Enhance Audit Quality Research Articles

The Implementation of the KAM Reforms in Saudi Arabia: Stakeholder Perspectives on the Audit Expectations Gap

ABSTRACTThis exploratory study investigates the implementation of key audit matters (KAM) in audit reports under ISA701 to better understand how KAM disclosures may help narrow the audit expectations gap. The study draws on findings from semi‐structured interviews with 28 professional stakeholders from the Kingdom of Saudi Arabia (KSA). The study's aim was to explore the relationship between KAM disclosures and the audit expectations gap considering audit quality concerns. Our findings reveal that (i) financial statement users report that they better understand what the auditor does, which enhanced their confidence in the audit process; and (ii) at least some financial statement users report that KAM disclosures provide new information about companies' risks that management was not already providing. We further report that many interviewees (particularly Big Four external auditors) indicated that the KAM reforms did not enhance audit quality in KSA. Interestingly, a small number of non‐Big Four auditors believed that KAM disclosures have enhanced audit quality. The key message is that the KAM reforms did not necessarily improve audit quality but that they are perceived to have played a role in further narrowing the audit expectations gap and reducing the need for communication, thus creating market efficiencies.

International Standard on Auditing (220), Quality Management for an Audit of Financial Statements, and its Role in Enhancing Audit Quality (A Field Study on some Audit Offices in Sudan)

The main objective of this study is to know the role of the International Standard on Auditing (220) in enhancing the audit quality. To achieve this goal, (170) questionnaires were distributed to the study population which represented in some audit offices in Sudan, and (150) questionnaires were retrieved and analyzed. The study relied on the inductive approach and descriptive analytical approach. The study found several results, among which is, the audit office adopts policies and procedures for what can be consulted in meetings that, contribute to enhancing audit quality, and continuous monitoring of the progress of the audit process enhances the quality of the audit. The study concluded with a number of recommendations, the most important of which is that, necessity of spreading the culture of audit quality and its positive results among external and internal auditors in the Sudanese environment through workshops, seminars and scientific conferences.

Competition and Certification: Theory and Evidence from the Audit Market

Abstract We study how financial certifier competition influences loan contracting in the context of financial auditing. Exploiting the unexpected demise of Arthur Andersen that exogenously decreased auditor competition, we find a greater decrease in loan spread for borrowers in markets in which certifier competition declined more. Additional analyses suggest the result stems from enhanced audit quality and reduced credit risk. The effect of certifier competition is stronger for borrowers with weaker external monitoring and those generating significant revenue for their auditors. Our evidence highlights negative consequences of financial certifier competition. (JEL D43, G21, M42, M49)

The effect of high-quality information technology on audit quality

Information Technology (IT) is changing the working environment and working process of clients and auditors. High-quality IT can enhance data accuracy, completeness and security, and automate data collection procedures. These attributes are important to auditors as their work highly relies on the quality of data. Using data from 2005 to 2013, this study provides empirical evidence showing that high-quality IT significantly enhances audit quality and reduces audit efforts. This study contributes to the stream of literature on IT quality and audit efficiency and can help managers understand how IT investments improve their data quality and audit quality.

Intelligent manufacturing, auditor selection and audit quality

PurposeThe purpose of this paper is to examine the influence of intelligent manufacturing on audit quality and its underlying mechanism as well as the variation in this influence across different types of organizations.Design/methodology/approachThis research utilizes a difference-in-differences (DID) method to examine how enterprises that apply intelligent manufacturing choose auditors and impact their audit work. The study is based on 15,228 observations of Chinese-listed A-shares from 2011 to 2020.Findings(1) There is a strong correlation between intelligent manufacturing and audit quality. (2) This positive correlation is statistically significant only in state-owned enterprises (SOEs), those that have steady institutional investors and where the roles of the CEO and chairman are distinct. (3) Enterprises that have implemented intelligent manufacturing are more inclined to employ auditors who possess extensive industry expertise. The auditor's industry expertise plays a crucial role in ensuring audit quality. (4) The adoption of intelligent manufacturing also leads to higher audit fees and longer audit delay periods.Practical implicationsThis paper validates the beneficial impact of intelligent manufacturing on improving corporate governance. In addition, it is recommended that managers prioritize the involvement of skilled auditors with specialized knowledge in the industry to ensure the high audit quality and the transparency of information in intelligent manufacturing enterprises.Originality/valueThis study builds upon previous research that has shown the importance of artificial intelligence in enhancing audit procedures. It contributes to the existing body of knowledge by examining how enterprise intelligent manufacturing systems (IMS) enhance audit quality. Additionally, this study provides valuable information on how to improve audit quality in the field of intelligent manufacturing by strategically selecting auditors based on resource dependency theory.

