AUDITING 2: Assessing Audit Quality, Independence and Expectations

This essay delves into the critical aspects of auditing, focusing on audit quality and the significance of auditor independence. It explores how audit quality is assessed, emphasizing the role of regulations, standards, and the auditor's ability to uncover and report breaches in financial statements. The essay highlights the positive impact of auditor independence on audit quality, categorizing it into programming, investigative, and reporting independence. Furthermore, it addresses the audit expectations gap, the difference between expected and actual auditor performance, and its negative influence on audit quality, particularly in fraud detection. The essay concludes by emphasizing the importance of auditors maintaining independence, minimizing the expectation gap, and taking measures to detect fraud to enhance audit quality and maintain a positive brand image for organizations. The essay references various academic sources to support its arguments and analysis.

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Auditing
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Abstract
The following essay highlights the issues related to audit quality and how it can be
assessed. It also reflects the importance of auditor independence over audit quality. It
has been identified that auditor independence has a positive impact upon the respective
audit quality. On the contrary, the essay also reflects the negative effects of audit
expectations gap upon audit quality and also highlights why audit expectations gap
needs to be reduced in order to increase audit quality.
Introduction
In modern times, the role of auditing is inevitable amount the business organizations. It
can be inferred that with effective auditing of financial statements, the organization will
meet the needs and requirements of its stakeholders (Chan &Vasarhelyi, 2018). If the
audit quality is at par with the financial reporting standards, then the firm can sustain in
the long run. The objective of the research is to identify the importance of audit quality
and how auditor’s independence has an impact on audit quality. The organizations have
witnessed changes in corporate governance structure due to increase of competition.
Therefore, the role of an effective audit framework is inevitable. The audit committees
mainly focus on effective stewardship.
Therefore, the structure of the research will be to identify audit quality, how it is
assessed, impact of auditors independence and expectation gap on audit quality.
Discussion
Audit quality and how it is assessed
The term audit quality mainly comprises of regulations, standards set up by the firms.
The purpose of audit is to increase the confidence of the stakeholders of the financial
statements by providing sufficient audit elements and as per the aspects of financial
reporting framework (Christensen et al. 2016).An audit quality can be referred as the
probability that the auditor will uncover and report the breaches in the financial

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statements. It is the important for an auditor to identify and report all the breaches to the
top management of the respective organization.
The audit quality can be based upon the following factors:-
 Understanding of the auditors about the operations and business risk of the
respective organization
 The accountability of the auditors in engaging the partners of the firm
 The manner in which the auditor’s report is reviewed and monitored.
The indicators of audit quality are as follows:-
 Turnover of audit personnel
 Industry expertise of audit personnel
 Audit hours worked and identification of the risk areas
 Allocation of different phases of audit
 Timely reporting of the weakness that are existing in internal control
 Quality ratings and compensation (Christensen et al. 2016).
From the above points, it can be highlighted that there are several indicators of audit
quality. For example, if the auditor have expertise for that particular industry, they, it is
expected that the audit quality will be good. However, if the auditor is not from the
industry, then, it will have a negative impact on audit quality.
It is the primary responsibility of an auditor to maintain quality throughout the audit
procedure. For this, an auditor needs to report the weaknesses that are existing in
internal control to the board of directors of the organization. The auditor must carry out
his work independently and this will reflect through their audit hours worked and
identification of the risk areas and Allocation of different phases of
audit(Alles,Kogan&Vasarhelyi, 2018).
Audit quality forms the basis of corporate governance and risk management of the
business organizations. If the corporate governance and risk management of the firm is
strong, then, it can be said that the audit quality of the firm is at par with the industry

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standards. The role of internal auditor focusses on the areas having highest risk. The
quality of the audit can be assessed with the help of external review with the help of
audit quality assessment review (Ruhnke& Schmidt, 2014). An effective quality
assessment review helps the organization to improve their respective audit procedure.
There are several steps in order to ascertain audit quality of the respective organization
which are as follows:-
 To identify whether internal audit is adding value to the respective organization
 To analyze whether the internal audit procedure is aligned with risk assessment
and compliance policies of the organization
 To identify whether internal audit has ever had an external review and if yes then
what steps were taken (BowlinHobson &Piercey, 2015).
It is of crucial importance for the organizations to assess the audit quality in a timely
manner. This will further help the organizations to attain their aims and objectives. It
depends upon the board of directors to push internal audit function into a quality
assessment review. Another important part of audit quality assessment review is taking
feedback of the senior managements and members of audit committee in order to judge
the steps of quality assessment (Cameran, Prencipe&Trombetta, 2016).
Impact of auditors’ independence on audit quality
The success of the auditors depend upon the independence of the respective auditor.
The key responsibilities of an auditor is as follows:
 To evaluate whether the financial statements of the organization is at par with the
financial reporting standards
 To undertake the procedure of audit in accordance to the respective audit
standards
 Providing declaration to the directors in their respective report (Abbott et al.
2016)
The auditor’s independence refers that the auditor needs to be impartial while
performing the respective audit procedure. An auditor needs to present an unbiased

