Examining Audit Quality: Factors, Independence, and Expectation Gap

This essay delves into the critical importance of maintaining audit quality within a business organization. It explores various aspects of the audit process, highlighting two key factors that significantly impact audit quality: auditor independence and the audit expectation gap. The essay emphasizes that a decline in audit quality can have detrimental effects on business decisions and strategic planning. The introduction underscores the role of audits in verifying the accuracy of financial statements, which are crucial for stakeholders. It discusses characteristics of a quality audit, including adherence to regulations, auditor training, ethical standards, teamwork, and clear reporting. The essay then examines auditor independence, detailing how financial or non-financial interests, and pressure from clients can compromise an auditor's objectivity and negatively affect the quality of the audit. Finally, the essay addresses the audit expectation gap, explaining the difference between stakeholder expectations and the actual work performed by auditors, which can lead to communication issues and interference in the audit process, thereby diminishing audit quality. The conclusion reiterates the importance of audit quality for management, shareholders, and auditors, emphasizing its role in ensuring the reliability of financial information for decision-making.

Audit quality
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Abstract
This essay is prepared to examine the important of maintaining quality in the process of auditing
conducted for a business organization. In this report various aspects of audit are discusses and
this essay has also highlighted two major factors that can affect the quality of audit. There is a
high probability that depletion in quality of audit will also have impact on business decision and
other strategic decision taken by management of an organization toward development of an
organization. This essay can be divided into two parts i.e. examination of important of quality in
audit process and factors affects quality of audit. Two main factors that influence quality of audit
process which are discussed in this essay are audit expectation gap and independence of audit.
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Introduction
Primary function of preparing financial statement and books of accounts of a company lies with
management of the company. But shareholders of the company cannot rely upon accuracy of the
data provided in the financial statements prepared by management. For checking accuracy of
such information, examination of books of accounts of the company are conducted which is
called as audit (Rezaee et.al, 2018). There are various stakeholders in a business organization
that possess interest in business organization through direct or indirect channels. These
stakeholders are required to be provided with certain information in relation of financial and
operational aspect of business. These information are provided by management of a company in
form of annual reports and other related documents. It is important for these stakeholders to
make sure that the information provided in these financial statements presents true and fair
position of the company in market. Here the role of quality audit comes into consideration.
Hence it becomes very important for shareholders to make sure that the quality of audit is high
so that proper inspection of books of accounts and true position of company can be evaluated.
This report is prepared to eventuate the importance of maintaining quality in audit of financial
statements (Knechel & Salterio, 2016). This report will consider some of the factors that can
have a significant impact on quality of auditing. Auditor’s independence and audit expectation
gap will be discussed in detail and their impact on quality of audit will be analyzed.
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Main objective of an auditor is to present true and fair opinion on financial statements of a
company. This objective of audit cannot be achieved if quality of work is not maintained during
audit process. There are some characteristics that a quality audit should possess (Messier et.al,
2015). Here some of these characteristics will be discussed to evaluate what can be considered as
quality audit.
There are various type of standards and compliances in relation to taxation, accounting and other
laws that an auditor and business organization should follow. These laws and regulations should
be properly evaluated and followed in a quality audit. Heavy penalties can be imposed on auditor
and business organization if such regulation are not strictly followed. Other important factor that
contribute to maintaining quality in audit process is training to auditor (Knechel et.al, 2012). An
auditor cannot be considered as an expert for every type of business organization. Therefore it is
important that auditor of the company should undergo basic training is a different field of
business is required to be audited. Basic knowledge of such business area will help auditor in
providing quality services during the process of audit.
There are various ethical and professional standards that are applicable on an auditor which helps
auditor in providing audit process with professionalism. Hence is it important for an auditor to
follow there rules and this will also help in providing quality audit services to business
organization. In addition to this professional diligence an auditor should also use their common
sense while discharging its duties in process of audit. Usually audit is conducted with the help of
a team which includes qualified auditors and training staff (Christensen et.al, 2016). Hence
teamwork and supervision of trainees is also required in conducting audit. There is a chance that
quality of audit work may get affected if work done by trainee is not properly supervised by
qualified auditor as such trainee might not have much experience. Hence it is important to shows
characteristics such as leadership, communication, supervision, teamwork to provided services of
quality audit.
Presenting audit report and other financial information in simple and understandable format is
also one of the important characteristic of quality audit. Whole process of audit will be of no use
is the conclusion and problems in the company are not properly communicated to the
shareholders and management (Gul et.al, 2013).
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Audit quality can be assessed by evaluating the working papers prepared by the auditor and it
can also be evaluated by reading audit report of the company. An auditor should follow certain
policies and procedures while conducting audit of any business organization. This will establish
set standards for auditing process which will help in improving quality of audit in future.
Documentation can also help in improving audit quality as all steps taken in audit are
documented and errors and mistakes can be analyzed over the period of time (Arruñada, 2013).
