The history and review of audit quality Essay

Right from the yearss the universe recognized “ quality ” as the arm to contend the planetary competitory war ( Dunk, 2002 ) . It

is applicable to every facet ; particularly to scrutinizing and accounting.

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Summarizing up, it turns out that we know more about audit quality than we might hold originally suspected:

aˆ? Auditing is comparative cheap, less than 1/10 of one per centum of aggregative client gross revenues ;

aˆ? Outright audit failures with material economic effects are really infrequent ;

aˆ? Audit studies are enlightening, despite the presence of false positive and negatives ;

aˆ? Audit quality is positively associated with net incomes quality ;

aˆ? Audit quality is affected by legal governments and the inducements they create ;

aˆ? There is grounds of differential audit quality by Large 4 houses and industry experts, and differential audit quality across

single offices of Large 4 houses and across different legal governments ;

aˆ? Academic research has had small impact on ordinances and policy-making in the US, although it may hold had more

influence in other states such as the United Kingdom ( Francis, 2004 ) ; and

aˆ? Audit quality is much related to scrutinize commission.

The importance of perceptual experiences of independency

External hearers hold themselves out to be professionals in every sense of the word. They subscribe to codifications of moralss

which provide counsel in keeping a professional attitude and stature. In the United States the ethical codification calls for

hearer independency from client direction ( American Institute of Certified Public Accountants, 1983 ) . Not merely

must an hearer be independent, nevertheless, but he or she must be perceived every bit independent as good. The external hearer ‘s

professional sentiment would be of small value to statement users if they believe the hearer is non entirely independent of

direction. Users can merely hold faith in an hearer ‘s representations when assurance exists that the hearer has acted

as an impartial justice, establishing decisions on nonsubjective grounds. Perry ( 1984 ) , province that the five most common grounds

for audit failures which they are as follows: range limitations ; incompetency ; scrutinizing by conversation ; non critically

measuring minutess ; and deficiency of Objectivity and incredulity. Each of the Perry Acts of the Apostless can be straight linked to the

construct of hearer independency. Which is one component of an auditing house ‘s quality control system, is defined by

the accounting/auditing profession in the United States as “ the ability to move with unity and objectiveness ” ( AICPA,

1985 ) . Independence, Further, if the hearers are independency so they can make the best occupation in their calling.

Brief history of scrutinizing

Accounting in the universe has a background of 6000 old ages and the first accounting paperss were ascertained 3600

old ages before Christ ‘s birth. Documents of antediluvian Iran show that in 500 B.C ( Mashayekhi and Mashayekh, 2008 ) . Here

we are traveling to explicate brief history of scrutinizing in Iran after Revolution.

Islamic Revolution of Iran in 1979 resulted in electing governmental directors for some companies, expropriating

companies belonging to a figure of capitalists affiliated to the past Shah ‘s Regimen and nationalising some of the

industrial entities. Proprietorship of public economical entities necessitated the formation of institutes to scrutinize the

histories of the national economic or expropriated companies and entities, and formation of audit institutes of National

Industries and Planning Organization, Foundation of the Oppressed and Martyr ‘s Foundation was necessitated

from1980 to 1983.

The instance of unifying the audit organic structures of public division was propounded in 1983, and jurisprudence of establishing the audit

organisation was approved. By the legislative acts of the Audit Organization in 1987, public audit organic structures merged

and the Audit Organization was established.

In the Certified Statutes and Act of Audit Organization, the duties of Certified Inspector and audit personal businesss of all

bureaus and setups, which were under the public proprietary, were ceded to the Audit Organization.

Furthermore, the Audit Organization was recognized as a specialised and official mention to roll up rules, and

ordinances of accounting and scrutinizing. Hence, for the first clip, legal review undertakings and audit were in pattern

consolidated, and an organisation to scrutinize the fiscal establishments of public division and an official mention to

compile rules and criterions of accounting and scrutinizing were ordained.

