Factors influencing audit quality

Factors Influencing the Audit Quality

Instructor Tanya Haddad

Yavrum Taghizade

6/23/2015

FACTORS INFLUENCING THE AUDIT QUALITY

Table of ContentsI. Executive Summary.............................................................................................................................1

II. Introduction.........................................................................................................................................2

III. Review of Literature............................................................................................................................3

IV Analysis................................................................................................................................................9

V. Recommendations.............................................................................................................................12

VI. Summary and Conclusions.................................................................................................................15

VII. References.........................................................................................................................................18


I. Executive Summary

One of the main responsibilities accountants have is providing investors, shareholders,

and creditors with information that is useful for decision-making. The auditors’ role in this

process is to ensure proper accounting treatment and fair representation. Thus, in order to

present users with transparent financial statements, auditors have to maintain a high-quality

audit.

There are numerous issues standing in the way of a properly performed audit. Regulatory

constraints and ethical considerations are not the only problems limiting the audit, there are also

various challenges faced by the auditors in their everyday routine. This research paper discusses

auditors’ independency, personal biases, and miscommunication with the internal audit

department as factors influencing the external auditors’ ability to remain objective and perform

an effective audit.

Internal-external auditors’ communication is a very crucial portion of the audit process.

The efficiency, cost, and timeliness of an audit depend on this relationship. An internal audit

department understands a company’s operations and regulations better than the external auditor,

and should guide an external auditor through confusing areas. Also, this communication allows

an external partner to rely on the internal auditors, thus, eliminating the need for duplicate work.

At the same time, in order to rely on documents and procedures provided by the internal auditor,

external auditors must be confident in the truthfulness of the internal work papers. There are two

methods used by internal audit departments that are considered to be trustworthy – continuous

auditing and outsourcing the internal audit function.

Page 1 of 24


Continuous auditing is a dynamic technology, providing continuous data assurance and

control monitoring in real time. Configurable items could be adjusted to point out various red

flags, serving as an extra control level, and providing a timely analysis of the current situation.

The system should be implemented and maintained by a trained audit department employee.

Among other advantages, an audit becomes more efficient, and results in fee savings in the long-

run.

Outsourcing is another reliable method used by the companies to reduce the audit time

and cost. The biggest advantage of outsourcing is the independence of the internal auditor from

the company’s management, and as a result lack of management’s pressure. This means that the

results provided by outsourcing are unbiased and more objective compared to the company’s

internal audit function.

Another issue influencing the auditors’ judgment is cognitive biases. Bias influences an

auditor through psychological mechanisms, and impairs an auditor’s objectivity by providing

easier, more convenient solutions. Many de-biasing techniques are known to help auditors to

restore their objectivity and provide high-quality audit.

Lastly, the new partner rotation period requirement has been established as a part of

promoting auditors’ independency. Although the theoretical side of this requirement seems to be

working effectively, the profession’s representatives argue with the benefits of the requirement.

In order to obtain new “fresh look” and maintain the auditor independency, a new requirement

sacrifices the depth of the company specific knowledge, lowering the audit quality for 2-3 years

after each partner rotation.

Page 2 of 24


II. Introduction

Public companies and financial statements users are concerned about the quality of the

financial statements. This problem arises due to a number of factors influencing an external

auditor’s decision-making process and impaired judgment. Personal biases, independency, and

miscommunication with internal auditors bring the quality of an audit down, resulting in poor

quality financial statements. To address the issue properly, these factors should be thoroughly

stated and researched.

There is clearly a problem regarding the communication between public auditors and

companies’ internal audit committees. Due to poor internal-external auditor communication, an

audit becomes less efficient, requires more time to perform, and allows an opportunity for

mistakes. A lack of communication allows for misunderstanding, requiring greater attention to

details and additional work, which also leads to a higher audit cost and delays the issuance of the

financial statements. Personal biases as well as impaired independency directly influence the

auditors’ ability to remain objective and disregard particular preferences.

The topic of this paper is tied up to these current issues in the accounting profession, and

clearly identifies the problems auditors face in their practice. The research allows a deeper

understanding of strengths and weaknesses of the existing auditing system. The literature

consists of theoretical articles as well as practical cases. The analysis portion discusses the

literature providing more details and opposing opinions. Additionally, recommendations are

provided in order to find the solution best suited for the application in the work field.