The impact of industry technology complexity on audit quality

With the continuous upgrading of Chinese industries, industry technology complexity has increased dramatically, to which audited units and audit subjects have adaptive responses, affecting audit quality. However, relevant studies have not been conducted. This paper takes A-share listed companies from 2007 to 2021 as a sample to investigate the impact of industrial technology complexity on audit quality and its mechanism. It is found that industry technology complexity can significantly enhance audit quality; in enterprises at the front-end of industrial technology, industry technology complexity has a more significant role in promoting audit quality. Adopting the demonstration zone for the transfer and transformation of scientific and technological achievements as an exogenous impact policy, the study finds that the impact of industry technology complexity on audit quality still holds. Further research finds that the adaptation of audited units and audit subjects to industry technology complexity has a positive incentive effect on audit quality. The findings extend the audit consequences of industrial technology complexity and provide empirical evidence for the role of industrial technology complexity in enhancing audit quality.

Behind closed doors: unveiling earnings management in private subsidiaries of public firms

PurposeThis study examines the earnings quality of private-subsidiary firms using a large sample data from India.Design/methodology/approachThe impact of parent–subsidiary relationship on earnings quality is examined using two common proxies. Findings are robust to alternative research designs, including different earnings quality proxies, endogeneity and matching techniques.FindingsThe study finds that private firms that are subsidiaries of listed firms tend to have lesser (greater) earnings quality (manipulation). Further, the study reports that this relationship is more pronounced when the parent firm is relatively larger than the subsidiaries. The study finds no evidence that Big 4 affiliation of the parent company improves earnings quality among private subsidiaries; instead, it exacerbates earnings manipulation in some cases. Finally, the authors document that subsidiary firms use tax management, as proxied by book tax differences, to engage in income-increasing earnings manipulation.Research limitations/implicationsThis study examines how affiliation with a listed entity as a subsidiary impacts the earnings quality of private companies. Future research could investigate the financial reporting practices of both private subsidiary firms and standalone private firms, comparing them in similar or differing regulatory environments across various countries.Practical implicationsThe findings of this study will help investors, bankers, creditors and regulators to understand the financial reporting of private firms. The study calls for enhanced audit quality at the subsidiary level by making the auditor of the parent firm responsible for auditing a subsidiary, a practice that is currently absent in India.Originality/valueThe results contribute to the existing debate on how firms manage earnings using data of private firms in a large emerging market setting. Previous research has not paid enough attention to the earnings quality of private subsidiaries. The study also emphasizes the necessity for a more robust system of governance and supervision for private firms, particularly in India and generally in other countries.

Faktor-faktor Yang Memengaruhi Kualitas Audit

This research aims to explore the factors influencing an auditor's audit quality. The researcher is interested in conducting an in-depth study to examine the impact of audit tenure, auditor switching, and audit firm size on audit quality. This study is quantitative descriptive research utilizing secondary data derived from financial statements and annual reports of property and real estate sector companies listed on the IDX during 2018–2022. The sample used in this study consists of 168 companies, which were analyzed using IBM SPSS Statistics 25. The results of this study indicate that auditor switching significantly and positively influences audit quality. This suggests that auditor switching serves as a mechanism to maintain a less tight relationship between clients and auditors, thereby preserving auditor independence and ultimately enhancing audit quality. Conversely, audit tenure and audit firm size do not significantly affect audit quality.

Does Convergence with International Standards on Auditing Improve Audit Quality?

ABSTRACT Many countries have converged their domestic auditing standards with International Standards on Auditing (ISA). This study provides global empirical evidence on first-order determinants of audit quality by examining whether and how convergence affects audit quality through utilizing data on 41 jurisdictions and using a staggered difference-in-differences approach. We find that ISA convergence leads to higher audit quality on average. The positive effect is stronger for clients of domestic audit firms, in jurisdictions with stronger enforcement, and when the ISA convergence level is higher. Insights from textual features suggest that changes in principle-orientation, comparability, readability, and size (or length) of auditing standards are positively related to audit quality. Exploratory analyses of textual content using machine learning reveal that the emphases of ISA on going-concern assessment and legal compliance, fraud risk assessment and internal control evaluation, and related-party transactions and subsequent events contribute to enhanced audit quality. JEL Classifications: M40; M42; M48.

