Table of Contents
Carrying out of auditing is very essential for all companies and institutions because it ensures that all these institutions and companies are properly using the correct policies that are prescribed by the laws and that the public funds are in safe hands. The fundamental merit of audit is that it facilitates the evaluation and comparison of different companies and institutions as the professional auditors obtain chances of expressing their views about the procedures’ fairness whereby the company or institution that is given a good opinion is considered as following and applying the set laws. Through auditing, the managers are barred from indulging themselves in fraudulent activities because auditing brings in the aspect of accountability. On the other hand, auditing is a costly exercise because the involved auditors are heavily paid and it is also costly for the companies to maintain well detailed records of all the transactions. This essay defines and explains audit quality and critically discusses the issue of audit quality, the problem of audit market concentration and possible solutions in relation to audit quality.
Audit quality is the management tool that evaluates, confirms and verifies all the quality related activities and practices. It delivers an independent professional view on the financial statements that is reinforced by objective judgments and relevant evidence. It is usually achieved when the involved auditors comply with the entire audit and ethical requirements that ensures professional competence, behavior, integrity and confidentiality. This audit quality is usually influenced by the thoroughness and objectivity of the audit. It is also dependent on the experience and skills/knowledge of the involved auditor. A good audit gives a clear picture of the conditions of the companies or institutions that are fully reflected in the available data and it is carried out without prejudice. The quality of audit is enhanced by timely completion of audit exercise in order to allow for appropriate action to be taken with respect to the outcomes of the process. The high standard audit quality assures the stakeholders and the entire public that their funds are not subject to fraud and inappropriate use and it ensures transparency that enhances marketplace confidence. On the other hand, poor audit quality leads to the bankruptcy and collapse of many companies and institutions.
The various requirements that leads to achievement of audit quality
Audit quality requires concepts of professional competence and the attainment of the ethical and technical professional standards in the expression of various opinions on the audited data/statements, in carrying out other attest activities and provision of other accounting services. The auditing standards are the key factors that facilitate audit quality which has inputs and outputs as the basic aspects. The major inputs include the process of auditing which incorporates the legitimacy of the methodology used, effectiveness of the tools used and the technical support available and the personal attributes of the auditor such as the experience and ethics. The audit output influences audit quality since they are important in the assessment of the audit quality by the relevant stakeholders and clients. For instance, the auditing reports which clearly reflect the actual auditing outcome is considered to positively influence the quality of audit. Also, the communication of the involved auditors to those with the responsibility of dealing with matters related to qualitative aspects of the financial reports of the entity leads to the achievement of audit quality.
The companies should ensure that the appropriate control measures of quality are incorporated in the process of enhancing quality of the companies’ auditing and accounting process. This should be done at the initial level for the purpose of facilitating proper documentation and reviews by the skilled personnel ( McDonnell J, Winograd N, Gerson S, Jaenicke R & Vincent M. 1999). Due to the fact that each institution has its unique policies concerning the documentation, consultation, reviews and specific enforcement means is dependent on its organizational structure, management philosophy and size, all this aspects must be present in one form or another. Also, to enhance audit quality, various incentives that maintain the audit quality should be provided through appropriate regulatory mechanisms. The incentives also ensure good individual engagements as a sole way of facilitating professional excellence and maintaining good audit reputation. The regulatory mechanisms involved in the provision of incentives include the various disciplinary systems that are provided by various agencies of the government and the self regulatory profession systems.
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The role of the self regulatory profession system is to impose some penalties for the practices that deviate from the set professional standards. Also, the system develops the quality control recommendations which provide an assurance that all the certified public accountants firms conforms to the required standards in their auditing and accounting practices. For example, in ensuring audit quality in America, the American Institute of Certified Public Accountants (AICIPA) demands that all the people engaged in the auditing and accounting in the country should practice as the employees of the firms that are under the program that monitors their activities in order to be members of the institute. The firms should be litigation and sanctions in the conduct of their auditing and accounting practices in order to maintain the audit quality. In addition, the companies committees and customers should put pressure on the firms to maintain the required audit quality because it increases the ability of the firm to attract professional personnel and more customers.
Problems of audit market concentration
The various difficulties of the market concentration include high barriers to entry, negative perceptions and lack of choice. There exists a barrier onto auditing large companies due to their size and the gap that exists between the second tier of the auditing forms. This is due to the lack of enough resources by the audit firms to enable them audit these large companies. Also, the investment to audit larger companies is prone to many risks due to very high costs that are as incurred to meet the requirements of auditing these large companies and institutions.
The reputation of some companies makes a significant driver in the choice of an editing firm. This favors the big firms only even if the choice is based on perceived differences or real scenarios. This denies other firms the opportunity to carry out the audit practices even if they possess the required abilities. This is a very serious problem since the large companies choose the audit firms without considering their capabilities but on the reputation they have in the market. Lack of choice another problem. For instance, very large companies face difficulties in choosing the audit firm to conduct the auditing activity. Due to the regulations that that surround the audit work, some companies end up lacking an alternative choice of the auditor in future. This lack of choice leads to very high costs which will continue to take effect for a long time and there will be no lowering of the audit prices.
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Solutions to audit market concentration problem
To eliminate the audit market concentration problem, the capabilities awareness should be raised. This will lead to creation of transparency on various audit firm’s abilities and resources and it will reduce the relying on reputations and audit firms branding in the making of choices. This will also enable the small companies to be viable in auditing field. Secondly, the perceptions should be changed and the small firms should merge and come up with large auditing firms so that they can get equal chances in the market.
Impact of audit market concentration on audit quality
Higher audit market concentration leads to the lower audit quality. Since the big companies are the only ones with the access to the auditing market, they may end up providing poor quality services leading to the low audit quality.
Conclusions and recommendations
Audit quality is the management tool that evaluates, confirms and verifies all the quality related activities and practices which delivers an independent professional view on the financial statements that is reinforced by objective judgments and relevant evidence. Audit quality requires concepts of professional competence and the attainment of the ethical and technical professional standards in the expression of various opinions on the audited data/statements, in carrying out other attest activities and provision of other accounting services. The companies should ensure that the appropriate control measures of quality are incorporated in the process of enhancing quality of the companies’ auditing and accounting process.
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The various difficulties of the market concentration include high barriers to entry, negative perceptions and lack of choice and the solutions are eliminating the audit market concentration problem, the capabilities awareness should be raised and changing the perceptions. In future, the audit quality should be enhanced by engaging all the stakeholders in important decision making debates. This will lead to the reali8zation of the importance of the basic engagement among the people with immediate responsibilities for the audit quality such as the regulators and those involved in the process of governance on important matters such as the collection of audit quality insights.