After the Islamic revolution of Iran in 1979, harmonizing to a measure ratified by the Revolutionary Council, many endeavors

were confiscated or came under direct supervising of Government. To scrutinize and execute statutory scrutiny of these

endeavors, three audit houses were established in the populace sector, i.e. , Nationalized Industries and Plan Organization

Audit Firm in1980, Mostazafan Foundation Audit Firm in1981, Shahed Audit Firm in 1983.

In 1983 an act was ratified by the Parliament, to unify and incarnate these three audit houses together with Audit

Company ( established in 1971 to scrutinize authorities corporations ) to set up Audit Organization. Audit Organization ‘s

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by-laws were besides approved by the Parliament in 1987 and the Organization was established as a legal entity with

fiscal independency, affiliated to the Ministry of Economic Affairs and Finance to follow those audit houses maps

and prosecute the activities legislated in the Organization ‘s Act and by-laws.

Audit Organization ‘s by-laws were revised and approved by the Council of Ministers in 2003 to follow with the Article

4 of the Third Economic, Social and Cultural Development Plan and the Organization ‘s legal position changed to State

Owned Limited Company.

The Organization ‘s chief aims are: ( I ) To supply authorities with basic demands in the field of auditing and

specialized fiscal services for province owned and authorities supervised entities ; ( two ) To put Accounting and Auditing

Standards and Professional Ethics in conformity with Islamic Rules every bit good ; and ( three ) To carry on research in scientific

and practical methods of accounting to heighten accounting compatible with state ‘s demands.

The Board of Governors comprises of Minister of Economic Affairs and Finance as president, Head of Management

and Planning Organization, Minister of Petroleum, Minister of Industries and Mines and Minister of Commerce. The

Board sets policies of the Organization ; approves programs, manuals and fiscal statements of the Organization ; and

appoints members of the Board of Executives Accounting and Auditing Standards and besides the Board of Governors

should O.K. the Organization ‘s Code of Ethics and its disciplinary regulations.

The Board of Executives comprises of Chairman and Chief Executive Officer of the Organization and four or six expert

comptrollers, all appointed by the Board of Governors. The Board is responsible for planning, forming, fixing

manuals, managing and executing of plans. Each Board member directs and supervises a portion of the Organization ‘s

activities Exposure bill of exchanges of accounting and auditing criterions should be reviewed and confirmed by the Board of

Executives before entry to the Board of Governors.

High Supervisory Council comprises of three adept comptrollers appointed by the Board of Governors and is

responsible for uninterrupted supervising of the Audit Organization ‘s activities, reappraisal of internal control system, statutory

scrutiny of the Organization ‘s fiscal statements and describing its findings to the Board of Governors and where

appropriate to the regulative organic structures.

In carry throughing its chief map to scrutinize and statutory scrutiny of province owned companies in 2003-04, Audit

Organization has audited Bankss ; insurance companies ; oil, gas and petrochemical companies ; regional H2O and power

corporations ; station, telegraph and telephone companies ; and steel, baccy and many other big corporations. Social

Security Organization, Mostazafan and Janbazan Foundation, Shahid Foundation, and 15th Khordad Foundation and

their attached companies are another major group of entities audited by the Organization. Investing companies and

other endeavors controlled by banking system are besides among those entities audited by the Organization.

3. Review of literature

Alford and Strawer ( 1990, p.70 ) carried out a study which consequences shows in the US, points out that with increasing the

minimal educational demands for CPA rank may be a direct consequence of the recent enlargement enjoyed by the

accounting profession. Expansion of accounting and auditing services and merchandises requires scrutinizing to spread out their

proficient instruction. Therefore, the instruction is straight affected on audit competency which it caused to high quality of

audit pattern. Further, Prior research has suggested that big transnational audit houses give higher audit quality ( e.g.

