External Audit Function Research Articles

Exploring Shariah audit practices in zakat and waqf institutions in Malaysia

PurposeThis study aims to explore the current Shariah audit practices in zakat and waqf institutions in Malaysia.Design/methodology/approachA focus group discussion (FGD) with 38 zakat and waqf officers from 17 different zakat and waqf institutions in Malaysia was conducted. For reporting purposes, this study used a single-case study approach. The FGD was conducted and completed at the end of June 2021 via an online approach through Microsoft Teams.FindingsThe finding highlights the existing Shariah governance practices especially in terms of Shariah supervision roles, Shariah audit implementation in terms of Shariah audit scopes and common findings, Shariah audit competency, Shariah audit effectiveness especially the need for external Shariah audit function and Shariah audit issues and challenges faced in the implementation of Shariah audit practices.Practical implicationsThe study findings and recommendations are useful for zakat and waqf institutions as well as the State Islamic Religious Councils to enhance Shariah audit practices in Malaysia.Originality/valueThis study is among the pioneer studies that explore Shariah audit practices in zakat and waqf institutions in Malaysia.

The Role of the Account Governor in the Validity and Credibility of Information in the Financial Statements: Case Study of the Cement Company, Ain El Kabira, scaek, Setif

The study aims to identify one of the most important independent functions that the institution resorts to uponcompletion of the preparation of its financial statements to give an honest and true picture of its financialstatements, which is carried out by the account keeper according to an organized methodology that begins by examining the accounts and numbers contained in the financial statements and ends with the recording A final report in which he expresses his opinion on the accuracy and reliability of the accounting information. The study concluded that the external audit function is the mirror that reflects the truthfulness of the information contained in the financial statements, and this function has been widely spread because of its positive impact on the decisions taken by the managers who depend primarily on the company’s financial statements, especially inlight of the adoption of the governance policy in management. This was reflected in the orientations of the cement company, Ain Al Kabeera

Overseeing the External Audit Function: Evidence from Audit Committees' Reported Activities

SUMMARYRecently, in response to calls for more transparency, many firms have begun reporting the activities undertaken by their audit committees in overseeing the work of the external auditor. We use a composite measure of audit committees' reported oversight activities for a sample of S&P 1500 firms and examine the extent to which these reported activities are associated with audit quality. We find that when firms' audit committees report exerting strong oversight, they have higher audit quality as proxied by audit fees, discretionary accruals, the likelihood of meeting or beating earnings benchmarks, and restatements. We also find that the market reacts positively to reports indicating strong oversight, consistent with perceptions of higher audit quality. This study extends prior literature on audit committees by introducing a new comprehensive measure of audit committees' reported oversight activities and sheds light on how these activities map into audit quality.JEL Classifications: M41; M42; G18.

The impact of client use of blockchain technology on audit risk and audit approach—An exploratory study

Blockchain is claimed to disrupt the external audit function by enhancing the reliability of both external and internal audit evidence. This study examined the impact of client use of blockchain technology on audit risk and audit approach. It referred to the Australian Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement and van Buuren et al.'s continuum of audit approaches to frame semi‐structured interviews with 28 blockchain stakeholders including audit partners. The study found that blockchain clients are perceived to be riskier than other clients and that inherent and control risks are amplified. The audit approach is not definitive with two likely approaches: a combination of direct, indirect, account‐level and entity‐level evidence and an increase in indirect and entity‐level evidence. This study's findings are useful for audit practitioners, standard setters and regulators.

Money laundering control systems, external auditor specialization and tax haven use: An empirical analysis of U.S. multinational financial corporations

This study investigates the association between money laundering control systems (MLCS) and tax haven use based on a sample of U.S. multinational financial corporations (MFCs). We also examine the impact of external auditor specialization on the association between MLCS and tax haven use. We find that MLCS is significantly negatively associated with tax haven use. Our result is also economically significant. Based on our regression estimates, a one‐standard deviation increase in MLCS is associated with a decrease in tax haven use by around 2.75%. Additional analysis shows that external auditor specialization magnifies the negative association between MLCS and tax haven use. Overall, our study indicates that MLCS and the external audit function have important consequences for tax haven use by MFCs.

