Effect of Audit Reports on Annual Financial Reporting Quality of an Organisation

Running head: ACCOUNTING RESEARCH
Accounting Research
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Topic of Research
Effect of audit reports on Annual financial reporting quality of an organisation
Introduction
This research was undertaken in order to assess the influence of audit quality on financial
reporting in Australia. The study intended to examine, investigate and ascertain the
interaction between quality of audit and corporate financial reporting in Australia. Therefore,
the study can be considered to be a movement towards enhancement of the quality of audit
exercises in Australia.
Aim and objective of the study
The aim of the research study is to augment quality of audit and overall reliability of financial
reporting. Particularly, this study intends to
- Examine the relationship between audit quality in association to financial reporting quality
of business concerns in Australia
Research Question
1) What is the nature of association between audit quality and overall quality of financial
reporting in Australia?
Research Problem
The global financial crises, various failures of corporate and financial scandals worldwide
raise doubts and questions regarding the efficacy of financial reporting as well as quality of
auditing. Several auditing firms, certified and regulatory bodies are therefore under fire and
encounter immense pressures to refurbish confidence in particularly auditing (Sirois et al.,
2018). In essence, regulatory and certified bodies attempted to uphold quality of audit to

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restore tarnished image as well as to enhance their legitimacy along with standing. Thus, this
study intends to analyse whether superior audit quality directs the way towards superior
quality of financial reporting that subsequently is a mechanism to avert financial crises.
Section: Literature Review
Introduction
The current section presents articles along research papers cope with control on and
dimensions of quality of financial reporting, as regards focus, concerns, as well as findings.
Essentially the section on review includes different elements of quality of financial reporting,
auditing and influence of auditing on financial reporting.
Measures of Financial Reporting Quality
Components of Quality
As righty put forward by Lennox et al., (2016), the important principle of evaluating the
financial reporting quality can be associated to faithfulness of overall objectives along with
quality of divulged information in financial reports of a business enterprise. In essence, these
qualitative characteristics augment facilitation of process of reviewing the effectiveness of
financial statements. This can show the way to superior level of quality. In order to attain this
level, different financial reports have the need to be faithfully reflected, comparable,
understandable, well timed and verifiable (Gaynor et al., 2016). Therefore, the stress is on
getting transparent financial assertions in place of misleading financial pronouncements. In
this connection it can also be said that there is also significance of preciseness along with
predictability as indicator of a superior quality of financial reporting.
According to the Conceptual Framework for the purpose of accounting, there are various
agreed upon components of superior quality financial pronouncements. In essence, different

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qualitative characteristics of pecuniary reporting include faithful representation, relevance,
timeliness, verifiability understandability as well as comparability. In actual fact, these are
also divided into different fundamental qualitative characteristics along with enhancing
qualitative features (Badolato et al., 2014). In essence, a theoretical illustration for the said
terms help in stressing and focussing on significance as qualitative characteristics, and also
indicates towards various qualities that are regarded to be fundamental among various
structures.
Relevance
As rightly mentioned by Abbott et al., (2016), relevance can be said to closely related to
terms of usefulness as well as materiality. In particular, relevance depicts ability of
undertaking various business decisions bya users of information presented in the financial
reporting. As such, at the time when information is presented in the financial assertions also
exert influence on economic decisions. This information is said to have the quality and
characteristic of relevance. In addition to this, at the time when this specific information aids
various users to analyse, correct and at the same time substantiate current as well as previous
incidents. The effectiveness of framing a decision that is a significant part of the quality of
relevance is said to be consistent with the framework presented by the conceptual framework.
As suggested by Brasel et al., (2016), fair value can be regarded as one of the most important
indicators or signs of relevance. Utilizing fair value in a business entity, as a foundation for
the enumeration can be regarded as an important sign of higher level of relevance in the
financial reporting information. Essentially annual declarations have an important role in the
process of ascertainment of level of relevance by divulging specific information regarding
opportunities of business along with risks. This can help in delivering feedback on the way
major market incidents and important business transactions can affect operations of business
entities (Pucheta‐Martínez & García‐Meca, 2014).

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Reliability
As correctly put forward by Robert Knechel et al., (2015), reliability can be considered to be
an important facet of quality of financial reporting. In particular, in case of financial
reporting, specific information has the need of quality of specifically reliability in a bid to be
effective. In essence, this quality can be attained at the time when information that users
depend upon is free from primarily bias as well as material errors.
Comparability
Cohen et al., (2013) suggests that comparability can be considered to be an important theme
of permitting various users to ascertain financial health and position, flow of cash and
performance of business entity. In essence, this process of comparison can help in the process
of carrying out comparisons across different time period and among different other
corporations during the same period of time. Particularly, comparability calls for the need
that similar incidents in the two different situations need to be represented by identical
accounting facts as well as numerals (Abbott et al., 2010). There are essentially different
events that can be represented by diverse accounting facts as well as figures in a manner that
can quantitatively represent the variances in both a comparable and at the same time and
interpretable way.
In a bid to point out towards this point, specific notes presented in financial statement have
the need to divulge as well as illustrate all the requisite alterations in the policies of the
accounting (Carcello & Nagy, 2014). In addition to this, notes also need to present the
implications of the alterations and applications of accounting principles as well as principles.
Furthermore, the present accounting period also have the need to compare with the ones from
prior ones. Finally, presentation of financial index along with financial ratios can contribute
towards comparison to other corporations.

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Understandability
Understandability is one of the essential qualities of information in financial reports.
Achieving the quality of understandability is through effective communication. Thus, the
better the understanding of the information from users, the higher the quality that will be
achieved (Robert Knechel et al., 2015). It is one of the enhancing qualitative characteristics
that will increase when information is presented and classified clearly and sufficiently. When
annual reports are well organized, users can comprehend what their needs are (Robert
Knechel et al., 2015). Usage of graphs and tables helps to present information clearly, and the
usage of language and technical jargon can be followed easily.
Timeliness
As recommended by Krishnan et al., (2016), timeliness can be considered to be enhancing
qualitative features. In a bid to illustrate specific information in a well timed manner there is
need to present financial information to decision makers before losing its authority as well as
appropriate influences. Therefore, in a bid to assess overall quality of financial reporting in a
yearly financial reporting, timeliness can be analysed utilizing the time period between year-
end and issuing date of report of auditor.
Faithful Representation
Christ et al., (2015) says that faithful representation can be referred to as the notion of
representing the actual economic position of financial information that is presented in the
reports. In essence, this notion has the value of illustrating the way the obligations as well as
economic resources, counting real economic position of financial information, transactions,
and various incidents are entirely represented in financial reports. Furthermore, this specific
quality has neutrality has a theme that is regarding objectivity along with balance. As