Establishing cause-and-effect relationships in the audit report as a key criterion for the value of internal audit

SUMMARYRecently, the International Auditing and Assurance Standards Board (IAASB) solicited public comments on its proposal to improve the current format of the auditor's report under International Auditing Standards. This commentary summarizes the contributors' views on the various alternatives proposed in the IAASB proposal, entitled, Improving the Auditor's Report. The invitation to comment (which invited comments through October 8, 2012), with links to the proposal, is available at: http://www.ifac.org/publications-resources/improving-auditor-s-report. Our comments submitted to the IAASB appear below.

The International Auditing and Assurance Standards Board (IAASB) implemented new auditing standards which became effective on December 15, 2016, which require auditors to disclose Key Audit Matters (KAM) in their reports. KAM was initiated by the International Auditing and Assurance Standards Board (IAASB) as an international auditing standard setting body, which aims to increase the transparency of audited financial reports. This study uses qualitative and quantitative methods which use secondary data sources. The secondary data used in this study is in the form of financial reports obtained from the Indonesia Stock Exchange (IDX) via the internet. Based on the results of data analysis of the financial statements of PT Bank Amar Indonesia Tbk Q2 of 2022, in the independent auditor's report, the main audit item disclosed is the allowance for impairment losses on loans. Based on data obtained from the Indonesia Stock Exchange (IDX), the share price per share at the end of the fourth quarter of 2021 and the share price on June 30, 2022, has fluctuated. It was concluded that in the period following the issuance of the Q2 2022 financial statements with the existence of an independent auditor's report disclosing key audit matters facilitated the flow of company-specific information to the market.

Traditional audit reports express audit opinions only by standardized texts, which makes them lack of value. In December 2016, the Ministry of Finance issues 12 new auditing standards, which include Communication of Key Audit Matters in the Independent Audit Reports, aiming to improve the information of audit reports and to reduce the information gap between companies and investors. A+H share listed companies are required to implement the new auditing standards from January 1, 2017. Many scholars study the impact of the new auditing standards on audit report users, such as investors, auditors, etc. (Louis-Philippe, et al., 2014; Christensen, et al., 2014; Wang and Li, 2019). Compared with general report users, analysts as information seekers and interpreters of the capital market (Chen and Liu, 2017), are more professional and sensitive to accounting and auditing information. Due to the high cost of private information acquisition for majority analysts, public information, such as annual reports and audit reports, is the primary source of information. The new auditing standards require auditors to disclose more audit information, especially the disclosure of key audit matters. It improves the information environment of the capital market by increasing the disclosure of the select reason of key audit matters, how to deal with them and the specific audit procedures. Then, can the implementation of the new auditing standards improve the information environment of the capital market by requiring auditors to provide more audit information, which in turn affects the accuracy of analysts’ earnings forecast? Based on the differences in the time and scope of the implementation of the new auditing standards, we use a difference-in-differences model to study the impact of the implementation of the new auditing standards on the accuracy of analysts’ earnings forecast. The study finds that the implementation of the new auditing standards improve the accuracy of analysts’ earnings forecast at the firm level, and the more key audit matters are disclosed in audit reports, the more significant this effect is. Further analysis shows that: (1) The implementation of the new auditing standards mainly reduces analysts’ optimistic bias forecast. (2) The implementation of the new auditing standards improves analysts’ earnings forecast accuracy at the individual level. (3) The implementation effect of the new auditing standards is more significant in companies with low information transparency. The contributions of this paper are as follows: (1) Using the exogenous event of auditing standard reform, this paper confirms that institutional changes can improve the information environment of the capital market, and further improves the accuracy of analysts’ earnings forecast, which enriches the relevant literature on the influencing factors of analysts’ behaviors (Bradshaw, et al., 2010; Wang and Wang, 2012). (2) This paper provides new empirical evidence on the policy effect of the implementation of the new auditing standards (Lu and Zhang, 2018; Wang, et al., 2018; Wang and Li, 2019), and responds to Defond and Zhang (2014) for the awareness of new audit reports and their value. (3) The documents on analysts are lack of study at the individual level, while this paper provides an analysis of heterogeneity at the individual level, which complements the research on individual analysts and their predictive behaviors. (4) This paper gives a positive evaluation of the new auditing standards’ implementation effect, and provides references and suggestions for the follow-up improvement of the auditing standards. This paper verifies the impact of the implementation of the new auditing standards on the information environment of the capital market. It has some implications for policy-makers and analysts. On the one hand, the conclusions of this paper are helpful for policy-makers to evaluate the policy effect of the new auditing standards. On the other hand, there are some implications for analysts. First, improve the ability of analysts themselves, so as to enhance the influence of analysts in the capital market. Second, strengthen the overall construction of the analyst industry, enhance the overall capacity of the industry, and ensure the healthy development of the analyst industry.