Auditor’s independence
There are various factors that can affect the quality of audit and one of such important factor is
independence of auditor in conducting audit. Auditor independence can be defined as freedom of
a person that is conducting the process of audit to present their views with integrity and without
any pressure from management and owners of a company. It is important that an auditor is able
to express its opinion with integrity and independence as it can affect the quality of services
provided as an auditor (Wright and Capps, 2012). In absence of auditor independence the risk of
errors and frauds in financial statement of an organization increases. Lack of auditor
independence is also important for management and owners of a company. There are various
investment and strategic decision that are based on these financial statements. Financial
statements prepared in lack of independence might not present true position of business and
decisions bases on such financial statement will not present best interest of management and
owners.
There are various factors that can affect the independence of auditor and here some of these
factors will be analyzed. One of the most important factor that affects auditor independence is
that auditor might have financial or non-financial interest in business organization. The opinion
given by an auditor will be biased in case there are any underlying interest of auditor in the
business organization under audit (Amake and Okafor, 2012). Hence and auditor should never
select an audit in which such auditor have any kind of interest. Shareholders of an organization
should also make sure that prospective auditor should not have any kind of interest in their
business organization.
Other factor that can affect auditor independence is that the business organization that is under
audit is paying audit fee to auditors. The chances of pressure and influence from business
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organization increases as auditor wants to secure more and more business from such client.
Influence and pressure from a big and long term client can also affect the objectivity and
independence of auditor (Tepalagul and Lin, 2015). Audit firms does not wants to lose their big
clients and modify their audit process according to the instructions and feasibility of business
organizations.
All these factors will have very negative impact on quality of audit provided to business
organization. Main objective of conducting an audit is to show that whether the financial
information provided in financial statements are correct or not. Here if auditor is under influence
of management of the company then there is no certainty that financial statement presents true
value of the company (Holland and Lane, 2012). Hence it can be said that auditor independence
is affecting the quality of audit process. It will affect all interested users of financial statement
and their decision will get affected due to false representation of financial information given in
balance sheet and profit and loss account.
Hence it is important for both shareholders and auditors of the company to provide an
independent environment for auditor so that audit purpose and objectives can be achieved. Best
method of giving such independence to auditors is by formation of audit committee which should
include members from boards of directors and representatives of shareholders. This committee
should oversee all functions in relation to audit to be done in the organization from appointment
of auditor to solving queries of auditor. This will help to form a transparent audit process which
will help in improving the quality of audit.
Audit expectation gap
Two major concepts that should be analyzed to understand the concept of audit expectation gap
are information provided to investors of organization and role of an auditor in providing
assurance services on such information. There is a clear and distinct difference between these
two concepts. Shareholders of company should understand that the role of an auditor is to check
whether the information provided in the financial statements are true and fair or not (Ruhnke and
Schmidt, 2014). These financial statements are prepared by management of the company and
auditor is responsible to check if they are true or not.
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Audit expectation gap can be defined as the difference between the expectation of shareholders
from auditor and actual work done by the auditor. The audit expectation gap be further
categorized into various categories such as expectation gap regarding effectiveness, operability,
financial information etc. All of these expectation gaps can create a complexity in the audit
process as proper communication between shareholders and auditor is very important to conduct
effective audit process. This lack of communication can affect the process and quality of audit
(Gold et.al, 2012).
There is a requirement of proper communication between shareholders, management and auditor
of the company. This is the only method which can help in filling the expectation gap between
auditors and shareholders of the company. Auditor should conduct meeting before starting the
process of audit with management and shareholders (Okafor and Otalor, 2013). In this meeting
the scope of audit should be discussed in detail to provide clarity to shareholders regarding
process of audit. This clarity will help in improving the quality of audit.
The expectation gap will create complexity in audit process which would lead to deplete the
quality of audit process. There are various aspects of business operations on which ideas of
auditor and company may differ from each other. For example auditor tries to reduce the risk in
business operation to acceptable level of risk. Here there might be cases where the acceptable
level of risk might be different in opinion of shareholders and auditor. All these disagreements
between auditor and shareholders will increase the time and money that actually should have
been spend by auditor. Hence it can said that audit expectation gap is disadvantageous for both
shareholders and auditor of the company.
Other way in which expectation gap can decrease the quality of audit service provided is
interference in the work done by auditor. It there is a lack of communication and differences on
manner in which audit should be conducted then there are chances that the management of the
company would interfere in the work done by auditor (Bedard et.al, 2012). This can affect the
work done by auditor as interference will affect the normal set of policies and procedures used
by auditor to conduct audit.
From this audit report it can be said that there are various factors which can affect quality of
audit which is very important for achieving objective of conducting an audit.
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Conclusion
It can be said that maintaining quality of audit process is very important management,
shareholder and auditor of a company. The financial information provided by management in
form of financial statement is used by various stakeholders to take important decisions in
business. Hence is it very important that these statements should be checked by a professional
and the process of checking should be high quality. In addition to analyzing. The concept of
audit quality, factors that can affect audit quality are also discussed. This project report will helps
in conducting the process of audit effectively and efficiently with providing quality services to
businesses.
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