Showing papers on "Audit plan published in 2013"

Audit Quality: Insights from the Academic Literature

Abstract: This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality. Next, we summarize research on indicators of audit quality, such as inputs, process, and outcomes. Finally, we offer some suggestions for future research. The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.

The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process

Abstract: Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company’s operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and non-audit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process.

How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice

Abstract: Securities laws mandate public corporations to hire an independent auditor. Since the advent of such mandates, there has been a concern that auditors face a potential conflict of interest because they are hired and paid by the companies they audit (Mautz and Sharaf 1961). It is a challenge for regulators to strike the right balance between the auditors serving commercial versus professional interests (Zeff 2003; Barrett, Cooper, and Jamal 2005; Humphrey 2008; Suddaby, Gendron, and Lam 2009). Although some observers have advocated changing the auditor appointment process so the company does not select its own auditor (Mayhew and Pike 2004; Moore, Tetlock, Tanlu, and Bazerman 2006), regulators have not adopted this recommendation. Instead, regulators have sought to promote auditor independence by implementing a set of alternative remedies, such as mandatory audit partner rotation and enhanced audit committee responsibilities, expertise and independence. At present, regulators in Europe and the United States are considering an extension of rotation requirements to encompass audit firm rotation, rather than partner rotation. In this paper, we conduct a field study to investigate how regulatory reforms designed to promote auditor independence (specifically audit committee reforms and proposed audit firm rotation requirements) may actually work in the context of auditor change. The process of engaging auditors requires the prospective parties to exchange and evaluate information about each other. Theoretical analyses and regulatory reforms often assume that the relevant information is readily available — perhaps even common knowledge — to the contracting agents (Antle 1982). However, in practice there may be significant information asymmetries and power imbalances among agents that might hinder the objectives of regu-

Responses by Australian Auditors to the Global Financial Crisis

Abstract: We examine the impact of the global financial crisis (GFC) on auditor behaviour in Australia. Using a sample of listed companies, we examine whether the GFC impacted the propensity of auditors to issue going concern modifications and increased audit effort as reflected in audit fees and audit reporting lag. Controlling for client characteristics, we find an increase in the propensity to issue going concern opinions during the period 2008–2009 compared with the period 2005–2007 and that Big N auditors responded to the GFC earlier than non-Big N auditors. In relation to audit effort, we find evidence of increased audit fees during the period 2008–2009 compared with the period 2005–2007. There is, however, no evidence of increased audit reporting lags during the GFC.

Internal audit function, board quality and financial reporting quality: evidence from Malaysia

Abstract: Purpose – The purpose of this paper is to test the impact of the internal audit function (IAF), an increasingly common internal governance mechanism, on a firm's financial reporting quality. Specifically, this paper investigates the association between the quality of the IAF and abnormal accruals (as a proxy for financial reporting quality) and whether the board of directors play a role in moderating the relationship. Design/methodology/approach – This paper uses a unique dataset of survey responses and archival data. Regression analysis was used to test their hypotheses. Findings – Although their initial findings show an unexpected positive relationship between internal audit quality and abnormal accruals, this relationship is contingent on whether firms outsource their internal audit activities and/or whether they are politically linked. In estimations excluding outsourcing and political connections observations, this paper shows that the association between internal audit quality and abnormal accruals ...

Auditors' time pressure: does ethical culture support audit quality?

Abstract: Purpose – The purpose of this paper is to address the impact of ethical culture on audit quality under conditions of time budget pressure. The study also tests the relationship between ethical culture and time budget pressure.Design/methodology/approach – The study is based on a field survey of financial auditors employed by audit firms operating in Sweden.Findings – The study finds relationships between three ethical culture factors and reduced audit quality acts. The ethical environment and the use of penalties to enforce ethical norms are negatively related to reduced audit quality acts, whereas the demand for obedience to authorities is positively related to reduced audit quality acts. Underreporting of time is not related to ethical culture, but is positively related to time budget pressure. Finally, the study finds a relationship between two ethical culture factors and time budget pressure, indicating a possible causal relationship, but ethical culture does not mediate an indirect effect of time bud...

Independent audit committee members’ board tenure and audit fees

Abstract: An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.

Audit Partner Perceptions of Post-Audit Review Mechanisms: An Examination of Internal Quality Reviews and PCAOB Inspections

Abstract: SYNOPSIS: This study reports the results of a survey of 107 audit partners from large public accounting firms that investigates and compares partner perceptions of Public Company Accounting Oversi...