III. Review of Literature

Internal-External Auditor Communication

Page 3 of 24


Public companies are facing pressure in presenting their financial statements due to

regulatory restraints, and improved reliability demands (Malaescu & Sutton, 2015). In order to

present timely information, free of error, and reliable for decision-making, companies should

strive for better communication with external auditors. According to Schneider (2009), a survey

of 117 auditing firms showed that 88% of their auditors rely on internal auditing to some extent.

Moreover, the Public Company Accounting Oversight Board (PCAOB) mandates an external

auditor to rely on internal audit work when appropriate, to ensure the timeliness of the audit

(Malaescu et al. 2015). An external auditor must have an understanding of the internal audit

structure, and assess its competence and objectivity, to be able to rely on results provided by the

internal audit function (Davidson, Desai & Gerard, 2013). A survey investigating the perception

of external auditors regarding the information provided by internal audit showed that the

majority of the external auditors prefer the work performed by an outsourced auditor, or through

the continuous auditing concept (Davidson et al. 2013).

Continuous Auditing

Among other challenges, companies face the need for timely risk and control identification

(Heffes, 2006). After the Sarbanes-Oxley Act (SOX) established new requirements for efficient

internal auditing and effective control over the audit, companies started to move towards an

automated system of an internal audit control (Davidson et al. 2013). In order to increase the

efficiency of internal audit, and make it possible for an external auditor to rely on it, companies

are switching to Continuous Auditing (CA) technologies (Davidson et al. 2013). CA is a concept

used by a company’s internal auditor to execute continuous audit procedures in real time

(Davidson et al. 2013). Continuous auditing is a very dynamic technology: it allows setting

certain configurable items, thus providing an extra control level (De Aquino, Da Silva, &

Page 4 of 24


Vasarhelyi, 2008). The activities performed by CA include both continuous data assurance

(CDA), and continuous control monitoring (CCM) (Malaescu et al. 2015). CDA verifies data,

transactions and process metrics, while CCM monitors system configurations and process

settings (Malaescu et al. 2015). The system should be implemented and maintained by a person

with a deep knowledge of company specifics, as well as audit and business processes for proper

control and parameter settings (Davidson et al. 2013).

Numerous research studies conducted over the past decade show the increasing percentage

of companies adopting or planning to adopt CA techniques (Davidson et al. 2013; Malaescu et

al. 2015). This growing interest could be explained by the many advantages the CA system

offers. First of all, the system is in compliance with SOX requirements regarding effective

internal controls (Malaescu et al. 2015). At the same time, it is more cost-efficient to switch from

paid employees to an automated system. It also provides management with a timely analysis in

critical situations in order to alert any misstatements (Davidson et al. 2013). Although CA

proved itself extremely useful in the numerous research and experiment cases, there are still a lot

of companies delaying the implementation (Malaescu et al. 2015).

Outsourcing

The external auditor’s reliance decision has an important influence on the timeliness and

effectiveness of the overall audit. This decision is significantly impacted by the difference

between outsourcing the internal audit results and performing them in-house (Davidson et al.

2013). It has been proven by many research studies that external auditors prefer the outsourced

internal audit work when inherent risk is high (Davidson et al. 2013; Malaescu et al. 2015). This

could also be explained by the pressures an in-house internal auditor may encounter. It is more

likely for the management to affect the in-house internal audit function, because the outsourced

Page 5 of 24


internal audit is not reporting to the company’s management, and has fewer biases regarding the

information (Davidson et al. 2013). Even though it is an extremely useful tool for public

companies, survey shows only 2% out of 300 companies actually outsource their internal audit

function (Davidson et al., 2013). This could be explained by the additional costs of maintaining

both the in-house internal audit department and outsourcing fees.