Leuz and Verrecchia, 2000 ; Asbaugh and Warfield, 2003 ) . Watts and Zimmerman ( 1986 ) predict that big audit houses

provide a higher quality audit because of greater monitoring ability. These companies may hold more resources

( Palmrose, 1986 ) and they may utilize higher quality staff ( Chan et al. , 1993 ) . Francis and Wilson ( 1988 ) suggest that audit

houses invest in their trade name name repute in order to command fee degrees for higher quality confidence. Such houses will

so supply a high quality audit in order to protect their trade name name and besides future grosss ( Palmrose, 1986 ) . Large

transnational audit houses have besides been found to be more independent ( e.g. Shockey, 1981 ) which might propose that

they are less willing to negociate audit affairs with clients. Furthermore, Teoh and Wong ( 1993 ) find that companies

audited by Big Eight have higher net incomes response coefficients i.e. investors and their proclamations more convincing.

As respects to relevant research in Greece, Caramanis ( 1997 and 1998 ) has found that in the early old ages after the

liberalisation reforms of 1992 there was no important difference between local and international houses in footings of audit

quality. However, comparatively newer grounds is more in line with the consequences of research in other markets ( Citron and

Manalis, 2001 ) .

One factor that may impact to scrutinize quality is fraud sensing which Dechow et Al. ( 1996 ) study that hearers are more

probably to hold detected accounting jobs and Klein ( 2002 ) finds that unnatural accumulations are smaller ( connoting less

net incomes direction ) when boards are more independent.

Harmonizing to SAS No. 53 the Auditor ‘s Responsibility to Detect and Report Errors and Irregularities ( AICPA, 1988 ) ,

the hearer had the duty to be after and execute the audit to obtain sensible confidence that any stuff

misstatements ( including those caused by fraud ) would be detected. This papers besides offers exemplifying client

concern hazard factors that may bespeak an elevated fraud hazard. In SAS No. 82 Consideration of Fraud in a Financial

International Journal of Business and Management February, 2009


Statement Audit, the AICPA ( 1997 ) attempted to further clear up the hearer ‘s duty by saying that the hearer

should specifically measure the hazard of stuff misstatements that are due to fraud. This dictum besides required the

hearer to document the fraud hazard appraisal. SAS No. 99 Consideration of Fraud in a Financial Statement Audit

( AICPA, 2002 ) is a more recent effort to spell out what society expects from the hearer with regard to

financial-statement fraud. Two of its chief inventions require the hearer to brainstorm about the hazard of stuff

misstatement due to fraud, irrespective of any past honest traffics with entity direction. It ‘s public-service corporation for bettering the

hearer ‘s appraisal of fraud hazard, nevertheless, remains an unfastened inquiry.

Groveman ( 1996 ) explored how the hearers can observe misstatement in fiscal statements. The writer highlighted

that the most frequent causes of audit failures are due to inexperient staff assigned to audits and a deficiency of professional

agnosticism. In order to keep the appropriate grade of agnosticism, hearers should non presume client direction is

dishonest and besides should non unquestioningly expect honestness. However, the audit squad must measure grounds

objectively to find whether or non fiscal statements are free of material misstatement. Sing to the audit

independency and audit quality Lacy ( 1990 ) examined the effects of investing by the CPA spouses and client

principals on the perceptual experience of hearer independency. Specifically examined were the effects of a joint investing by a

CPA spouse and a client ‘s Chief Fiscal Officer ( CFO ) in a limited partnership unrelated to the audit client, and a

direct investing by a CPA in a client company. The consequences showed an incompatibility between the respondents ‘

perceptual experience of hazard of losing the independency and the AICPA independency regulations. The respondents were more concerned

about the certain articulation investings, which were acceptable under the AICPA regulations, than they were about little

per centum, financially immaterial direct investings which were unacceptable under the AICPA regulations. The CPAs

perceived that the hazard of losing the independency when there was a direct ownership of stock by a CPA was greater

than that of any other group who perceived the hazard to be. A study was conducted by Abu Bakar et Al. ( 2005 ) among