Informal Interactions between Audit Committees and Internal Audit Functions: Exploratory Evidence and Directions for Future Research

Abstract: This paper provides evidence on the prominence of informal interactions between audit committees and internal audit functions and exploratory evidence on factors associated informal interactions. The findings, based on a questionnaire survey of chief audit executives (CAEs) in the UK, suggest that in addition to formal pre-scheduled meetings, audit committees rely on informal interactions with internal audit functions to undertake their monitoring role. The evidence also shows that informal interactions have a positive significant association with both audit committee independence and the knowledge and experience of the audit committee chair. Emphasizing the need for further research to better understand the nature and quality of audit committees’ informal interactions the paper encourages further research focusing in particular on: (i) the effect of both audit committee and internal audit/CAE knowledge and objectivity on informal interactions; (ii) the nature, quality and variations in informal interactions; (iii) the antecedents and consequences of informal interactions; and (iv) the institutional and organizational contexts within which audit committees operate and within which informal interactions take place.

Determinants of Audit Report Lag and Corporate Governance in Malaysia

Abstract: Inevitably, an accurate and timely financial statement contributes enormously to the success of manyorganizations. Therefore, accuracy and availability about financial information is vital for investors andshareholders in order to ease their decision making process. This paper aims to analyze the relation between thecharacteristics of corporate governance; board independence, ownership concentration, audit committeeindependence, expertise, meeting, size, internal audit investment and audit report lag among companies listedunder Bursa Malaysia. The samples covered are among 180 companies listed at Bursa Malaysia for 2009 and2010. The samples were chosen randomly from 843 companies, the population. Descriptive statistics have beenused to provide better perception of the length of time needed by an auditor, to complete an audit. The resultsshow that in average, the companies took about 100 days to complete their audit report with maximum andminimum days of 148 days and 26 days respectively. In addition, regression analysis was used to provideempirical evidence on which variables had strong bonding with audit report lag. The outcomes elicit that auditcommittee size, ownership concentration; organization size and profitability are significantly associated withaudit report lag. However the other six variables (audit committee independence, meetings, expertise and typesof auditors) were found to have insignificant relationship with audit report lag.

A meta‐analysis of the determinants of modified audit opinion decisions

Abstract: Purpose – The purpose of this paper is to provide a meta‐analysis of the effect of: auditor and audit‐related variables; and firm‐specific variables on auditors' propensity to issue modified audit opinions. Auditor and audit‐related variables include Big N affiliation, audit firm industry specialization, audit firm and audit partner tenure, provision of non audit services and audit report lag. Some of the important firm‐specific variables include firm size, leverage, and profitability.Design/methodology/approach – The Stouffer combined test is employed as the meta‐analysis technique for this paper. The test produces a z‐statistic that can be used to test the direction and significance of the effect of the hypothesized variables on the propensity of auditors to issue modified audit opinions. A total of 73 published studies are aggregated from 1982 to 2011.Findings – Meta‐analysis result reveals that the effect of audit and auditor‐related variables on audit opinion decisions is far from conclusive. Big N a...

Auditing: A Risk-Based Approach to Conducting a Quality Audit

Abstract: 1. Auditing: Integral to the Economy. 2. The Risk of Fraud and Mechanisms to Address Fraud: Regulation, Corporate Governance, and Audit Quality. 3. Internal Control over Financial Reporting: Management's Responsibilities and Importance to the External Auditors. 4. Professional Liability and the Need for Quality Auditor Judgments and Ethical Decisions. 5. Professional Auditing Standards and the Audit Opinion Formulation Process. 6. A Framework for Audit Evidence. 7. Planning the Audit: Identifying and Responding to the Risks of Material Misstatement. 8. Specialized Audit Tools: Sampling and Generalized Audit Software. 9. Auditing the Revenue Cycle 10. Auditing Cash and Marketable Securities 11. Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle. 12. Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal. 13. Auditing Debt Obligations and Stockholders' Equity Transactions. 14. Activities Required in Completing a Quality Audit. 15. Audit Reports on Financial Statements. 16. Advanced Topics Concerning Complex Auditing Judgments. 17. Other Services Provided by Audit Firms. Auditing Standards Appendix. ACL Appendix. Case Index. Auditing in Practice, Emerging Issues and Fraud Focus Index by Chapter. Index.