Audit firm informatization and audit quality during COVID-19

PurposeCOVID-19 has forced audit firms to change the way they operate. One change has been to rely more on information technology (IT) and IT human capital to overcome COVID-19-related challenges. We refer to audit firms’ use of these two resources as audit firm informatization (AFI). It is important to understand whether AFI helps audit firms address challenges created by the pandemic. Thus, this study examines the impact of AFI on audit quality during the COVID-19 pandemic in China with a focus on IT human capital.Design/methodology/approachWe use a mixed-methods approach. First, we perform multivariate regression analyses on archival data. Specifically, we investigate the relationship between IT human capital and audit quality and the two mechanisms (i.e. improved efficiency and reduced audit risk) underlying the relationship. We also investigate how this relationship is moderated by features of clients, audit firms and individual auditors. Then we use interviews to corroborate the results of our regression analyses.FindingsOur analyses of archival data show that IT human capital positively affects audit quality through improved efficiency and reduced audit risk and that this positive impact is more pronounced for clients in non-manufacturing industries, those with a more opaque information environment, audit firms with greater industry coverage and individual auditors with less experience. Our interview data indicate that audit firms with more advanced AFI and a higher level of IT human capital in particular are less disrupted by the pandemic and are better able to use IT to address challenges associated with COVID-19. Furthermore, the results confirm that improved efficiency and reduced audit risk are the mechanisms through which AFI enhances audit quality. Finally, we identify issues associated with the use of IT.Originality/valueThis study is the first to investigate how IT human capital (and by extension AFI) influences audit quality in the context of the COVID-19 pandemic. Our findings should be of interest to practitioners and setters of auditing standards.

Leader versus lagger: How the timing of financial reports affects audit quality and investment efficiency

AbstractThis paper examines how relative timing affects the quality of financial reports in a staggered reporting system in which some firms report earlier than others. We show that the audit quality of the leading firm exceeds that of the lagger. Investment efficiency also differs systematically across firms, depending on the relative reporting timing as well as the audit market structure. Audit regulations mitigate the misalignment of interests between auditors and investors but limit the effect of information spillovers. We characterize the socially optimal auditing standards and show how and why imposing minimum audit quality requirements complements and/or substitutes for adjusting auditors' legal liability. Overall, we show that a staggered reporting system dominates a simultaneous reporting system in enhancing audit quality and investment efficiency through regulation.

Unveiling the Nexus: Audit Quality and Financial Reporting in Sharia Banks—An Analysis of Non-Financial Matrix

This research investigates the impact of auditor experience and ethical perspectives on audit quality and financial reporting in Sharia banks in Indonesia. Utilizing a quantitative approach and employing Partial Least Squares Structural Equation Modeling (PLS-SEM), the study reveals a positive and significant relationship between auditor experience and both audit quality and the quality of financial reports. Ethical perspectives of auditors are also found to positively influence these outcomes. The findings highlight the importance of investing in auditor expertise and ethical considerations to ensure the integrity and reliability of financial information in Sharia banks. The study contributes valuable insights for practitioners and policymakers in the Islamic finance sector, emphasizing the crucial role of auditor experience and ethical perspectives in enhancing audit quality and financial reporting in Sharia banks.

Enhancing The Excellence of Quality Management System Auditors: A Competency-Based Training Model with Instructional Design Strategic Approaches and Measurable Outcomes

The development and implementation of a competency-based training model for Quality Management System (QMS) auditors are crucial for enhancing audit quality and organizational performance. This study identifies and addresses gaps in current auditor training programs through a structured approach that includes clear instructional goals, effective assessment tools, and robust instructional strategies. The research utilizes Training Needs Analysis (TNA) data and aligns training objectives with industry expectations through Occupational Standards and Competency Standards. Learning outcomes are formulated using the ABCD method (Audience, Behaviour, Condition, Degree) to ensure clarity, measurability, and achievability. The training program employs Outcome-Based Learning and Teaching (OBLT) methodologies, ensuring that the focus remains on achieving specific competencies. Self-assessment based on competency standards encourages reflective learning and self-improvement, while competency-based assessments measure the effectiveness of the training and the skills acquired by participants. The program culminates in the awarding of Micro Credentials and Certificates of Competency, which are traceable to national and international standards, thereby validating the skills and knowledge gained. Through rigorous testing and evaluation involving experts, educators, and participants, the study refines the training model to ensure its effectiveness and relevance. The findings indicate that the competency-based training model significantly improves the skills and performance of QMS auditors, leading to more effective audits and continuous quality improvement within organizations. This research contributes to the field by providing a comprehensive, evidence-based approach to developing high-quality training programs for QMS auditors.