Earnings opacity and corporate governance for Chinese listed firms: the role of the board and external auditors

PurposeThe purpose of this paper is to investigate the relationship between corporate governance and earnings opacity in China.Design/methodology/approachTwo corporate governance mechanisms form the basis of the analysis: 1) the board of directors and 2) the external audit function. OLS regression analysis is employed on a large sample from 2000 to 2014 with 20,235 firm-year observations.FindingsCorporate governance is found to be associated with reduced levels of earnings opacity for Chinese listed companies. Furthermore, the association between corporate governance and reduced levels of earnings opacity strengthened after the implementation of various key reforms.Practical implicationsChinese regulators are advised to proceed with caution as not all Western approaches to corporate governance are transferrable to the Chinese setting.Originality/valueThis study contributes to the literature by analyzing broad latent constructs of corporate governance in addition to individual observable dimensions in order to reveal that various key reforms have been successful in strengthening the link between governance and reporting quality for Chinese listed companies.

Non-CPAs and Office Audit Quality

SYNOPSIS During the time surrounding the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years, consulting service lines of the large accounting firms have seen a dramatic resurgence and growth. Regulators have taken notice of, and expressed concern over, this renewed focus on consulting. The accounting firms claim that such services enhance audit quality, mainly due to the prominent role of non-accounting specialists in today's external audit function. This study examines whether the availability of non-CPAs in U.S. Big 4 firm offices is associated with audit quality. We find that greater access to non-CPAs in the office is associated with higher audit quality and conclude that office audit quality is not just a function of audit-specific human resources but also the availability of non-CPAs to support audit engagement teams. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources identified in the study.

An Analysis of Mandatory Auditor Rotation Requirements in South Africa in light of International Legislative Trends

An independent and objective external audit of companies is an integral element of sound corporate governance and of functional financial markets. The issues relating to auditor independence and objectivity have attracted considerable regulatory and public scrutiny in many leading jurisdictions. This is partly due to a general decrease in audit quality over the years as evidenced by high-profile accounting scandals and audit failures, both locally and internationally, as well as the vital role that an external audit is expected to play in ensuring transparency, accuracy and efficiency in the financial markets. In an attempt to restore confidence in the audit profession and to strengthen the independence of the external audit function for companies, legislatures in some leading jurisdictions have introduced a variety of regulatory strategies, including mandatory rotation of auditors in the form of mandatory audit partner rotation (MAPR) and/or mandatory audit firm rotation (MAFR). In this article, the author examines the adequacy of the current provisions of section 92 of the Companies Act 71 of 2008 regarding MAPR and the recently promulgated rule of the Independent Regulatory Board for Auditors (IRBA) on MAFR (the MAFR rule) in addressing the issue of mandatory auditor rotation in South Africa. The author considers whether the provisions of the Companies Act 71 of 2008 regarding MAPR and the MAFR rule are adequate to promote an independent and objective external audit function for companies, as well as transparency, efficiency and accountability, while providing certainty for companies and auditors. The author first examines some of the key principles and policy considerations relating to the external audit of companies – namely, the significance of audits and auditors in the financial markets as well as the value of auditor independence and objectivity. This is followed by an examination of the provisions of section 92 of the Companies Act 71 of 2008 regarding MAPR and the recently promulgated MAFR rule in light of legislative developments in the United States, Canada, the European Union, Australia and India regarding mandatory rotation of auditors and audit partners. Based on the lessons to be drawn from the experiences of the above jurisdictions, the author then makes recommendations for appropriate reforms for South Africa in this important area of company law. This is followed by some concluding remarks.

An examination of the Vietnamese emerging market economy: understanding how and why auditors have responded to the audit law reforms

AbstractUsing New Institutional Sociology (NIS), we seek to explain the variation between what was intended with the Vietnamese reforms to audit in 2011 and the actual practice, and why there is variation. This paper reports findings from interviews with 70 individuals representing identified groups of stakeholders in the market for audit and assurance services in Vietnam. Overall, the findings indicate that there still exist business risks for foreign companies that pursue trade and commerce in communist Vietnam, particularly where non‐Big 4 audit firms are involved in the external audit function, as in some cases auditor independence is most likely compromised.

Overseeing the External Audit Function: Evidence from Audit Committees’ Reported Activities

Although one of the most crucial responsibilities of audit committees is overseeing the audit process, we know very little about how audit committees fulfill this role and how their oversight impacts audit quality. Recently, in response to calls for more transparency, many firms have begun reporting their audit committees’ oversight activities. We create a composite measure that captures the extent of audit committees’ reported oversight over the external audit. We find that when firms’ audit committees report exerting strong oversight, they have higher audit quality as proxied by discretionary accruals, audit fees, the likelihood of meeting or beating earnings benchmarks, and restatements. We also find that the market reacts positively to reports indicating strong oversight, consistent with perceptions of higher audit quality. This study extends prior literature on audit committees by introducing a new comprehensive measure of audit committees’ reported oversight activities and sheds light on how these activities map into audit quality.