Auditor’s Personal Bias

Audit is a process of obtaining and assessing the relevant evidence as the basis for a quality

audit opinion (Parker & Fogarty, 2012). The opinion relies completely on external auditor’s

judgment and analytical procedures, since auditing does not consist of strong cause-effect chains

(Parker et al. 2012). This includes forming an expectation about the company’s balances and the

degree to which it is similar to the actual numbers (Pike, Curtis & Chui, 2013). The analytical

procedures performed by the auditor when setting the expectations involve obtaining knowledge

about the client, industry and overall economics (Pike et al. 2013). This procedure is frequently

destined to fail due to availability of the company’s unaudited balances at the early expectation

formation stage. It is psychologically proven that humans tend to integrate readily available

information into decision-making processes, regardless of the relevancy degree of that

information (Pike et al. 2013; Parker et al. 2012). No matter how professional and experienced

the auditor is, personal expectations and cognitive biases could affect the audit opinion, when

obtained evidence does not sufficiently support the activity.

Cognitive Biases

Psychologist Daniel Kahneman (1972) defined the term “cognitive bias” describing the

human tendency to make systematical mistakes in judgment when concluding a decision (Knapp

& Knapp, 2012). This means that cognitive biases constantly influence individuals in everyday

Page 6 of 24


decisions, and when it comes to an external auditor this effect is crucial in multiple ways. For

instance, an auditor might subconsciously reject the stronger relevant evidence under the

impression of a personal assumption about the management assertion (Knapp et al. 2012). This is

a cognitive dissonance mechanism that prevents new information from being evaluated as it is

(Parker et al. 2012). Another bias problem is the auditor’s tendency to predict the possibility of a

certain event based on general previous experience rather than relying on company

circumstances (Knapp et al. 2012). The other common issue is the desire to simplify and

expedite the decision-making process through a familiar alternative solution (Knapp et al. 2012).

This means that in high-stress situations, when making an important decision under a great

pressure, the auditor will more likely to pick the easier solution used before, even if the situation

is not quite the same. The same mechanism works when deciding between letting the little

mistake go, or proceeding with routine punishment procedures – if there is not much harm, a

number of people will let it go instead of drawing attention to the matter. Lastly, an auditor

becomes a victim of his own previously made decision, and is unable to admit that the decision is

wrong, despite the strong evidence gathered (Knapp et al. 2012). This happens because of the

conflict of pre-existing beliefs with the new challenging information, creating a stressful

environment for a person (Parker et al. 2012).

Auditor Independency

The PCAOB (2012) findings state that the lack of independency in the audit process is one

of the main problems leading to accounting scandals and audit failures (Church, Jenkins,

McCracken, Roush, & Stanley, 2015). The actual independence is the key to the auditor’s ability

to overcome personal biases, and provide objective judgment and transparent reports (Church et

al., 2015). The importance of an auditor’s independency has been further emphasized by the vast

Page 7 of 24


amount of policies mandated by the PCAOB and the Securities and Exchange Committee (SEC)

(Church et al., 2015). The main independency issues impairing auditors’ judgment are

considered to be developed from the auditors’ relationships with the client, and the desire to

support the company’s preferences (Church et al., 2015). Client preferences have great impact

on an auditor’s objectivity, and the pressure of these preferences may lead to inappropriate

accounting treatment (Krishna, Seetharaman, & Saravanan, 2010). A number of studies report

that auditors are more likely to support the method preferred by the client if they are aware of

that preference prior to the evidence evaluation process (Church et al., 2015; Krishna et al.,

2010). Most of the PCAOB’s concerns regarding the audit quality arise from the shortcomings of

auditor’s independency and professional skepticism (Church et al., 2015).

Partner Rotation

Partner rotation was one of the steps towards high-quality financial information – it

maintains auditor independency requirements. A five year rotation period and five year cooling-

off period substituted the previous seven and two years, respectively (Litt, Sharma, Simpson, &

Tanyi, 2014; Daugherty, Dickins, Hatfield, & Higgs, 2012). The change was initiated by Section

302 of the SOX Act, with the purpose of ensuring external auditor independency, and preventing

fraudulent activities (Litt et al., 2014). The main objectives were to reduce the period of

engagement with an auditor in order to achieve actual independence, and obtain a “fresh look”

on the company by the new partner (Daugherty et al., 2012). Although it sounds like an effective

way to enhance the audit quality, this new partner rotation requirement received strong

disapproval from practicing professionals and company executives. In 2008, The Advisory

Committee on the Auditing Profession (ACAP) heard testimony about the unfavorable impact of

required partner rotation on audit quality and partners’ quality of life (Daugherty et al., 2012).

