current issues in auditing

7/23/2019 Current Issues in Auditing

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Audit qualityTransparency reportingIndependent inspection

Audit expectation gap


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Definition proposed by DeAngelo (1981):Audit quality is the market-assessed jointprobability that a given auditor will both: (i)identify a breach in the client companys

accounting system and (ii) report that breach,that is, that the auditor has both the technicalcompetence to detect any material errorsduring the audit process, and the

independence to ensure that material errorsand omissions are corrected or disclosed in theauditors report.


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Aspects to Audit Quality:

Inputs audit firm size, audit fees, audit

tenure and industry specialisation) and

Outcomes financial reporting quality and

cases analysis) related to audit quality

Process audit procedures, judgement and

decision making, and quality threatening

behaviour) Perception users-investors, bankers and

shareholders)


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Inputs Factors Which May Influence Audit Quality

Characteristics of audit firm: 1. Size

2. Audit fees 3. Non-audit services 4. Audit tenure Characteristics of auditors: 1. Professional attributes 2. Professional values


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Outcomes Related to Audit Quality

Financial Reporting Quality: 1. Quality of earnings 2. Accurate financial

information 3. Restatements of Financial Statements 4. Accurate audit opinion 5. Regulatory sanctions

Audit Failure Cases: 1. Litigation


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Literature defines QTB or dysfunctionalbehaviour as actions that could impair theability of the auditor to detect material errors(Kelley and Margheim, 1990).

Herrbach (2001) defines dysfunctionalbehaviour as actions taken by an auditorduring an engagement that reduce evidence-gathering effectiveness inappropriately.

Malone and Roberts (1996) define it as theauditors failure to properly execute auditsteps.


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Premature sign off Reducing the amount of work performed below

what auditor would consider reasonable

Failing to research accounting principles

Making superficial reviews of client documents Accepting weak client explanations

Bias in sample selection

Reduction in sample size

Reduction in amount of documentation Failing to research technical issues

Reliance on client work more than appropriate


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Statutory Auditors Transparency Reporting Project

The Statutory Audit Directive introduced a mandatoryrequirement for annual transparency reporting byauditors of UK companies with securities admitted totrading on a UK regulated market. The Statutory

Auditors (Transparency) Instrument 2008gives effectto this.

In 2008 the FRC reviewed the transparency reports ofseven of the 10 largest firms who publisheda transparency report on a voluntary basis. A

further report in 2009/10 reviewed the quality of thefirst reports prepared to meet the statutoryrequirements.
http://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspxhttp://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspxhttp://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspxhttp://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspxhttp://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspxhttp://www.frc.org.uk/FRC-Documents/POB/Statutory-Auditors-(Transparency)-Instrument-2008.aspx


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Information about the auditors legalstructure and ownership Where the auditorbelongs to a network, information about thenetwork and the legal and structural

arrangements in the network

Information about the auditors governancestructure Information about the internalquality control system of the auditor


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Details of when the last reviews of the auditorconducted by an authorised body took place

Names of the relevant entities audited

Information about the auditors independence

practices The auditors continuing professional

development policy

Financial information for the auditor regardingtheir audit and non-audit revenue, and

Information regarding the basis of remunerationof an auditors partners or directors (nrfia).


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The Audit Inspection Unit (AIU) was part ofthe Professional Oversight Board, andwas responsible for the monitoring of theaudits of all listed and other major public

interest entities. The AIU was set up followingthe UK Governments post-Enron review ofthe regulation of the UK accountancyprofession which reported in January 2003


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PCAOB inspects registered public accountingfirms to assess compliance with theSarbanes-Oxley Act, the rules of the Board,the rules of the Securities and Exchange

Commission, and professional standards, inconnection with the firm's performance ofaudits, issuance of audit reports, and relatedmatters involving U.S. companies, otherissuers, brokers, and dealers.


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he Audit Oversight Board (AOB) is establishedunder Part IIIA of the Securities Commission Act1993 (SCA) which came into force on 1 April2010 to promote and develop an effective audit

oversight framework and to promote confidencein the quality and reliability of audited financialstatements in Malaysia. The key responsibilitiesof the AOB, amongst others, are:

implement policies and programmes in ensuringan effective audit oversight system in Malaysia;


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register or recognise auditors of public interestentities (PIEs);

direct the Malaysian Institute of Accountants(MIA) to establish or adopt, or by way of both,

the auditing and ethical standards to be appliedby registered auditors;

conduct inspections and monitor programmes onregistered auditors to assess the degree ofcompliance of auditing and ethical standards;

conduct inquiries and impose appropriatesanctions against registered auditors who fail tocomply with auditing and ethical standards;


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cooperate with relevant authorities in formulatingand implementing strategies for enhancingstandards of financial disclosures of PIEs;

liaise and cooperate with oversight bodies

outside Malaysia to enhance the standing of theauditing profession in Malaysia andinternationally; and

perform such other duties or functions as theAudit Oversight Board determines necessary or

appropriate to promote high professionalstandards of auditors and to improve the qualityof audit services provided by auditors.


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The difference between the actual andexpected performance of an auditor. Accordingto the the American Institute of Certified PublicAccountants (AICPA) in 1992, the expectationgap could be defined as "the differencebetween what the public and financialstatement users believe auditors areresponsible for and what auditors themselvesbelieve their responsibilities are.


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Porter (1993, p.50) provides an analysis ofthe components of the expectation gap:

The reasonableness gap: defined as a gapbetween what society expects auditors toachieve and what auditors can reasonably beexpected to accomplish.

The performance gap: defined as a gap

between between what the public canreasonably expect auditors to accomplish andwhat they are perceived to achieve.


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The audit expectation-performance gap can befurther divided into:

The deficient standards gap: a gap between theduties which can reasonably be expected of

auditors and auditors existing duties as definedby law and professional promulgations.

The deficient performance gap: a gap betweenthe expected standard of performance of

auditors existing duties and auditors perceivedperformance, as expected and perceived bysociety.


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Dr. Noor Adwa Sulaiman

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