This course provides an intensive conceptual and applied introduction to auditing in society. It focuses on concepts and applications related to financial-statement auditors’ professional responsibilities as well as major facets of the audit process including risk assessment and audit reporting. In the U.S. financial-statement audits and related services generally are provided by Certified Public Accountants (CPAs). To succeed in this course, you should anticipate engaging in critical thinking and thoughtful communication about audit professionals' decision environments, decision processes, and deliverables. Additionally, you should understand the macro-level learning objectives in each of the course's weekly modules.
Audit Quality Indicators Part II
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From the course by University of Illinois at Urbana-Champaign
Auditing I: Conceptual Foundations of Auditing
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From the lesson
MODULE 8: Audit Quality
Meet the Instructors
Mark E. Peecher, PhD, CPAAssociate Dean of Faculty and Deloitte Professor of Accountancy
Department of Accountancy
Audit quality like financial reporting quality not
withstanding the PricewaterhouseCoopers audit quality document,
and there are similar documents by other audit firms and
as someone who engages in a high level of learning in the area,
you could take a look at those other statements,
or if you're an audit researcher,
you'll look at these types of statements.
The Financial Reporting Council in the United Kingdom
cautions that there is no single definition of audit quality,
that one can use unthoughtfully and
uncritically as a way to compare against actual performance.
Let me give you a quick example.
Suppose that one audit firm says,
what we like to do is look at those companies that inherently
have a high business risk because these companies although they often will fail,
these are precisely the companies that will tend to
provide the home run using a baseball analogy.
The home run type of new service or new product that can really benefit society.
So, we're going to be that kind of audit firm.
We're going to seek those types of
situations and in those companies where there's a high degree of business risks,
you will from time to time encounter these mavericks that
will either have overly optimistic views of reality themselves,
candy coated views viewing their businesses through
rose-colored lenses that they may have in good faith and
incorrect overly optimistic view of what
their financial statements should report and you may even get
some average from time to time stretch the truth and commit fraud.
In our audit business,
you're going to see more mis-statements, okay?
But that doesn't mean the quality of our audits is lower than that of our peers.
That simply means we have harder cases.
It would be a little like saying that let's measure the quality of the emergency room,
medical care in a rural hospital where there is zero to very low levels of
gang violence and drug trafficking in
an urban area where there is just outside of the urban area
a bunch of legal crops of illicit drugs and so there's a much higher incidence
of hard cases coming to the ER at this metropolitan hospital versus a rural hospital.
So, one thing you have to do as a researcher and
as an investor when you're trying to think about audit quality,
is control for the type of patients if you will that the audit firms are dealing with.
Now, the other thing that I like about
the Financial Reporting Council view audit quality,
it takes full stock of how their audit report in the UK differs from
the audit report you see in the United States and they would
tell you that the auditor's opinion is two fold.
It's not simply that the financial statements
comply in all material respects to Generally Accepted Accounting Principles.
No, it says in addition to that,
it says that the financial statements in the auditor's opinion provide
a true and fair view of that company's operations financial position and cash flows.
I love that. I think that brings tremendous value to
the report but they're also stressing that this
is inherently subjective and you're going to get
different judgments by different engagement partners.
Much like you would get different judgments by
very different, highly specialized positions.
You go get second opinions and if you have a different opinion from one let's say
eye specialist about whether surgery is advised compared to
another specialist who has a different view about whether surgery is advised.
That doesn't mean that one is incompetent.
That means they have a difference in judgment, subjective professional judgment.
In the academic space,
audit quality is divided into three areas primarily.
One is competence and actually coming up with
your audit findings which means competence and
planning the audit and getting the evidence.
So, there's the competence in getting the evidence and
then there is honesty in reporting what you really find.
So, that's a little bit of an artificial bifurcation but it does get at, "Hey,
are you competent in what you do and do you have the courage and
integrity in the call of independence
often in the literature to actually tell the world what you think?"
The other thing is is that it engages one line of
research in the academic world is viewing auditing as an exercise
and constantly and pervasively persuading management to not get away with things in
the financial reporting but actually as an opportunity to develop a reputation as
a high-quality reporter and if you have this reputation as being a high-quality reporter,
you're going to get rewarded by investors in the market.
In addition to knowing and having the self-satisfaction that you've done the right thing,
you've done something well from an ethical perspective.
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