Audit committee experts and earnings quality

Abstract: Purpose – The purpose of this paper is to investigate the relationship between audit committee expertise and financial reporting quality. Since the Sarbanes Oxley Act, 2002, there has been growing interest in the research concerning audit committee expertise, especially as the Security Exchange Commission requires firms to identify their audit committee financial experts.Design/methodology/approach – Based on two theories, the resource dependence theory and agency theory, the study examines the association of audit committee experts with financial reporting quality, proxied by earnings management. Samples involved 2008 financial data of 300 firms that were ranked by highest market capitalisation. In total, four types of expertise are developed based on academic qualification, professional qualification and work experience.Findings – Presence of non‐accounting experts and accounting experts is significant to reduce the magnitude of earnings management. Other than that, leverage and firms size are also foun...

The Impact of Audit Committee Characteristics on the Performance: Evidence from Jordan

Abstract: []The objective of this paper is to investigate the relationship between audit committee characteristics (namely: audit committee size, financial experience, and audit committee independence) on performance, which includes financial, operating and stock performance. The study sample contained 106 corporations from the financial sector listed in the Amman Stock Exchange Market with a total of 212 observations during the 2008-2009 sample years. The results showed that the audit committee has an impact on financial and stock performance. It does not have an effect on operating performance.[Keywords] audit committee characteristics; performance; Amman stock exchange.(ProQuest: ... denotes formulae omitted.)IntroductionThe main purpose of this study is to examine the audit committee on performance over the period of 2008-2009. The concept of the audit committees differs according to the goals, functions, and responsibilities assigned to them. However, the need to determine the impact of audit committee characteristics on performance quality has become the focus of increasing attention among accountants, academics, researchers and investors. Many countries over the world and local and international vocational bodies have spent more effort to issue instructions and standards that, when adopted help restore credibility in the financial data declared. It will also help in activating the role of the audit committee, which consolidates functioning, and independence of the external auditor for being an independent part providing his opinion on the declared financial data fairly and objectively. One of these efforts is the recommendation of the Securities and Exchange Commission (SEC). The New York Stock Exchange NYSE, and the National Association of Securities Dealers NASDA, formed a Blue Ribbon Committee (BRC) in 1999 to be a natural reaction to the distortions in financial statements.These committees aimed to develop recommendations, which help improve financial reports through consolidating their roles. It also put down a series of qualities that should be available in order to have an active audit committee. Such qualities include the size of the committee, experience, financial knowledge of members, degree of their independence, and frequency of meetings. In July 2002, the US issued the Sarbanes-Oxley law, described by analysts to be the most significant and comprehensive American legislation since the forming of the SEC, because of its impact on general companies and independent accountants. Some of the large reforms that the legislation included were the right of declaration, submission of financial reports by foreign general company's corporate governance, and monitoring of accounting auditors. According to Article 301 of the legislation, a special part was made stressing the duties and formation of an audit committee in order to secure the safety and credibility of the report of the external auditor who might be put under management pressure that might be imposed on him. As for Jordan, much legislation that supports corporate governance was issued in order to regulate work of the audit committee in Jordanian companies. Our study attempts to discuss such legislations related to audit committees to ensure their application by Jordanian companies. Afterwards, the study tries to test the role played by the audit committee in improving the performance.Background of the Audit CommitteeAudit Committee in JordanJordan tried to enact a group of legislations to support corporate governance one of which is the Stock Exchange Law No. 76 (2002). This law obliges all Jordanian joint-stock companies to form an audit committee consisting of three non- executive members from the company's board of directors. The duties and responsibilities of such committee are determined by the instructions issued by the board that comply with Article 46. It also secures Banking Law No. 28 (2000), which obliges all Jordanian banks to form audit committees. …

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Abstract: The publication of the European Commission Green Paper, ‘Audit Policy: Lessons from the Crisis’ in October 2010, has stirred up a lively debate on the role of joint audits. This literature review identifies and evaluates, for the benefit of future research and regulators, existing evidence about joint audits. We find limited empirical support to suggest that joint audits lead to increased audit quality, but some empirical support to suggest that joint audits lead to additional costs. Overall, this paper indicates that joint audit should be seen as a mechanism that is embedded in a broader institutional context and not be considered in isolation from other factors that might impact the audit market. The results indicate that various country-level characteristics are simultaneously at play. While joint audits can potentially enhance the audit market competition by allowing smaller audit firms to maintain larger market shares, the related impact on audit quality has not yet been clearly demonstrated and thus provides a promising avenue for future research.