Improvement of Auditing Procedure Following the 2008 Financial Crisis

The key audit matters (KAM) have been included in the independent audit process recently and are recognized as an application to make the independent audit process more effective. Above all, the global financial crises experienced, and the complex nature of the financial transactions have revealed new quests in the audit process. In this context, the International Auditing and Assurance Standards Board (IAASB) published the "Communicating Key Audit Matters in the Independent Auditor's Report" (ISA 701) standard to make the independent audit process more efficient and meet the expectations of the stakeholders. By this article, the Public Oversight, Accounting and Auditing Standards Authority has published the independent audit standard 701, which includes the communicating of key audit matters in the independent auditor's statement. With the publication of the standart, identifying key audit matters in the audit process and specifying them in statements has also started. In this study, the audit reports (key audit matters) prepared by independent audit firms since 2017 when the mentioned standard came into force were analyzed within a three-year process, unlike previous academic studies in the BIST Manufacturing sector. In this respect, the study has addressed the development of key audit matters over three years and comparatively analyzed the change/transformation of key audit subjects in independent audit statements over the years on a company basis.

The Turkish Court of Accounts’ regularity reports released after the audits of the public universities conducted in 2012–2018 covering 87% of them in total (103 public universities in 2012 and 129 in 2018) were examined in terms of their compliance with the international audit standards set by INTOSAI. No university name is mentioned in the report. Our goal is to understand the audit findings and draw university administrators’ attention to the findings. Although the Turkish Court of Accounts classified its audit findings as “affecting the audit opinion” and “not affecting the audit opinion”, the audit opinion did not change, which does not match the INTOSAI international audit standards. The Turkish Court of Accounts neither gave an adverse audit opinion nor issued a disclaimer of opinion. The Turkish Court of Accounts is observed to audit the public universities on a continuous basis and at a high rate. In line with the international audit standards, the audit reports were found to require a qualified opinion of 50.7% and an unqualified (positive) opinion of 49.3%. Especially in 2017, 76.2% of the institutions should have been given qualified audit reports. On average, 69.37% of the audited institutions had findings that did not affect the audit opinion, and 49.81% had findings that affected the audit opinion. Some of the audit findings fit in with the description of fraud. The findings that may fall within the scope of error and fraud are not even classified. The number of institutions with audit findings has increased over the years, which reveals that neither the findings are understood properly nor the due attention is paid to them. It was determined that the regularity audit reports do not comply with the continuity, consistency and full disclosure principles, among the fundamental principles of accounting. The fact that the Turkish Court of Accounts shares all audit reports with the public is an indicator of its transparency and impartiality. The Turkish Court of Accounts performs an important task on behalf of Turkish Grand National Assembly (TBMM), and it is an institution that everyone needs. The Turkish Court of Accounts should not be weakened. However, the Court must distinguish between classification, consistency, error and fraud, and to reflect its opinion accordingly. It must also follow the INTOSAI audit opinion standards.

This article discusses the development of auditing standardization based on Islamic principles as formulated by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), headquartered in Bahrain.The study aims to critically analyze AAOIFI approaches and compare them with global audit standardization practices conducted by the International Auditing and Assurance Standards Board (IAASB) under the International Federation of Accountants (IFAC).Using methods such as comparison, analysis, and synthesis, as well as logical and systemic approaches, the authors examined two groups of auditing standards, IAASB and AAOIFI, highlighting their differences.Findings reveal that current AAOIFI standards, such as Auditing Standard for Islamic Financial Institutions ASIFI 1 “Objectives and Principles of Audit” and ASIFI 2 “Audit Report,” have been in use for about 25 years. These standards are outdated and require urgent transformation. The proposed AAOIFI Standard on Auditing (SOA) 1 “Audit Foundations” seeks to consolidate existing standards but risks being excessively bulky and less comprehensible compared to IAASB standards.The authors recommend leveraging IAASB’s experience to adapt the AAOIFI standards, including the creation of an AAOIFI Assurance Tasks Concept akin to IAASB’s international concept, enabling clarity and accessibility for global auditing professionals while adhering to Islamic principles.