Page 8 of 24


Many auditors expressed an opinion that a new partner does not possess sufficient knowledge

about the company and its operations, which means the quality of audit is lowered during the

first two or three years (Litt et al., 2014). Audit firms and an association of leading corporate

Chief Executive Officers (CEO) have been concerned about the loss of engagement with the

partners due to the complexity and volume of operations, and the nature of transactions large

companies deal with (Litt et al., 2014). Also, reduced time for partner rotation and an extended

cooling-off period create a problem for large corporations in certain industries where a limited

number of auditors have appropriate knowledge and experience to perform an audit (Litt et al.,

2014).

As mentioned before, the partner rotation requirement does not just harm the company-

auditor communication, but it also affects the quality of partners’ life. Some of the auditors

interviewed by Daugherty, Dickins, Hatfield, and Higgs (2012) named the quality of life as their

“primary concern” – frequent partner rotation means an increased amount of relocations for the

auditor. It may have an influence on auditors’ careers as they try to minimize the chances of

relocation. This means training for more and broader industries rather than perfecting one in

depth, which eventually results in less specific expertise and low audit quality (Daugherty et al.,

2012). Relocation itself brings a lot of inconvenience to the auditors’ lives: family situations and

commute might negatively affect the auditors, impairing their personal judgment and job

satisfaction (Daugherty et al., 2012). This may result in poor client service and lower audit

quality as well. Shortened periods for partner rotation and a prolonged cooling-off period

requirement lowers the audit quality, and consequently reduces the quality of the financial

statements, thus harming the investors’ interests (Litt et al., 2014).

Page 9 of 24


IV. Analysis

Communication

Although an auditor’s knowledge and experience play a big role in the profession,

communication skills are the key to a successful relationship with the client. Communication is

not only the way to provide feedback to the client, but also a way of establishing an appropriate

work environment. Krishna (2010) provides a list of the most frequent and serious barriers

standing in the way of improved communication and clear understanding between the external

auditor and client company. At the top of the list were omission of information and lack of trust,

which disrupt the professional relationship, bringing additional difficulties into the audit process

(Krishna et al., 2010). Building a strong communication with the internal audit department helps

to avoid unnecessary audit procedures, since internal auditors have a better understanding of

company operations, transactions, and regulations (Schneider, 2009). In order to rely on internal

audit function, outside auditor should be confident in the material provided to him. Continuous

auditing and outsourced internal auditing are accepted by the auditors as reliable sources of valid

information.

Even though the CA system has been available since 1970, certain obstacles postponed

the mass adoption (Heffes, 2006). Slow transaction processing performance, security and control

issues, implementation and maintenance costs, information overload, as well as the lack of

professionals in the field were the main reasons slowing CA adoption down at the time

(Davidson et al., 2013). With technology development and more information available these

obstacles can be removed. According to PricewaterhouseCoopers (PwC), more than 80% of 400

companies surveyed in 2006 stated that they either had CA implemented or planning on

developing the concept in the near future (Heffes, 2006). This means that most of the public

Page 10 of 24


companies understand the benefits provided by the CA and strategically move towards stronger

internal controls.

Biases

Unbiased, objective auditor judgment is one of the most critical elements of an audit. Not

only is it required by the auditing regulations, but it also shows the degree of professionalism the

auditor has. Despite that, it is psychologically proven that auditors cannot resist certain cognitive

biases arising from personal issues and relationships with clients (Pike et al., 2013).

The two types of the cognitive bias that affect an auditor the most are “anchoring” and

“confirmation” (Church et al., 2015; Knapp et al., 2012). It is believed that information

voluntarily provided by the client before the initial engagement stages influences the auditors’

objectivity, and unconsciously makes them approve the client’s choice of accounting methods

and confirm the financial statements clarity. (Church et al., 2015; Knapp et al., 2012). After a

certain level of familiarity with the company is achieved, these biases arise and have a stronger

impact on auditors, further impairing their independency (Church et al., 2015). For instance, the

auditors of “Just for Feet Inc.” were criticized by the SEC because of “anchoring” bias (Knapp et

al., 2012). The external auditors failed to persuade the company to adjust the allowances for

obsolete inventory (Knapp et al., 2012). Although they initially proposed an increase in the

allowance, later they settled with the numbers provided by the client even though the allowance

account was clearly understated (Knapp et al., 2012). This might be extremely dangerous due to

client’s ability to intentionally affect the auditor and present to the public the financials suitable

for a company.

