Improving the Quality of External Audit

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IMPROVING THE QUALITY OF EXTERNAL AUDIT
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Introduction
External auditors play a role in assuring the public about company governance and
examining their annual reports to check accuracy. External auditors, however, have been
currently experiencing public criticism for their duty in accounting scandals and the quality of
performed audits. Therefore, various auditing regulation bodies aim to improve the quality of
external audits continuously. They have implemented various regulatory changes in the last five
years with an aim to improve audit quality. The changes include significant restrictions on
provision of non-audit services to clients and mandatory rotation of audit firms. This paper aims
to discuss factors that influence audit quality, explain threats to audit quality and necessary
measures to improve it. It also evaluates recent measures by various stakeholders to improve
audit quality.
Factors Influencing External Audit Quality
External audits are purposed to secure the quality of a firm’s accounting and improve the
reliability of its financial reports. Audit quality is the probability of a particular external auditor
to discover a breach in the client’s accounting system and fail to report the same (Arens, Elder
and Mark 2012, pp. 23). A high-quality audit, therefore, is that which enhances the reliability and
quality of a company’s accounting records. An auditor must express his opinion on the firm’s
financial statements fairness. Factors that influence audit quality include the qualification and
proficiency of the auditor, number of assignments, internal control, size of the firm, auditor’s
fees, auditor’s independence, auditor’s reputation and industry specialization (Leung, Coram and
Cooper 2017, pp. 117).
a. Auditor Qualification and Proficiency

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External audit mainly aims to assure the public that the company’s financial statements
are not misstated materially and give an accurate and fair view of its financial performance.
Audit quality and the proficiency of the auditor correlate positively. Auditors with a high level of
education and a wide range of experience offer quality audit services as they have advanced
technical and analytical capabilities. Therefore, one has to meet specific unique qualifications to
become an excellent auditor. He or she should be well educated in social sciences as well as
scientific evaluation and investigation methods. An auditor needs to have specialized knowledge
in various auditing areas such as accounting and financial auditing, program evaluation and
performance auditing (Louwers, Ramsay, Sinason, Strawser and Thibodeau 2015, pp. 38).
b. Internal Control
External auditors achieve audit quality through identification, administration, and
assessment of a firm’s internal control measures and activities. The audit committee must review
the internal controls of the company. Therefore, the quality of the audit committee correlates
with internal control weaknesses. The audit committee monitors the internal control of a
company to assure quality corporate accountability and financial reporting. The strength of
internal controls depends significantly on the quality of the audit committee. A weak internal
control consequently influences the quality of the external audit (Santiso 2013, pp. 148).
c. Size of the Audit Firm
Audit quality and the audit firm size correlate significantly. For instance, large audit
firms have the likelihood to perform robust and high-quality audits. They give more precise
information than small auditing firms. Large audit firms are likely to give quality audits since

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they have few incentives that may compromise their professional standards to enhance client
retention (DeAngelo 2012, pp. 188).
d. Auditor’s Fees
Audit fees comprise of all benefits that external auditors receive for the audit and non-audit
services. Auditors who receive large audit fees from clients face a significantly high threat to
their independence. Therefore, audit quality and audit fees correlate positively as the company’s
management is willing to give colossal remuneration to the auditor to receive favorable audit
opinions on their financial reports (Santiso 2013, pp. 156).
e. Auditor’s Independence
An independent committee plays the role of ensuring the auditor is free from the
influence of the management, in order to enhance his independence. The committee often meets
with the external auditor, in the absence of the management, and encourages him to be
independent and transparent. High auditor’s independence improves the ability of the auditor to
resist and withstand any pressure and benefits from the management in auditor-client
negotiations regarding financial reporting issues (Gaynor, Kelton, Mercer and Yohn 2016, pp.
21).
f. The Reputation of the Auditor
The reputation of the auditor directly relates to the perceived and actual levels of audit
quality. Reputable auditors do a high-quality job and the probability of the public to use their
audit reports is high since they give recommendations on the client’s financial statements
accuracy. The reputation of audit firms for consistency in providing high-quality audits ensures