Perceptions of factors affecting audit quality in the post-SOX UK regulatory environment

Abstract: Global repercussions of the Enron scandal and particularly the enactment of the Sarbanes–Oxley Act (SOX) in the USA, resulted in significant changes in the UK regulatory regime for audit and corporate governance, including an increased role for audit committees and independent inspection of audit firms. UK-listed company chief financial officers, audit committee chairs (ACCs) and audit partners were surveyed in 2007 to obtain views on the impact of 36 economic and regulatory factors on audit quality post-SOX. Four hundred and ninety-eight usable responses were received, representing a response rate of 36%. All groups rated various audit committee interactions with auditors among the factors most enhancing audit quality. However, International Standards on Auditing (ISAs) and the audit inspection regime, aspects of the ‘standards-surveillance-compliance’ regulatory system, are viewed as less effective. Exploratory factor analysis reduces the 36 factors to nine independent dimensions: economic risk; audit committee activities; risk of regulatory action; audit firm ethics; economic independence of auditor; audit partner rotation; risk of client loss; audit firm size and, lastly, ISAs and audit inspection. Post-SOX regulations have introduced additional dimensions to the factors influencing audit quality. Respondents commented that aspects of the changed regime are largely process and compliance driven, with high costs for limited benefits, a finding consistent with regulatory over-reaction.

Auditor independence, audit quality and the mandatory auditor rotation in Egypt

Abstract: Purpose – The purpose of this paper is to introduce the problem of the lack of auditor independence in the Egyptian context, how it might affect the audit quality, through assessing reasons behind the voluntary switching of auditors, whether this switch is in the side of improving audit quality or not and the suggestion of the mandatory auditor rotation as a solution to such a problem. Design/methodology/approach – The paper's findings are based on a survey analysis. The survey is done through a questionnaire created by the researcher (author) from the literature and distributed among audit practitioners from the Big Four audit firms operating in Egypt. Findings – The problem of lack of auditor independence exists in Egypt due to many reasons. The main reason is the poor structure of corporations of being closely held. It was also found that the voluntary switching of auditors are for purposes improving the quality; from these reasons is the search of more reputable auditors and timelier audit opinions. F...

Political accountability and performance audit: the case of the auditor general in norway

Abstract: Performance audit is widely used in public administration, but, at present, little empirical evidence exists on its usefulness and contribution to accountability. Based on survey data from 353 civil servants in Norway, this article analyzes the auditees’ perceptions of the audit. Performance audit was seen as useful by a majority of the auditees. If auditees agreed to audit criteria and assessments, were allowed to influence the process, had favourable opinions of the reports, and believed that the State Audit Institution contributed to accountability and improvement, then they regarded it as useful. Reports used for accountability purposes were not perceived as less useful. The auditees’ administrative level, the use of the report to further interests, and attention from politicians, the media, and the Parliament impacted on the accountability dimension. These results indicate that performance audit can influence civil servants, but the influence is contingent on how the audited civil servants perceive the performance audit.

Do Auditing Standards Matter

Abstract: SUMMARY: Properly understanding the economic role of auditing standards is an important step toward improving both audit effectiveness and efficiency. In this essay, I observe that auditing standar...

“Big 4 fee premium” and audit quality: latest evidence from UK listed companies

Abstract: Purpose – Using the most recent observations (2005‐2011) from a sample of UK listed companies, This paper aims to investigate whether Big 4 audit firms exhibit a “fee premium” and, if this is the case, whether the premium is related to the delivery of a better audit service.Design/methodology/approach – Univariate tests, multivariate regressions and two methodologies that control for self‐selection bias are used to answer the proposed research questions. Data are collected from DataStream.Findings – Findings provide consistent evidence about the existence of an “audit fee premium” charged by Big 4 firms while they do not highlight any significant relationship between audit quality and type of auditor with respect to the audit quality proxies investigated.Research limitations/implications – Evidence from this paper might signal the need for legislative intervention to improve the competitiveness of the audit market on the basis that its concentrated structure is leading to “excessive” fees for Big 4 client...