Independency

Page 11 of 24


Auditors’ independency is a cornerstone of the audit profession and the foundation for the

public’s trust (Krishna et al., 2010). It is extremely hard to define an auditor’s independency, so

authoritative bodies often provide the examples of improper behavior, guiding the auditors

through do’s and do not’s (Church et al., 2015). Auditor independency remains one of the

biggest concerns the PCAOB has about auditing (Daugherty et al., 2012).

Peytcheva and Gillett (2011) expressed an opinion that auditors can be influenced by the

superior’s or predecessor partner’s opinion regarding the conflicting situation, and as a result

provide bias conclusions in their reports. This means that an auditor with less experience might

rely on the predecessor’s opinion, relying on the expertise the previous partner has. It goes

against the PCAOB’s “fresh look” concept and impairs the objectivity to the maximum extent.

Although communication between the predecessor partner and current auditor is crucial for

certain stages of the auditing process, it is important to understand that there is a thin line

between taking other’s opinion into considerations and blindly following them.

Church (2015) emphasizes that the length of the auditor-client relationship directly

influences the auditors; they tend to identify themselves with the client and are more likely to

accept the explanations given by the client, thus impairing the objectivity. The effects of this

impaired judgment magnify over time and the trust the auditors have for the client becomes

stronger, weakening their level of professional skepticism. Even though client preference plays a

great role in shaping auditors’ opinion, auditors should understand that they will be held

accountable for the decision in the future (Krishna et al., 2010).

Page 12 of 24


V. Recommendations

Over the past decades, many things have been done to improve auditing standards and

procedures. Although authoritative bodies keep the regulatory portion up-to-date, the practical

side of the audit must also be controlled. Following recommendations could be helpful in

maintaining a consistent level of audit quality by joining the efforts of audit companies and

regulatory boards.

To ensure a proper degree of communication without impairing the auditor’s judgment, all

of the internal audit department activity should be provided to the auditor. The auditor should

have unrestricted access to records, assets, and personnel, as well as the necessary explanations

needed for the uninterrupted audit process (Krishna et al., 2010).

One of the biggest problems standing in the way of continuous auditing implementation is

the lack of information about the technology (Malaescu et al. 2015). Since the PCAOB is

supporting the partner’s reliance on the internal audit department work, the continuous auditing

practice should be reviewed and approved by authorities (Davidson et al. 2013). A separate web

page on the PCAOB official website, or having external auditors hand out brochures to the

companies’ internal audit department would be a great start to provide further information and

get more companies involved. A similar document is shared by the American Institute of

Certified Public Accountants (AICPA), but it is more like an interesting topic rather than

necessary tool (AICPA.org, 2012). Eventually, the continuous auditing could be proposed as a

requirement for public companies.

Moreover, to monitor the implementation process, an employee with the basic

understanding of auditing standards should be trained before working with continuous auditing

concept. It might require additional costs for the company to train the personnel, but the switch

Page 13 of 24


to an automated monitoring system and the savings in audit fees will bring the company more

benefits in the long-run. An employee of an internal audit department who has a broad

understanding of company operations and business processes could be easily trained to

implement and maintain the system for the company needs. Certified training sessions provided

by experienced professionals will help to expand the borders and get more interested people

involved.

Compared to continuous auditing, outsourcing is also a great auditing tool proven to be

approved by the external audit companies. Although it might be costly for the company to pay

the outside auditor to maintain the workpapers, it provides a benefit of convenient audit timing

and fees. Public companies will spend less time on the actual audit if the external auditors can

rely on the work provided by an outsourced auditor. Thus, every large public company should

plan for additional outside auditor fees, until continuous auditing adoption.

Cognitive biases are another issue that can impair an auditor’s decision-making process.