Background: The article focuses on inconsistencies in audit approaches when auditors place reliance on the work performed by others. It examines differences in the approach followed by auditors when relying on the work of a predecessor versus the work of an auditor’s expert.Setting: The study contributes to the limited body of auditing research focusing on the technical application of International Auditing Standards and the functioning of actual audit practice in a South African context. It outlines how auditors apply their professional judgement when using technical auditing standards when comparing the work of a similarly trained expert in the field of accounting and auditing (per ISA510) versus the work of an expert in a field other than accounting and auditing (per ISA620).Aim: The purpose of this article is to examine and identify inconsistencies in the interpretation and application of ISA510 and ISA620 by a purposefully selected number of registered auditors in South Africa. It considers how inconsistencies in the approach followed when an auditor places reliance on the work of another auditor or an auditor’s expert points to underlying efforts to seek legitimacy and manage legal liability.Method: Detailed interviews are used to explore auditors’ experiences and challenges with the application of these two ISAs.Results: Audit quality is not necessarily a function of compliance with professional standards. While ISA510 and ISA620 deal with a situation where an auditor places reliance on the work of a third party, they are interpreted and applied very differently.Conclusion: The application of ISA510 is part of a rules-based approach to auditing aimed at reducing an auditor’s legal liability rather than enhancing audit quality. The same logic applies to ISA620 except that auditors perceive that their risk exposure is lower because the standard is limited to a single transaction or balance rather than to the entire audit engagement. The application of ISA620 is also useful for convincing internal reviewers, external regulators or audit committees that sufficient appropriate evidence for a complex line item has been obtained. The need to ensure a more robust process for testing complex balances and transactions is not, however, the primary consideration. Regulators and standard setters should not assume that compliance with auditing standards results in better quality audits. At the operational level, the need to manage legal liability and to signal the credibility of test procedures may be more relevant for the execution of audits than ensuring that audit opinions are supported by sufficient appropriate audit evidence. As only two standards, applied in a single jurisdiction, are used to illustrate this point, additional research will be required to determine the extent of inconsistency in the application of auditing standards and how this can result in lower levels of audit quality.

We examined the nexus between four internal audit functions (IAF) and sustainability audits (SA) of manufacturing firms. The specific IAF employed in this study were; risk management practices (RMP), sustainability sensitivity (SS), internal audit effectiveness (IAE) and enactments, policies, standards, systems and procedures (EPS). In line with the four measures of IAE, the study puts forward to investigate four research hypotheses. The explanatory research design and quantitative research approach were applied to achieve the study’s objective. A sample of 1340 managers of SMEs were invited to complete a standard questionnaire based on extensive evaluations of prior empirical investigations. The samples were chosen using a straightforward random process from a population of 2495 manufacturing companies. The results were estimated using the partial Least Square Structural Equation Modelling (PLS-SEM) method. Findings from the study divulged that internal audit effectiveness, risk management process and sustainability sensitivity had significant positive relationship with sustainability audits. It is important for the creation of an audit department, the hiring of a permanent internal auditor, the provision of suitable logistics, the training of personnel on the value of internal audit, and the use of internal auditing standards and principles in the report-writing process for an enhanced sustainability audit.

SYNOPSIS The Public Company Accounting Oversight Board (PCAOB), the International Auditing and Assurance Standards Board (IAASB), and the U.K. Financial Reporting Council (FRC) have proposed or approved standards that significantly change the independent auditor's report. These initiatives require the auditor to make additional disclosures intended to close the information gap; that is, the gap between the information users desire and the information available through the audited financial statements, other corporate disclosures, and the auditor's report. They are also intended to improve the relevancy of the auditor's report. We augment prior academic research by providing standard setters with an updated synthesis of relevant research. More importantly, we provide an assessment of whether the changes are likely to close the information gap, which is important to financial market participants and other stakeholders in the audit reporting process. Also, we identify areas where there seems to be a lack of sufficient research. These results are of interest to all stakeholders in the audit reporting process, as the changes to the auditor's report are fundamental. Additionally, our summaries of research on the auditor's report highlight where there is limited research or inconsistent results, which will help academics identify important opportunities for future research.

SYNOPSIS This article outlines proposed reforms to auditor reporting currently being considered by the International Auditing and Assurance Standards Board (IAASB), and other key national and transnational standard-setters and regulatory bodies. It adds to recent academic contributions on reforming the auditor's report by analyzing the 165 stakeholder responses to the IAASB's 2012 Invitation to Comment: Improving the Auditor's Report to determine levels of support for the IAASB's proposed reforms, and the differences, if any, between the views of various respondents based on stakeholder groups (e.g., audit and assurance firms, users, preparers, regulators, etc.) and regional classifications. Guided by insights from communication theory, our results show the levels of stakeholder support for the IAASB's proposed reforms addressing auditors' expectations, information, and communication gaps are mixed. The strongest overall support was for enhanced auditor reporting on other information attached to, or intended to be read with, the financial statements, and the least supported initiative was including additional information in the auditor's report about the auditor's judgments and processes. While overall there is generally consensus across both stakeholder groups and regions concerning the various questions investigated, we highlight where statistically significant differences between groups do exist. Notably, North American respondents were less likely to support a number of the IAASB's proposed reforms than their counterparts from other regions. Data Availability: The data used in this study are referred to on the IAASB's website.