The Effectiveness of SOX Regulation: An Interview Study of Corporate Directors

Abstract: This study provides insights on the effectiveness of the Sarbanes-Oxley Act (2002) in promoting high quality financial reporting and good corporate governance. We report the results of interviews conducted with 22 experienced directors from US firms. Our results indicate that SOX has had a positive impact on the strength of the relationship between the audit committee and the external auditor, and, similarly, on the monitoring role of the board. In general, we find that post-SOX, directors express greater empowerment and authority of the audit committee, and contrary to the findings pre-SOX (Cohen et al. 2002), directors indicate that audit committees have sufficient financial expertise to provide effective monitoring of the financial reporting process. However, participants also indicated that in addition to the audit committee, management still has some influence in decisions to appoint or dismiss auditors, a finding that is consistent with the perspectives of auditors reported in Cohen et al. (2010). Participants indicate that SOX has also led to a substantial improvement in the scope, responsibility, and status of internal auditors. Although CEO certification were viewed as improving financial-reporting quality, directors tempered what they considered to be the benefits of the legislation with the labor-intensive (over)reaction to SOX on the part of management, the audit committee, and the external auditor that resulted in an excessive loss of time for all concerned, which was driven by the heightened sense of litigation risk. This was compounded by a formalistic approach to accounting policy choice that threatens the accuracy and reliability of accounting disclosures. The increased emphasis on compliance has also come at the cost of appropriate risk management.

The role of internal audit function in the public sector context in Saudi Arabia

Abstract: This paper contributes to the debate on the role of internal auditing in the public sector by focusing on the nature and practice of internal auditing in organisations that are subject to audit by the General Audit Bureau. Archival and documentary analysis, supported by 29 semi-structured interviews revealed that the underpinnings of the Saudi Internal Audit Regulation did not tie in directly with perceived international best practice - the International Standards for the Professional Practice of Internal Auditing. Institutional factors are also likely to play a part in terms of the existence of the state-required ‘Follow-up department’ in all organizations, tasked with performing investigation and inspection, the ‘auditing department’ (which monitors the propriety of transactions and accounting), and the work of the mandatory ‘Financial Representative (Controller)’.

Office-Level Characteristics of the Big 4 and Audit Report Timeliness

Abstract: Timeliness of annual financial reporting information has long been a concern of investors, regulators, financial reporters, and auditors. Recent changes in the audit and financial reporting environment have resulted in longer audit report lags and have increased the importance of identifying factors associated with a timely audit. In this study, we examine the audit timeliness implications of office-specific attributes of the audit firm. Specifically, we examine whether office-specific industry expertise, office size, and the importance of the client to the local office are associated with audit delay (i.e., the time between fiscal year end and the audit report date). In additional analyses we further explore the sensitivity of audit delay to office-specific industry expertise and examine whether the aforementioned audit firm attributes are associated with a propensity to issue an early earnings announcement (which we define as an announcement ten days or more before the audit report date). We find that office-specific industry expertise is negatively associated with audit delay while office size and client importance are both positively associated with audit delay. Office-specific expertise is also positively associated with the propensity to announce earnings substantially early. Finally, we find that office-specific industry expertise garnered via a product specialist strategy (i.e., a small number of large clients within a particular industry) is positively associated with audit delay relative to a low cost specialist strategy (i.e., a large number of smaller clients within the industry). Our study provides further support for the importance of office-specific characteristics on audit and financial reporting outcomes and, more specifically, provides evidence of the benefit of office-specific industry expertise. This research should be of interest to financial reporters, audit firms, and regulators interested in increasing the timeliness/relevance of financial reporting information.

The Effect of the Internal Audit and Firm Performance: A Proposed Research Framework

Abstract: This study attempts to propose a structure of the relationships between the internal audits characteristics (IAC); such as professional qualifications of the chief audit executive of the Internal Audit (IA), size, experience, and qualification; and firm performance The presence of an internal audit department is significant as it is considered as the main element in employing accounting systems and this, in turn, assists in evaluating the department’s work The internal audit is deemed as the core of business accounting as it is the section that keeps track of all businesses associated with the sector The internal audit efficiency assists in developing the company’s work because the financial reports present the internal audit department’s quality In addition, an internal audit is a crucial part of corporate governance structure in an organization and corporate governance (CG) covers the activities of oversight conducted by the board of directors and audit committees to ensure credible financial reporting process (Public Oversight Board, 1994) Consistent with previous studies of the importance of internal audit, this study provides comprehensive oversights on the relationship between internal audit and firm performance The past literature reveals there is a paucity of studies exploring the association between internal audit characteristics (IAC) and firm performance whether conceptual or empirical The main objective of this study is to fill up the gap in the literature and provide an opportunity for future research to deeply to investigate this relationship Keywords: Internal Audit Characteristics (IAC); Agency Theory (AT); Resource Dependence Theory (RDT); Firm Performance (FP) JEL Classifications: M40; M41; M42