To control the problem, an auditor needs to first realize and acknowledge the issue. So one of the

first things every auditor should do is double-check their work and analyze the decisions made.

Was the auditor influenced by personal issues when making a decision? Is there a better way of

resolving the issue? Thinking about the reality of bias could make an auditor more aware of this

issue, allowing them to recognize and prevent the bias problem in its roots. Another interesting

solution is the use of structured decision aids. For example – checklists describing the most

common ways fraudulent activities occur might be very helpful in providing steps to be aware of

bias and fraud. Auditors may also consider converting one large task into fewer smaller ones for

a comprehensive overview, as well as taking personal notes when brainstorming an audit

problem (Knapp et al., 2012). There is also an exercise an auditor can practice to sharpen their

Page 14 of 24


de-biasing skills – when presented with an issue they are hesitant about the auditor should come

up with as many reasons and alternative explanations as possible. This exercise allows thinking

outside of the situation, and noticing little details the auditor would otherwise not pay attention

to. Lastly, a brief tutorial explaining the nature of bias and the impact it has in a decision-making

context would be helpful in minimizing the bias effect on auditors’ judgment (Knapp et al.,

2012). All of these allow an auditor to take a step back and review the process and the outcomes

in stressful situations, helping to eliminate improper treatment and judgment. Although

establishing a complete control over biases is impossible, auditors have many tools and activities

to realize their weaknesses, and work to suppress them.

Unfortunately, there is not much we can do with the authoritative decision regarding the

partner rotation and cooling-off period. The new requirements are set and have to be consistently

complied with. This means that auditors have to start helping each other to get acquainted with

the companies or industries they are not fully knowledgeable in. For instance, an old audit

partner of a client can summarize the most important details observed while working with the

company, so the new audit partner will know where to start and what to be aware of. An

objectively composed one or two page summary could be extremely helpful for the new partner

and would not take much of an old auditor’s time. This will help a new partner to maintain some

level of quality during the first year of an audit without compromising the “fresh look”

advantages. On the other hand, it is extremely important to understand one of the limitations for

this kind of communication: a new partner’s judgment might be impaired by the old auditor’s

views, creating additional biases (Peytcheva & Gillett, 2011). The predecessor must emphasize

only the critical points in company operations and controls, without including a personal opinion

Page 15 of 24


and influencing the new partner’s objectivity. Additional supervisions and reviews could also be

helpful in holding the auditor accountable for the process and decisions made during an audit.

VI. Summary and Conclusions

The accounting scandal following the fall of Enron, with Arthur Andersen’s involvement,

brought the reputation of the profession and the public trust in the auditors down. In order to

restore public’s confidence in the effectiveness of an audit and reposition the role of an auditor,

the quality of an audit should be maintained at a high level over the years (Krishna et al., 2010).

To achieve a high-quality audit, publicly traded companies and authoritative bodies need to work

together on problem areas. Resolutions to the problems that have been discussed earlier might be

the first step towards transparent financial statement presentation.

The lack of communication between an internal audit function and an external auditor

directly influences the quality of an audit. The auditor should have substantial knowledge about

the company to perform an audit, and the internal audit department should assist during the audit

process. At the same time, the auditors cannot just rely on workpapers provided by the company;

they have to check the truthfulness of the documents provided. Knowing this, companies prefer

the use of continuous auditing technology, or outsourcing the internal audit function. Both

methods proved themselves reliable to the external auditors, despite of additional costs for the

company. In order to save money in the long-run, many companies are interested in

implementing continuous auditing. Due to a reliable source of continuous test controls and

monitoring, the overall audit costs and time are decreased, while the effectiveness of an audit is

increased. If the authoritative bodies provide the masses with more information about CA,

Page 16 of 24


including all of its benefits and the ways of implementing it, more and more companies will start

the switch to the CA technology, making the audit process easier, quicker, and more efficient.

Another issue influencing the audit quality is the auditors’ cognitive state. It is

psychologically proven that auditors suffer from cognitive biases impairing their judgment and

questioning their objectivity. These cognitive biases are working on an unconscious level,

making it harder to identify and control them. The auditors should be attentive to details when

making an important decision to recognize the bias influence and to restore their objectivity.