The impact of the non-audit fee cap on audit quality in European public interest entities

The European audit reform of 2014 imposes, inter alia, a cap on the fees of non-audit services (NAS) for Public Interest Entities (PIEs). Prior academic findings do not provide consistent evidence that NAS impair auditor independence, and it is thus unclear whether a cap effectively enhances audit quality. Our study examines the impact of this cap on audit quality for listed PIEs across the EU from 2013 to 2018. We find that the cap decreased earnings management and increased audit fees for affected PIEs, i.e., those that exceeded the 70% cap before the reform, compared to unaffected PIEs. We document that the effect occurred immediately, persisted in 2017 and 2018, and was driven by companies with non-audit fees exceeding their audit fees before the reform. Furthermore, we show that the improvement in audit quality post-regulation is generally more pronounced in the sample of Big 4 clients.

Investigating the impact of adopting big data and data analytics on enhancing audit quality

Purpose This study aims to empirically investigate the impact of adopting big data and data analytics (BD&A) on audit quality (AQ). Design/methodology/approach A questionnaire was distributed among audit practitioners working at audit firms in Egypt and 205 responses were collected. Partial least square structural equation modeling (PLS-SEM) was used to analyze and test research hypotheses. Findings The results reveal that BD&A has a direct significant positive effect on the audit process (AP) and auditor competence (AC). However, an insignificant impact of BD&A is found on audit fees (AF). In addition, the results indicate that BD&A has significant positive direct and indirect impacts on AQ. Research limitations/implications The results of this study will benefit several auditing stakeholders, such as audit firms, audit regulators, novice financial auditors and academic scholars. Originality/value This research is one of the earliest to empirically address the role of BD&A in enhancing AQ. It incorporates AP, AC and AF as mediators into a single model to explain the impact of BD&A on AQ. Also, it attempts to provide empirical evidence from a developing country with a less-regulated audit environment.

PELAKSANAAN STANDAR OPERASIONAL PROSEDUR AUDIT, TANTANGAN HINGGA PELUANG AUDITOR DALAM MENINGKATKAN KUALITAS AUDIT PASCA COVID-19

In the current post-Covid-19 era that we are facing, auditors are confronted with a series of challenges. Changes in the business environment, shifts in risks, and alterations in how companies operate have affected the way audits are conducted. This research aims to investigate how the implementation of audit standard operating procedures, challenges, and opportunities faced by auditors contribute to improving audit quality post-Covid-19. Qualitative research methods are utilized in this article to explore and analyze various perspectives, concepts, and findings present in relevant literature. The data sources include primary and secondary data. Primary data is obtained from interviews conducted by the author with informants directly (face-to-face), while secondary data is derived from documents and previous research via Google Scholar, which can complement primary data and provide an overview in achieving the research objectives. The results indicate that the Covid-19 pandemic has impacted various aspects of the implementation of audit standard operating procedures, presenting challenges and opportunities for auditors to enhance audit quality post-Covid-19. The pandemic's impact on the business and financial landscape cannot be ignored, and auditors must be prepared to navigate these changes wisely. By understanding and responding to challenges and leveraging emerging opportunities, the auditing profession can continue to contribute to trust and transparency in corporate financial reporting in the future. In essence, audit quality will remain a cornerstone in safeguarding the integrity of financial markets post-Covid-19.

A panel data analysis of the effect of audit quality on financial statement fraud

