what is audit quality? what do u think?

Question

i'm doing an assignment, it's about 1500-2000 words essay about audit quality.

Answer 1

Your paper should mention the following:

The major financial reporting failures at Enron and WorldCom, as well as apparent failures at Qwest, Tyco, Adelphia, and others, led to the financial reporting reforms contained in the Sarbanes-Oxley Act of 2002 (SOA). SOA’s reforms directly related to auditors include the establishment of the Public Company Accounting Oversight Board (PCAOB), increased audit committee responsibilities, and mandatory rotation of lead and reviewing audit partners after five consecutive years on an engagement.

In addition, regulators and the business press have shown interest in considering whether long-term relationships between companies and their auditors create a level of closeness that impairs auditor independence and reduces audit quality. (read more at the 1st link)

The term “quality audit” means different things to different people. For example, one survey of financial statement users (Epstein and Geiger, 1994) indicated that 70% of investors believe that audits should provide absolute assurance that there are no material misstatements or fraud in the financial statements. An auditor is likely to think about audit quality in other ways. In addition to strictly following GAAS, an auditor also assesses business risk with the intention of avoiding litigation, minimizing client dissatisfaction, and limiting the damage to a reputation that could follow a “bad” audit.

Somewhere within this continuum is the perspective of the courts. When potential audit failure cases are brought before a judge or jury, no one is certain of the outcome. Audit quality as determined by the courts sometimes results in standards that are more specific than GAAS, other times less.

Measuring audit quality is also problematic. The outcome of audit quality is not directly or immediately observable. Audit quality-control procedures attempt to maintain high standards of control over the process of an audit, but an audit failure usually becomes known in the context of a business failure. When a major company experiences an audit failure, the business press will broadcast it. It is impossible to know the number of poor-quality audits that simply go undetected and unpublicized. A firm may perform a poor-quality audit but, without knowledge of the planning and fieldwork, there could be no indication of it if the financial statements are not materially misstated. Similarly, if a poor-quality audit were performed and a material misstatement overlooked, there may have been no negative repercussions.

Since audit quality is unobservable, researchers look at surrogates or indicators of audit quality, such as the opinions of experts, to determine the inputs and outputs of a quality audit. Other researchers use more objective outputs as a source of determining audit quality. If a firm has a low rate of litigation, gets very good ratings on peer reviews, and seldom has to reissue audit opinions, then one can infer that it performs high-quality audits. (2nd link)

PCAOB - Elements of an Audit Quality Control System. An effective audit quality control system needs to have appropriate policies and procedures related to all critical elements of quality control. In thinking about what elements are critical to a registered firm's quality control, the staff has developed the example of elements of an audit quality control system shown in Figure 1. Following the example is a brief description of each of the elements. (3rd link)