There are also certain de-biasing techniques that could be used when training the auditors to help

them to be aware of the biases.

One of the biggest problems in the auditing profession is an auditor’s independency.

There are numerous rules and constraints defining independency itself, and examples of the

impaired auditor’s judgment resulting in fraud and scandals. Not only intentional regulation

bypass can result in inappropriate treatment. Many of the auditors identify themselves with the

company they work with for a very long time, and as a result they tend to lose their

independency in the process. The length of the auditor-client relationship and the specifics of

these relationships are the main indicators of the auditor’s independency. The longer the auditors

work with the company the more impaired their objectivity is. Considering all of these issues, the

PCAOB and the SEC changed the initial partner rotation period requirements. Although the new

requirement gave up the depth of specific company knowledge to gain a stable independency,

many practicing auditors disagree with it. The frequency of the partner rotations leads to a high

number of relocations, and puts the quality of auditors’ lives in jeopardy. As a result, the

auditors, unsatisfied with their lives, lose interest in the job or lose expertise by training for more

industries. All of these are directly tied to the audit quality and financial statement transparency.

Page 17 of 24


Standard-setting bodies need to work jointly with practicing auditors in order to achieve the

shared goal, and provide public with high-quality financial statements.

Page 18 of 24


VII. References

American Institute of the Certified Public Accountants (AICPA) (2012). The current state of

continuous auditing and continuous monitoring. Retrieved on June 6, 2015 from:

http://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/downloadabledocument

s/whitepaper_current-state-continuous-auditing-monitoring.pdf

Church, B. K., Jenkins, J. G., McCracken, S. A., Roush, P. B., & Stanley, J. D. (2015). Auditor

independence in fact: Research, regulatory, and practice implications drawn from

experimental and archival research. Accounting Horizons, 29(1), 217-238.

doi:10.2308/acch-50966

Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L. (2012). An examination of partner

perceptions of partner rotation: Direct and indirect consequences to audit

Davidson, B. I., Desai, N. K., & Gerard, G. J. (2013). The effect of continuous auditing on the

relationship between internal audit sourcing and the external auditor's reliance on the

internal audit function. Journal of Information Systems, 27(1), 41-59. doi:10.2308/isys-

50430

De Aquino, C. M., Da Silva, W. L., & Vasarhelyi, M. A. (2008). Moving toward continuous

auditing. Internal Auditor, 65(4), 27-29.

Heffes, E. M. (2006). Theory to practice: Continuous auditing gains. Financial Executive, 22(7),

17-18.

Page 19 of 24


Knapp, M. C., & Knapp, C. A. (2012). Cognitive biases in audit engagements. CPA

Journal, 82(6), 40

Krishna Moorthy, M., Seetharaman, A., & Saravanan, A. S. (2010). The realities of auditor's

independence and objectivity. Journal of Accounting, Business & Management, 17(1),

90-103.

Litt, B., Sharma, D. S., Simpson, T., & Tanyi, P. N. (2014). Audit partner rotation and financial

reporting quality. Auditing: A Journal of Practice & Theory, 33(3), 59-86.

doi:10.2308/ajpt-50753

Malaescu, I., & Sutton, S. G. (2015). The reliance of external auditors on internal audit's use of

continuous audit. Journal of Information Systems, 29(1), 95-114. doi:10.2308/isys-50899

Parker, L. M., & Fogarty, T. J. (2012). Seeing what you want to see: Perceptual biases of

auditors. Journal of Management Policy & Practice, 13(2), 11-25

Peytcheva, M., & Gillett, P. R. (2011). How partners' views influence auditor

judgment. Auditing: A Journal of Practice & Theory, 30(4), 285-301. doi:10.2308/ajpt-

10170

Pike, B. J., Curtis, M. B., & Chui, L. (2013). How does an initial expectation bias influence

auditors' application and performance of analytical procedures? Accounting

Review, 88(4), 1413-1431. doi:10.2308/accr-50426

Schneider, A. (2009). The nature, impact, and facilitation of external auditor reliance on internal

auditing. Academy of Accounting and Financial Studies Journal, 13(4), 41-53

Page 20 of 24


Page 21 of 24

Documents

Factors influencing audit quality