors.  When the discovered errors are to be reported, then independence of auditors is considered as crucial factor (Ioana and Adriana 2014).

The factors influencing the quality of audit are critically appraised

The review of literature argues about many factors influencing quality of audit and the audit quality can be directly or indirectly impacted by such factors. Some of the factors are listed below:

Industry expertise- Auditors expertise plays a crucial role in improving audit quality according to literature. The likelihood that the auditors will detect material misstatement and errors in the financial statement is enhanced by knowledge of industrial expertise and thereby impacting the reporting of discovered errors probability. There will be higher audit quality due to higher audit expertise and there exist a positive relationship between audit quality and audit fee (Bumgarner and Vasarhelyi 2018).

Tenure of audit- It has been mentioned in the study that auditors will have less client knowledge if the tenure of auditors is short. On other hand, the professional care of auditors will decrease if the audit tenure is loner and thereby reduced audit quality. Auditors having large audit tenure are likely to discover the material misstatement using high level of knowledge and technical capabilities. However, the probability of reporting misstatement and independence can be reduced due to relationship between client and auditors. On other hand, there will be less risk of abilities and technical capabilities if the auditors have short tenure. Therefore, audit tenure is likely to impact audit quality.

Size of auditors- It has been confirmed by most of studies that there is positive correlation between audit quality and large size auditors. Some other studies on other hand that in terms of impact on audit quality, there is no difference between large and small audit firms. Nonetheless, it seems that large audit firms are more qualified and committed to high quality of audit. Higher quality of audit can be attributable to factors such as professional competencies and high technical information (Power and Gendron 2015).

Audit fees- One of the important factor influencing audit quality is audit fees as greater audit fees are associated with qualified auditor’s choice. In case of doubt regarding going concern option and audit fees, no relationships have been identified.

Reputation of auditors- The reputation cost of smaller firms is significantly less than large audit firms and due to these formers firms have incentive to maintain their reputation by accurate presentation of audit report. This is because of impact of audit quality on reputation of auditors. Audit firms with higher reputation are considered to be presenting more accurate audit report due to more credibility of such auditors as per capital theory (Tepalagul and Lin 2015). Moreover, higher audit fees are demanded by such audit firms that result in decreased independence of auditors and thereby impacting the independence of auditors.

The professional skepticism prevailing in the auditing industry

An engagement quality control review (ECQR) provides organization with an objective evaluation of considerable judgment and conclusion made by engagement teams in formulating the report. ECQR is the process that is designed for providing an objective evaluation of significant judgment that is made by audit teams in the formulation of audit reports on or before such reporting date (Byrnes et al. 2016).

The procedures and policies of such review enable organization to discuss with engagement partners on significant partners. The conclusions in the formulation of audit report are properly evaluated with the help of such quality control review. It plays an important role in ensuring the quality of audit on an engagement level and an insufficient quality control review is considered as a contributing factor when the audit files do not meet the minimum standards (Dogui et al. 2014). Partners of engagement quality control review are expected to perform critical review of the risky areas in preparation of audit file and providing assurance of the fact that such audit file contains sufficient and appropriate audit evidence.

One of the critical areas in audit is issue of professional skepticism and it is regarded as root cause of issue in audit quality. The audit client structure helps in providing base of independence of auditors and unconscious and conscious personal bias. Professional skepticism can be reduced by the powerful incentive from threat to independence of auditors. This makes it difficult t exercise professional skepticism while making judgment. Independence of auditors are threatened under many circumstances and the threats that have considerable impact on independence of auditors are self review threat, self interest threat, familiarity threats, advocacy threats and intimidation threat (Amir et al. 2016). There is a common connection between belief and trust and belief is defined as extreme of trust. Such concepts are regarded crucial in professional skepticism and facilitation of professional skepticism is the fundamental purpose of independence of auditors. Threats that are subject to prohibitions are no longer threat to independence of auditors. Intimidation threat is considered to be of paramount importance in posing threat to independence of auditors. Such threat occurs when the auditors might be deterred from exercising professional skepticism and acting objectively (Abdul et al. 2015).

The collapse of HIH Insurance in Australia was related to working of audit that was characterized by lack of sufficient evidence of audit for presenting his conclusions about the opinion on the financial statement. The true financial position of HIH was not properly appreciated as the approach of audit detracted the ability of users. There existed lack of independence that reflects susceptibility to pressure and undue influence. An additional issue relating to independence emerged in conduct of commission. Difficulties faced by auditors and HIH in reaching the resolution of accounting issues regarding the accounts and reserves was not fully appreciated by audit committee. The meeting between audit committee and auditors appear less common at HIH when such meeting is regarded as common practice (Bemelmans 2017). Moreover, the meeting between audit committee and senior auditor staffs was done in the absence of management of HIH. Therefore, the failure of organization was associated with the issues of auditor independence.

Definition of audit quality

Conclusion:

From the above analysis, it can be seen that there is rise in accounting scandals due to increasing accounting irregularities practiced by auditors either due to external or internal pressure. The professional skepticism of auditors is hampered by several threats to independence of auditors. Quality of audit of an organization is improved by the implementation of engagement quality control review. Conclusions have been drawn by conducting the investigation of many issues both in literature and empirically and rely on findings. In order to maintain the credibility of financial information presented in the reports of organization, auditors are required to remain strictly independent. Furthermore, it has been found that there are various factors impacting the audit quality ranging from audit fees to auditors reputation.

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