116 loan officers in Malaysia. The consequences showed that 75.60 per cent of the respondents indicated that the size of the

audit house did impact the hearer independency and 74.40 per cent of them mentioned that the degree of competition in the

audit service market influenced the hearer independency. Furthermore, the consequences indicated that the proviso of MAS

had a negative consequence on the hearer independency in Malaysia. Sajadi and Ebrahimimand ( 2005 ) elicited 98 Persian

Certified Public Accountants ‘ point of views on the factors increasing hearers ‘ independency. The aim of the survey

was to place the factors which increased/would increase the hearers ‘ independency. The consequences showed that the

factors such as audit commission, client size, the size and experience of audit houses increased the hearers ‘ independency,

and other factors, viz. , competition among the auditing houses decreased the hearers ‘ independency. A study was

carried out by Sajadi and Naseh ( 2003 ) in Iran sing the effectivity of certified auditing of fiscal statements

among 51 directors. The decision was that independent hearers would be effectual in the sensing and decrease of

illicit Acts of the Apostless and offenses every bit good as the exercising of precise assessment of bases used in accounting estimations. However, such

scrutinizing would non function the intent of bettering internal control system cut downing the likeliness of mistakes skip.

The survey by Mojtahedzadeh and Aghaei ( 2005 ) focused on the factors act uponing independent audit quality. The survey

covered the perceptual experiences of 90 investors, 71 creditors, and 92 hearers in Iran selected on the footing of random sampling.

The survey showed that the investors and the creditors strongly believed that any other services affected hearer


Another study was carried out by Hassas-Yeganeh and Khaleghi ( 2004 ) in Iran sing the attest map of the

independent hearers and the respondents included hearers and investors. The consequences indicated that there was an

outlook spread between the hearers and users on the attest map of the independent hearers. The consequences besides

showed that there were important differences between the hearers and users sing the dependability of the audited

fiscal statements and the comparison of the audited fiscal statements. The users believed that if the audited

fiscal statements were re-audited by others, they would demo a different image.

4. Research methodological analysis and aim

Since the chief aim of this research is finding of relationship between audit competency and audit quality in

Persian environment, therefore the research inquiry as follows: Q1: Make audit expertise detect more fraud in scrutinizing?

Q2: Make audit Effectiveness can observe major deformations?

Q3: Make more audit competency cause more fraud sensing?

Harmonizing to the above literature and the aim of this survey the utile information was collected. So far accurate reply to

this inquiry, the writers design and developed a questionnaire based on method used in old research workers. The

questionnaire contains two parts viz. ( A ) bio-data and ( B ) this subdivision includes some inquiries sing to scrutinize

expertness and fraud sensing, audit effectivity and fraud sensing, and audit competency and fraud sensing.

In this research at first measure the of import factor that is related to scrutinizing quality were explored by analyzing proficient

contexts ; further, the cogency of explored rubric assessed by Delphi group that includes Persian Association of Certified

Public Accounting ( IACPA ) members. in the Delphi session rubric in Iran environment. Exploitation gained point of views the

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simple group asked to find the relation and importance of detected index regulated. Hence we can state, those

factors that conduct research hypotheses are those factors that are wholly compatible to Iran environment. In this

research participants at the first measure requested to find their thought ( understanding or dissension to the effects of

independent variable on observing of import deformations ) , so harmonizing to their thoughts requested to find grade of

understanding and dissension for measuring grade of dissension and understanding we used the Range of whole number figure

from -9 to 9 which -9 represent extremely disagreement and 9 represent extremely understanding to the hypotheses while nothing

represent none of them.

To the bases of of import factor we conducted three hypotheses including:

H1: Specialization of IACPA member affects on their ability on observing of import fraud.

H2: Audited account efficiency ( audit net income to expenditure ratio ) affects on IACPA member scrutinizing to observing of import fraud.

H3: The competence of IACPA member affects on observing of import fraud.