The objective of the research work is to examine whether application of auditing standards do enhance the quality of external auditor’s performance. The research population for this work comprises of all external auditors in Ondo and Ekiti States. The primary source of data collection was employed and the stratified random sampling method was used to select the required sample size. The research instrument used for data collection was questionnaire and hundred (100) copies of questionnaire were administered and Eighty Six (86) were returned, representing 86%. The 4-point Likert scale was logically employed to assign number to the measure of the degree of intensity of the relationships among the variables and the ordinary least squares (OLS) was used. The study revealed that there was a positive relationship between the auditing standards and auditor’s performance and that auditor’s performance often depends on their competency and ability to comply with required auditing standards. It is therefore recommended that the audit report should be expanded beyond complying with all standards by including a statement about the auditors’ evaluation of the internal control mechanism and there should be need for more interpretations, clarifications and improvements in both International Auditing Standards (IASs) and the Nigerian Auditing Standards so as to enable auditors to improve more on their service deliveries Keywords : Accounting Standard, Auditing Standard, External Auditors and Auditor’s performance DOI: 10.7176/EJBM/12-21-05 Publication date: July 31 st 2020

PurposeThe purpose of this paper is to examine and evaluate the internationalisation of Australian auditing standards by analysing the submissions to the Auditing and Assurance Standards Board's (AUASB) strategic directions paper (SDP) and comparing the proposed and approved strategic directions frameworks of the AUASB.Design/methodology/approachA content analysis of the submissions to the SDP is conducted to identify the extent of support, and arguments for and against the proposed strategic directions. This study attempts to find a link, if any, between the proposed strategic directions, the views expressed by the stakeholders, and the final set of strategic directions issued by Australia's Financial Reporting Council.FindingsOverall, the final set of strategic directions released in April 2005 are consistent with the views expressed in the submissions, which support minimal divergence from International Standards on Auditing (ISAs) and using the ISAs as the base for developing Australian auditing standards. Major changes from the SDP include a requirement for the AUASB to undertake research and monitor auditing standards issued by national standard setters. However, the AUASB is no longer obliged to contribute to the international standard arena and need only have regard to any program initiated by the International Auditing and Assurance Standards Board.Research limitations/implicationsThe findings of this study provide an insight into the future of Australia's role in the international arena and increase awareness of stakeholders' views on the international harmonisation of auditing standards.Originality/valueWhile there have been several studies examining the international harmonisation of accounting standards, there is comparatively little research on the international harmonisation of auditing standards. This paper attempts to address this void, in part, and contribute to the literature on the convergence of auditing standards with ISAs.

IMPACT This article contributes to the policy debate on whether to standardize audit reports in public sector organizations. It offers useful insights that national regulators and standard-setters can consider when introducing new rules and standards in the audit regulatory space. Regulators and standard-setters interested in teasing out the professional support that auditors can offer should be aware of the need for a balance between standardization and freedom in preparing annual audit reports.

In order to adapt to the requirements of corporate governance, internal audit must enhance its value and innovate itself to meet new challenges. The value of internal audit mainly lies in the improvement of internal value rather than the improvement of quantitative value. The improvement of internal audit value must be aimed at risk management and internal control. The core of internal audit innovation is the innovation of audit concept and audit thinking mode, and the basic foothold should be on the innovation of audit content, which is the full coverage of internal audit. Full coverage of internal audit refers not only to the full coverage of the audited entity, but also to the full coverage of the audit content. Internal audit should not only be limited to the flow of funds, but should jump out of the small circle of financial audit and march into the decision-making audit and strategic audit. The scope of internal audit must be extended to all aspects of enterprise economic activities. Full coverage of internal audit requires that internal audit must be value-added internal audit aimed at increasing enterprise value, which is value chain audit. Based on the value chain analysis as the breakthrough point, putting the internal audit activity into the organization's value chain, the author put forward that the tentacles of the internal audit should be thoroughly all the value chain analysis, and according to the type of cost drivers respectively constructed three kinds of value-added internal auditing mode, the structured audit mode, process-based audit model and nodal audit model.