Rethinking agency theory in developing countries: A case study of Pakistan

We investigate if agency theory effectively explains agency conflict in the context of a developing country namely, Pakistan. Utilising data from 26 semi-structured interviews, we found that in Pakistan, there is no variation in risk preferences of principals (minority shareholders) and agents (majority shareholders). We also found that remuneration packages and board independence are not effective tools for governing owner managers in Pakistan. Thus, policy makers must shift their focus from soft internal governance mechanisms of appropriate remuneration and board independence. We propose for a rigorous external audit function, and appointment of independent directors and external audit firms by regulator.

Earnings Opacity and Corporate Governance for Chinese Listed Firms: The Role of the Board and External Auditors

This paper investigates the relationship between corporate governance and earnings opacity in China. Two corporate governance mechanisms form the basis of the analysis: i) the board of directors and ii) the external audit function. Employing a large sample from 2000 to 2014 with 20,235 firm-year observations, we provide evidence that corporate governance is effective at reducing earnings opacity for Chinese listed companies. Furthermore, we show that the role of corporate governance in constraining earnings opacity improved after the IFRS/ISA and Split-Share Structure Reforms. We contribute to the literature that seeks to understand the board function for Chinese listed companies by showing that, contrary to western economies, both CEO duality and gender uniformity are associated with higher levels of earnings quality. We also contribute to the audit quality literature by showing that an effective external audit function is an important governance mechanism for Chinese listed companies. Overall, these findings have regulatory implications by arguing that improved board and audit quality should enhance corporate reporting for Chinese listed companies; however, regulators must proceed with caution as not all western approaches to corporate governance are transferrable to the Chinese setting.

The perceived motivations behind the introduction of the law on external audit in Vietnam

PurposeOver the past 20 years, external auditing activities and practices in Vietnam have developed quickly. An important milestone is the first Law on External Audit No. 67/2011/QH12 which has been passed by the National Assembly of Vietnam on 29 March 2011. The purpose of this paper is to understand the perceived motivations in regard to the introduction of the Law on External Audit, through the eyes of various key stakeholders. There has been genuine public interest concerns regarding audit quality in Vietnam as prior academic research has indicated, and this is the first study to examine whether the new audit reforms where introduced specifically to deal with those concerns.Design/methodology/approachFace-to-face semi-structured interviews were conducted with 45 key stakeholders during 2014 in both Ha Noi and Ho Chi Minh City, Vietnam.FindingsThe study finds that the Law on External Audit was introduced because it holds the highest form of regulatory authority in Vietnam, and the lower level Decrees that existed before the law did not even detail the audit firms’ responsibilities resulting in low audit quality. Also, the new Law was introduced to add more credibility and trust in the external audit function in Vietnam, and to reduce unfair price competition. However, some of our findings indicate that the Governments’ motivations were not all purely public interest related. A theoretical framework is developed to evaluate whether these reforms are substantive enough in nature to effect public confidence in reported financial data and audits.Originality/valueExternal auditing plays a crucial role in any market-based economy. In a developing economy, audit quality is often perceived to be lower than in a developed economy. Therefore, it is not uncommon to observe governments in developing economies producing tighter regulations for the auditing and assurance market to help attract more foreign investment and to establish credibility and more trust. In Vietnamese context, the current study conveys that the new audit reforms not only were introduced with genuine public interest concerns but also were a mechanism to protect the government’s interests.

E-business audit: Advisory jurisdiction or occupational invasion?

This study sets out to examine the impact of technological change on the external audit function of e-businesses and, specifically, the professionals involved in executing it. Utilising semi-structured interviews combined with a questionnaire survey, this paper explores the possible implications of developments in e-business audit for financial auditors as a professional group. The findings suggest that the traditional authority enjoyed by external financial auditors is being, and will be, increasingly challenged by IT audit specialists. The role of the professional bodies, responsible for the education and training of financial audit professionals, in particular, is highlighted as key to the outcome if they are to fend off challenges in this growing arena and retain jurisdictional control.