PurposeFinancial statement fraud has become a global concern, and auditors are increasingly focused on identifying and investigating it. Auditors may play a crucial role in investigating and reducing financial statement fraud, and this is particularly important in developing countries where fraudulent practices are more prevalent due to the lack of strict regulations and oversight. This study investigates whether enhanced audit quality has an impact on reducing financial statement fraud. The primary aim is to recognize whether a higher level of audit quality relates with a decrease in fraudulent activities in Indonesia, which is one such country that has not yet adopted IFRS.Design/methodology/approachThis study investigates the effect of audit quality, as measured by audit tenure, audit fee, and audit size, on the dependent variable of financial statement fraud, as indicated by Dechow F-value. The sample for this study comprises 951 observations from 2015 to 2020, and the research design utilizes a panel data approach. To test the main hypothesis, OLS, and GMM estimation techniques are employed.FindingsThe analyses reveal a negative relationship between audit tenure and financial statement fraud. This suggests that shorter audit tenure may be associated with an increased risk of financial statement fraud. This heightened risk could stem from auditors having limited time to thoroughly understand the company's operations and internal controls, potentially making it more challenging to detect and prevent fraudulent activities perpetrated by the client. Conversely, a positive relationship is identified between audit fees and financial statement fraud, suggesting that companies paying higher fees may be engaging auditors less adept at detecting fraudulent activities. Furthermore, a negative relationship is observed between Big-5 and financial statement fraud, which may be due to the greater resources, expertise, quality control, scrutiny, reputation, and ethical conduct of Big-5 audit companies.Research limitations/implicationsThis study only focused on listed companies in Indonesia, therefore, caution should be exercised when generalizing the findings to other developing and Muslim countries such as Malaysia. The findings may differ due to the adoption of IFRS in Malaysia. As such, it is important for future studies to include Malaysia as a sample and compare the results with those of Indonesia. This comparison would demonstrate the impact of IFRS adoption on the relationship between audit quality and financial statement fraud and provide insights for policy makers in Indonesia.Practical implicationsThe findings of this study have important implications for developing countries that have been shown to be more susceptible to fraud than developed countries. This study contributes to the existing research on the role of audit quality in reducing financial statement fraud and emphasizes the need for auditors and accountants to take a proactive approach in detecting and investigating financial fraud.Originality/valueThis study is a new study because it investigates the relationship between audit quality and financial statement fraud in Indonesia, a developing Muslim country that has not yet adopted International Financial Reporting Standards (IFRS). The study provides valuable evidence on the unique factors that influence fraud in Indonesia and fills a gap in the literature as previous studies on this topic have largely focused on developed countries. Additionally, the study recommends that policymakers in Indonesia consider implementing IFRS to improve the reliability of financial reporting and strengthen the effectiveness of the auditing process, thus reducing the incidence of fraud.

Pengaruh Profesionalisme dan Akuntabilitas terhadap Kualitas Audit (Studi Literature Review)

The objective of this study is to examine how auditor professionalism and accountability impact audit quality through a literature review employing a qualitative methodology. Data were gathered from five national journals sourced from Google Scholar and scrutinized for data processing. The analytical process aimed to derive conclusions from the test outcomes to assess the influence of professionalism and accountability on audit quality. In general, most research findings support a positive correlation between auditor professionalism and audit quality, though several studies suggest variations indicating that professionalism may not consistently enhance audit quality. It is widely recognized that accountability generally contributes positively to audit quality, despite discrepancies found in certain studies.

The role of blockchain in auditing processes: A review and future perspectives

This review paper critically examines the transformative impact of blockchain technology on auditing processes. Through a comprehensive analysis of existing literature, it elucidates how blockchain can enhance audit quality, mitigate fraud, ensure data veracity, and navigate the complex landscape of regulatory compliance and ethical considerations. The review highlights the early stages of blockchain adoption in auditing and the evolving nature of the technology, emphasizing the need for further empirical research and case studies. It also underscores the importance of regulators, auditors, and technology experts collaborating to develop comprehensive guidelines and standards for responsible blockchain integration. The paper contributes to the academic discourse by bridging the gap between traditional auditing methodologies and the emerging blockchain paradigm, offering valuable insights for auditors, regulatory bodies, policymakers, and organizations.

Persepsi Auditor Eksternal Atas Pengaruh Kemudahan dan Kegunaan Artificial Intelligence Terhadap Kualitas Audit

This study aims to investigate external auditors' perception of the impact of artificial intelligence's ease of use and usefulness on audit quality, while also examining the potential scepticism among external auditors towards the integration of artificial intelligence in the audit process. A quantitative approach is utilized to analyze the relationship between the variables. The research was conducted through questionnaires distributed via telegram and WhatsApp groups, email, and collaboration with IAPI. One hundred and eight valid responses were gathered from external auditors of Big Four KAP, internationally affiliated KAP - non big four, and national KAP. Findings reveal that external auditors do not exhibit a sceptical attitude towards the usage of artificial intelligence in the audit process. The test results demonstrate that external auditors' perceptions of the ease of using artificial intelligence aids in enhancing audit quality. Similarly, gauging external auditors' perceived usefulness or benefits of artificial intelligence can also lead to improved audit quality. This study's sample is limited to external auditors of financial statements at public accounting firms, and therefore the findings should not be extended to other types of auditors such as government or internal auditors. This study offers external auditors a thorough comprehension of how artificial intelligence contributes to the audit process to improve audit quality. The necessity for external auditors to improve their technical skills arises due to the increased utilization of big data by businesses. Hence, universities must provide graduates with competence in not only accounting and auditing but also the latest technology.