Can the Academic Literature Contribute to the Debate over Mandatory Audit Firm Rotation

Abstract: Recently, the Public Company Accounting Oversight Board (PCAOB) issued a concept release soliciting public recommendations to improve auditor independence and audit quality [PCAOB, 2011]. The focus of the release is on mandatory audit firm rotation (MAFR) with a request for commentaries addressing the advantages and disadvantages of MAFR. In this paper, we briefly summarize the recent literature on mandatory audit firm rotation and suggest how it can be useful to regulators as they consider the implementation of mandatory rotation. We find that the conclusions reached about the possible effectiveness of MAFR appear to depend on the type of data used (voluntary vs. mandatory auditor changes), suggesting that regulators should exercise care when drawing inferences from past audit firm rotation research.

Auditor Fees and Auditor Independence—Evidence from Going Concern Reporting Decisions in Germany

Abstract: SUMMARY: This study examines the potential for non-audit services to impair auditor independence using going concern modifications as a proxy for audit quality. While prior research has focused primarily on Anglo-Saxon environments, this study focuses on Germany because of the country's unique reporting attributes and lower litigation risk when compared to Anglo-Saxon settings. Based on a sample of financially stressed manufacturing companies during the period 2005–2009, the results do not suggest that German auditors are less independent when the level of non-audit fees is high. However, there is some evidence that Big 4 audit firms are less likely than their non-Big 4 counterparts to issue a going concern emphasis-of-matter paragraph for engagements characterized by both relatively high levels of non-audit fees and financial stress.

The impact of audit committee existence and external audit on earnings management

Abstract: Purpose – This study aims to examine the combined effect of audit committee existence and external audit on earnings management. Design/methodology/approach – The paper uses ordinary least squares regression model to examine the effect of audit committee existence, external audit and the interaction between these two monitoring mechanisms on earnings management for a sample of 33 non-financial listed Portuguese firms-year from 2003 to 2009. Findings – In contrast to results of most previous studies, which assume that audit committees and external auditor act independently from one another, the paper finds a positive relationship between both audit committee existence and external audit and discretionary accruals. However, this study suggests that the existence of an audit committee and external auditor jointly reduces earnings management. Practical implications – The findings based on this study provide useful information for regulators in countries with an institutional environment similar to that of Por...

Mandatory Audit Firm Rotation: A Review of Stakeholder Perspectives and Prior Research

Abstract: The global financial crisis brought to the fore questions surrounding the scope and quality of the external audit, market concentration and auditor independence. One of the issues currently being considered by the European Commission and European Parliament is mandatory audit firm rotation. The aim of this review is to identify, consider and evaluate stakeholder views and research evidence on mandatory audit firm rotation to highlight deficiencies in the existing research literature, identify opportunities for further research and make recommendations for policy-makers. As demonstrated, stakeholder views vary widely. We find that the research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. Whilst there is some evidence that rotation may have a positive impact on ‘independence in appearance’, most research fails to generalise these findings to measures of audit quality associated with ‘independence in fact’ and there is even evidence of pot...

Reflections on a Decade of SOX 404(b) Audit Production and Alternatives

Abstract: SYNOPSIS: Since passage of the quickly finalized Sarbanes-Oxley Act during July 2002, audit production in the U.S. has been substantially expanded by mandated internal control audits. The control audit mandate is unique to the U.S. and costly to apply, yet little is known about the conduct of control audits or the efficacy of lower-cost alternatives. This paper reflects our overall knowledge about control audit production and observation of a consistent message across public and limited non-public archival data, analytical studies, and numerous personal experiences of audit practitioners. Our primary observation is that, absent any financial misstatement, auditors find it difficult to identify material weaknesses in control design. Conversely, when auditors know about misstatements they can, and do, detect related material weaknesses and thereby identify most public companies found by mandated control audits to have ineffective controls. Thus, it appears possible to exploit this observation to identify an...