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point of view towards the financial statements of the respective organization. The
independence of the auditor can be categorized in three different categories. These are
Programming independence, Investigative independence and reporting independence.
All of these play an important part to analyze whether the auditor is working
independent or not and whether any factor is affecting their independence or not. It can
be inferred that the value of auditing depends upon the perception of the stakeholders
regarding the independent nature of the auditor. However, it has been often seen that
many of the auditors have sacrificed their respective independence. If it is seen that that
any particular auditor has a possibility to earn in any financial incentive in order to retain
that particular client, then, they can sacrifice their independence. In that case, the
respective audit quality will be compromised (Alles, Kogan&Vasarhelyi, 2018).
The threats of auditors’ independence can be evaluated with the help of the following
points:-
 Importance of the client
 Tenure of the respective auditor
 Non-Audit services (BowlinHobson &Piercey, 2015).
These threats also have an impact on audit quality as well. In addition to this, it can be
also inferred that if the independence of the auditor increases then the audit quality will
improve automatically. However, there are other factors as well effecting the audit
quality which are outside the control of auditors. These are as follows:-
 Changes in corporate governance structure
 Problems in audit committees
It is important for an auditor to perform the audit procedure with quality. Their
responsibility is to identify frauds and misinterpretation in the financial statements and
take steps according to that. This is not possible without their independence. Therefore,
it can be referred that more independent the auditor is and more will be audit quality for
the respective organization. It can be also inferred that variations in auditor monitoring

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can be reflected through the faithfulness of information published in the financial
statements of the respective firms (Tepalagul& Lin, 2015).
Impact of audit expectations gap on audit quality
The difference between the actual and expected performance of an auditor can
be inferred as audit expectation gap. It can be also defined as a difference between the
expectations of financial users from the auditors and what auditors themselves believe
their responsibilities are. It can be inferred that if the expectations of the stakeholders of
financial statements are higher, the lower is the credibility of the respective auditor.
Therefore, the existence of auditors’ expectations gap can be complicated in nature due
to the nature of audit function. In case of the organizations Enron and WorldCom, the
auditors failed to meet the expectations of the society and this had a considerable
impact on audit quality as well. In addition to this it can be said that it is primary
responsibility of an auditor to distinguish the perception of the society along with its own
perception. The auditor needs to know how much effort is required and what steps are
required to be taken in order to detect fraud in financial steps. However, the
stakeholders of financial statements expect the auditors to detect frauds (Alles,
Kogan&Vasarhelyi, 2018). If any fraud goes undetected and later if it is disclosed by
accident then it declines the brand image of the organization. Due to this reason, it is
important for an auditor to understand and minimize the expectation gap. There are
several reasons due to which a fraud may go undetected. These are as follows:-
 Lack of awareness
 Lack of experience
 Personal relationships with the respective organizations (Abbott et al. 2016)
The audit expectations gap have two major variables which are in the form of auditors’
effort to detect fraud and auditors ability to get fraud. For example, if an auditor is not
able to detect the fraud due to the required expertise issue, then it will fall under the
category of auditor’s ability to get fraud. On the other hand, if the auditor do not give

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satisfactory effort to detect the fraud, then it will fall under the category of auditors’ effort
to detect fraud.
Both these variables will broaden the expectations gap and thus effecting audit quality.
Therefore, it is the responsibility of the auditor to reduce the audit expectations gap.
This can be done by prompt efforts to reduce frauds, proper auditing plans, several
brainstorming sessions and increasing the personal competencies of the auditor.
Therefore, it can be said that audit expectations gap has negative influence on audit
quality as well as reputation of the auditors as well as the respective organization
(Bedard et al. 2012).
Conclusion
It can be concluded that auditing process have several impacts on the stakeholders of
the financial statements. It is the accountability of an auditor to ensure audit quality in
the audit process and follow the rules and norms of financial reporting standards. In
addition to this, they should be independent enough to carry out the audit process and
ensure that it does not have any impact upon audit quality. The auditors need to take
appropriate measures in order to nullify the expectation gap so that it does not have any
impact on audit quality. Apart from this, steps must be taken to detect frauds and
increase audit quality that will have a positive impact on brand image of the
organization.

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References
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financial reporting quality: The joint importance of independence and
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Alles, M. G., Kogan, A., &Vasarhelyi, M. A. (2018). Putting continuous auditing theory
into practice: Lessons from two pilot implementations. In Continuous Auditing:
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Bedard, J. C., Sutton, S. G., Arnold, V., & Phillips, J. R. (2012). Another piece of the
“expectations gap”: What do investors know about auditor involvement with
information in the annual report?. Current Issues in Auditing, 6(1), A17-A30.
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Chan, D. Y., &Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing.
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Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding
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Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature
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