Evulation of Audit Tenure, Industry Specialization, and Firm Size Affects Financial Restatements

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things

We find no difference in audit quality between these two samples. Second, we compare the mandatory rotation sample with itself one year earlier (2003) (the mandatory rotation sample in the prior year). We find that the audit quality of companies in the mandatory rotation sample under new audit partners is lower than the audit quality of these same companies one year earlier under old audit partners. Third, we compare our mandatory rotation sample with companies in years before 2003 whose audit partners were voluntarily rotated within the same audit firm (the voluntary rotation sample). We again find no difference in audit quality between these two samples. In sum, we find no support for the belief that mandatory audit partner rotation enhances audit quality. Our findings are robust to various sensitivity checks. Next, we examine the effect of mandatory audit partner rotation on investor perceptions of audit quality, using the earnings response coefficient (ERC) as a proxy for perceived audit quality (Teoh and Wong 1993; Ghosh and Moon 2005), After controlling for common determinants of the ERC, we find that the ERC of the mandatory rotation sample is not significantly different from that of the nonrotation sample or that of the mandatory rotation sample in the prior year, but is significantly larger than the ERC of the voluntary rotation sample. Overall, we find no consistent support for the belief that mandatory

Carcello, Hollingsworth and Mastrolia tested whether PCAOB annual inspections result in higher quality financial reporting (Carcello, Mastrolia, & Hollingsworth, 2011). They compare abnormal accruals reported by audit clients before and after initial inspections by PCAOB (Carcello, Mastrolia, & Hollingsworth, 2011). If the inspections result in improved auditing, they expect to see less earnings management after the initial inspection (Carcello, Mastrolia, & Hollingsworth, 2011). For comparison purposes, they make the same observations before and after AICPA peer review inspections made prior to SOX (Carcello, Mastrolia, & Hollingsworth, 2011). They find a significant decrease in income-increasing abnormal accruals in the first and second years

The company is struggling with the implementation of new IT systems. This new system has eliminated the audit work since it has problem on the accuracy for most of the report such as: internal management budget report, inventory status report, and payroll tax deductions, etc. especially when Barnes and Fischer is not familiar with the system. To be noted the new IT system was implicated in early 2011, but the new controller who was in charge of accounting reporting and be responsible for the accuracy just got hired few months before the year of 2011 end. Thus, the auditors may have difficulty time getting additional help from the controller as well as the information they need from the system and may increase the amount of time and cost on applicable testing required. Last but not lease, Ocean Manufacturing has changed auditors three times over the past 12 years. They also had problem on agreeing on auditing fees. This cause of concern. I believe there has to be something inherently wrong in the company system.

Professional trends, particularly the demand for faster reporting of financial information as suggested by Securities Exchange Commission’s (SEC) recent reporting period change[2], put pressure on auditors to rely on internal rather than more persuasive external evidence items (CICA, 1999; Bierstaker et al., 2001; Helms, 2002; Hunton et al., 2003; LeGrand, 2002; SEC, 2002, 2005).

Lindberg and Beck (2002) claim that auditor independence is hailed as the “cornerstone” in the accounting profession as it is the core reason as to why the public trusts their professional opinion. However, since 2000, many accounting fraud scandals have negatively impacted public opinion on the legitimacy of the audit profession and, if in fact, its independence is uninfluenced by other parties. One of the scandals being the sudden collapse of Enron, given that a few months prior its bankruptcy its auditors Arthur Andersen, which was one of the five largest audit and accounting firms, claimed that Enron was financially healthy, but in fact they were paid off

The positive effects of audit firm rotation are described in this section. Audit firm rotation prevents auditors from having relationships with managers. These relationships have a negative effect on audit independence because these relationships may prevent the auditor from reporting certain breaches (Jackson et al., 2008). The prevention of these relationships also prevents aggressive accounting acceptance by the audit firm (Myers et al., 2003). With long audit tenure, the skeptical attitude towards gathering and evaluating evidence may be lower since the auditor relies too much on client experience and previous audits. This is confirmed by Shockley (1981) and Hoyle (1978), who mention that long audit tenure has a negative impact on the independence level of the

Audit quality is crucial for financial statements users and efficient capital markets. However, how to measure audit quality properly has been a controversial issue, because quality is not observable. With no uniform definition of audit quality, prior researchers developed various audit quality proxies. Earning quality is one of the most commonly used measure for audit quality. Client discretionary accruals, meet or beat earnings target, and likelihood of restatement are all under this category. Among those, discretionary accruals are the most widely used, because it is positively related to earnings management, which reflects audit quality. The purpose of this review is to summarize the most commonly used models to measure discretionary accruals by previous literature, and to help future studies to choose from these models when they are used as audit quality proxies.

The presence of an external auditor allows creditors, investors or bankers to use financial statements that have been prepared with confidence. Although it does not guarantee the accuracy of a financial statement, it provides users with some reassurance that a company’s financial statements give a true and fair view of its financial position and its business operations. It also provides credibility, where in business, is a major asset. With credibility, the willingness of investors, bankers and others to relate and undertake business projects with a company increases. Credibility is also important to build positive reputations.

The majority of the world’s financial audits are dominated by four major audit firms, which are known as the “Big 4” (PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte). Prior studies suggest that these firms, on average, provide higher quality audit services and also exhibit a fee premium in comparison with their non-Big 4 audit firms; however, it is questionable that whether all these Big 4 audit firms are the same and that whether there are differences in audit quality within the Big 4.

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).

The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.

A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of