Jonas Tritschler. Audit Quality. Association between published. reporting errors and audit firm. characteristics

Transcription

1 Jonas Tritschler Audit Quality Association between published reporting errors and audit firm characteristics Foreword by Univ.-Prof. Dr. Rudolf Steckel and Univ.-Prof. Dr. David Manry ^ Springer Gabler

2 Table of Contents Foreword Acknowledgements List of Figures List of Tables Abbreviations List of Symbols V VII XV XIX XXI XXIII 1 Introduction Problem Statement Research Objective Research Data and Methodology Basic Assumptions and Hypothesis Outline of this Study 6 2 Literature Review and Current Issues Agency Theory and Audit Services Definitions of Audit Quality Two Main Schools of Thoughts DeAngelo's Definition of Audit Quality Level of Compliance with Standards Financial Reporting Quality and Compliance with Auditing Standards Francis Framework on Audit Quality Research Regulatory Definitions and Frameworks on Audit Quality Directive of the European Union PCAOB's Definition of Audit Quality International Standard on Quality Control (ISQC 1) IAASB Framework on Audit Quality UK Financial Reporting Council's Framework on Audit Quality 24

3 X Table of Contents Overview of Important Institutions Concerned with Audit Quality Determinants of Audit Quality Overview Independence Prerequisite for Professional Judgment Threats to Independence Audit Firm Size Audit Fees Provision of Non-Audit Services Audit Tenure Legal Liability Accounting and Audit Knowledge Client, Industry and Audit Experience Audit Effert and Resource Mix Audit Methodology and Tools Criticism on Selected on Audit Quality Measures Earnings Management Restatements Going-Concern Reporting Conclusion and Knowledge Gap 67 3 Audit Quality Measure Based on Reporting Errors Overall Audit Objectives and Audit Failures Overall Objectives of the Auditor Material Misstatements Misstatements in Financial Statements Materiality Concepts of Materiality Quantitative Considerations of Materiality Qualitative Considerations of Materiality Audit Risk and Materiality Consequences Audit Failures Definitions Indicators of Audit Failures Significant Audit Engagement Deficiencies 83

4 äble of Contents XI Restatements Litigations Accounting Enforcement Releases Accounting Enforcement in Germany Legal Basis Examination Triggers Examination with Cause (Concrete Indicators) Examination on Request by BaFin (Certain Indicators) Examination by Random Sampling (no Indicators) Enforcement Process Examination Commencemen t Examination Process Process for Publication Materiality in the Enforcement Process Summary of Enforcement Results Error Rate Trend Error Categories Causes of High Error Rates Evaluation of the Enforcement Methodology Evaluation Criteria Evaluation by Criteria Objectivity Reliability Validity Transparency Adequacy Reflexivity Discussion of Limitations Triangulation Evaluation Summary Published Reporting Errors as Audit Quality Indicator Audit Failure Rates Definitions Auditors'Absolute Failure Frequency Auditors' Relative Failure Frequency Data Description Data Basis 130

5 XII Table of Contents Distribution of Absolute Failure Frequencies PIE Market Concentration Data Analysis Absolute Failure Frequencies Relative Failure Frequencies Big vs. Small Audit Firms Conclusions Reporting Errors and Audit Firm Characteristics Audit Service Production Models Audit Production Function A Modified Audit Production Framework Audit Input Factors Audit Input Factors Overview Auditores Competence and Audit Effort Cost-Optimization Model Optimization Model for the Input Factors Audit Time and Experience Auditores Competence Audit Effort Audit Methodology Audit Support Systems Preparing and Auditing Financial Statements Process Overview Financial Statement Preparation Audit Process Interactions and Iterative Process Audit Firm Structure and Audit Firm Characteristics Multinational Audit Firms and SMP Organizational Levels of Multi-National Audit Firms Structure of Audit Firm's Organization Audit Engagement Team Structure Employee Specialization Accessible Audit Firm Characteristics Audit Firm Characteristics and Financial Reporting Errors Working Hypothesis Research Model 175

6 Table of Contents Xin Research Data Certified Audit Professionals Ratio Employee Experience Average of Experience per Employee Total Years of Experience of all Employees Client-Specific Experience Results Summary Summary and Conclusions Conclusions on Literature Review and Current Issues Summary and Conclusions on Empirical Study Limitations and Further Research 196 Appendix 199 Appendix A: Published Reporting Errors 199 Appendix B: Involved Audit Firms 204 Appendix C: Data Basis for Certification Rate Calculation 206 Appendix D: Example Calculation of Isoquality Curves 210 Appendix E: Derivation of Formulas 216 References 219