Exploring milestones and rationales for the development of the audit methodology of the European Court of Auditors

The key objective of the article is to explore the evolution of the audit methodology of the European Court of Auditors, the external auditor of EU finances. The author identifies significant landmarks of the process, by splitting the whole period into three parts from its foundation until recent progresses. The research method applied is the consultation of the documents available at the Historical Archives of the European Union in Florence and the European Court of Auditors in Luxembourg (within the framework of the Postgraduate Research Grant Programme), and interviews with auditors of the Court and professionals who have the knowledge of the overall external audit. The article concludes that the Courts methodological framework reflects from all aspects the professional standards on auditing. Both the legal framework and the Courts institutional evolution highly influenced the development of the methodology. The outcome of the research later serves as a reference point to investigate whether a common methodology to EU funds across Member States is possible and of intention. This aspect is a fundamental prerequisite of the feasibility of the single audit concept in the context of the external audit function and internal control chain of EU funds.

The perceived effectiveness of audit committees in the South African public service

Audit committees have increasingly been recognised as an integral part of modern control structures and governance practices in both the private sector and public service. The audit committee is an integral element of public accountability and governance processes. It plays a key role in underwriting the integrity of corporate governance of a government department. The broad aim of this study is to investigate the status and function of audit committees in South African national government departments. The research question investigated in this paper is to determine whether audit committees in the public service are perceived to be effective in assisting accounting officers of government departments to discharge their responsibilities. The study concludes that the majority of audit committees in the South African public service are not perceived as ineffective in the performance of the required functions of committees. Audit committees can still improve their effectiveness in their performance of certain key functions in the areas of oversight over risk management, governance, financial reporting, internal control and support for the external audit function.

Governance factors affecting internal auditors' ethical decision‐making

PurposeThe purpose of this paper is to explore the ethical decision making of internal auditors and the impact of corporate governance mechanisms thereon. It also aims to explore whether ethical decision making is influenced by years of experience in internal auditing.Design/methodology/approachA total of 66 internal auditors were presented with five ethical dilemmas. For each scenario, a key element of corporate governance was manipulated to assess its impact on ethical decision making. These were audit committee support; management integrity regarding accounting policies; management integrity regarding pressure on internal audit; external auditor characteristics; and organisational code of conduct.FindingsParticipants were generally sensitive to ethical dilemmas but were not always confident that their peers would act ethically. A higher quality external audit function was positively associated with internal auditors' ethical decision making. However, the strength of other governance mechanisms did not appear to influence ethical decision making. Finally, more experienced internal auditors adopted a more ethical stance in some cases.Research limitations/implicationsThe sample was self‐selected and may not be representative of internal auditors in general. The lack of significant results may be due to insufficient variability in the manipulations and/or an oversimplification of reality in our scenarios.Practical implicationsThe study has implications for the internal audit profession with respect to training and the provision of support mechanisms to strengthen the ability of internal auditors to withstand pressure when dealing with ethical dilemmas.Originality/valueThis paper is the first to study whether the strength of other governance mechanisms influences internal auditors' ethical decision making.

Special issue on The future of the external audit function

Special issue on The future of the external audit function

Special issue on The future of the external audit function

Special issue on The future of the external audit function

Accounting firms cautiously maneuver in the new audit environment – a note

PurposeThis paper seeks to discuss the effect that the Sarbanes‐Oxley Act (SOA) had on both the nature of the external audit function and overall audit quality. Additionally, it aims to discuss how audit firms maneuvered through the newly regulated environment, and what their strategic actions are for the future.Design/methodology/approachThis discussion is based on interviews conducted with auditors from nine public accounting firms located in Northeast Ohio, United States of America. The sample consisted of five national and four regional firms, and the interviewees included mostly partners and a few senior managers.FindingsThe increased oversight and workload resulting from the SOA requirements has changed the nature of the external audit function to more compliance type work, and the environment has created much anxiety for the auditors. The new reform has significantly impacted the audit environment in terms of: scope of services; client assessment procedures; management and audit committee relationships with the external auditor; audit firm personnel management; and the long‐term outlook of the profession. The details of these impacts are discussed throughout the paper.Research limitations/implicationsThis paper provides detailed insight as to how the SOA impacted the audit profession. Hopefully, such an understanding will benefit future research in measuring the costs and benefits of the new reform. Lastly, a future research showed further examine the effect that the SOA has had on overall audit quality.Originality/valueThis paper summarizes the insightful comments obtained in structured interviews with several leading audit professionals. The sample was judged to be highly knowledgeable of the changing audit environment caused by the SOA. With an improved understanding of its impacts, regulators, practitioners, and academics can better assess the effectiveness of the SOA.