4.1 Consequences of the survey

180 respondents were completed the research questionnaire. Among these 180 participants, there were 29 expert or

holding scrutinizing cognition ( 16.10 per centum ) which they worked as an independent hearer, the remainder 30 ( 16.8 per centum )

were worked as an internal hearer, 60 were in fiscal and banking direction ( 62.40 per centum participants ) , 30

Numberss of them were in module member and 31of them were accounting pupil. Harmonizing to Table 1 out of 180

participants 55 were male ( 30.60 per centum ) and 125were female ( 69.4 per centum ) . Further, 135 participants were younger

than 40 ( 75.00 per centum ) and 45 participants elder than 40 ( 25percent ) . Among these 52.50 per centum had less than one

twelvemonth experience, 36percent had experience between 10 to 20 old ages and 21.50 per centum had more than 20 old ages


As Table 1 reveals the bulk of participant had sufficient academic grades. Out of 180 participants 113participant,

were keeping unmarried man grade in accounting or related topics ( 62.5 per centum ) and 67 were keeping M.A or PhD grades

( 47.50 per centum ) . Demographic features of participant are summarized in Table 1.

Insert Table 1

The binomial trial was foremost conducted to measure how many per centum of participant accept the effects of independent

factors on dependent 1s. For this intent we divided participants into two groups including holding and differing

with hypotheses. The consequences revealed that 171 participant ( 95.00 per centum ) were agree that the consequence of specialisation on

observing of import fraud ( H1 ) ; so the consequence of specialisation on observing of import fraud significantly confirmed

( P & lt ; 0.05 ) . Mean grade of understanding for this hypothesis was 3.94 ( SD= 2.21, 95 per centum of assurance interval from 3.6

to 4.26 ) .

For the 2nd hypothesis 105 participant ( 58.00 per centum ) were disagree to the consequence of audit efficiency on hearer

willingness to observing of import fraud ; so this hypothesis rejected ( H2 ) and average grade of dissension for this

hypothesis was -0.644 ( S.D= 6.61, 95 per centum of assurance interval from -1.6 to 0.32 ) .

About 3rd hypothesis, bulk of participants confirmed the consequence of hearer competences on researching of import

deformation ( H13 ) . 151 participants ( 84.00 per centum ) agreed to this hypothesis, so this hypothesis were significantly

confirmed ( P & lt ; 0.05 ) and average grade of understanding was 4.25 ( S.D= 3.8, 95.00 per centum of assurance interval from 3.68

to 4.88 ) .

The consequence of proving hypotheses by binomial trial showed in Table 2.

Insert Table 2

In this phase every bit mentioned before, participants requested to find grade of understanding or dissension to the

inquiries. Table 3 represents the average grade of understanding or dissension harmonizing to their thought to the research

questionnaire with ciphering Mean Value, S.D, and interval assurance.

Insert Table 3

As Table 3 shows positive Numberss represent average grade of understanding while negative figure represents average grade

of dissension.

As shown in upon tabular array the competence of hearer has the most consequence on observing of import fraud by hearers.

5. Decision and comments

Shaw ( 1995 ) expressed that recent high profile and unexpected corporate prostrations were non created by audit failures.

However, it was created by a figure of failures of the executive direction and of corporate bonds. But the audit

failures, at least, delayed disciplinary action and frequently allowed the guilty to get away the penalty. However, unexpected

prostration of an of import company listed on a stock exchange ( i.e. Enron prostration ) will sabotage the credibleness and

dependability of the information and the regulative system, which is put in topographic point to protect the investors. Therefore the

International Journal of Business and Management February, 2009


hearers should make in a mode that they keep audit prestigiousness. In such a status they have to follow every bit good as obey

their ordinances and model. Further Arrunada ( 1999, 2000 ) , has argued that audit ordinance should see three

basic features of scrutinizing: professional judgement, the specific nature of audit quality and the being and

effectivity of private quality-assurance techniques. The consequences of this survey showed that from the position point of

participants ‘ specialisation of IACPA member affects on the ability of IACPA member for observing of import frauds. In

such a status the Persian legislators should coerce the IACPA member for go toing up-to twenty-four hours accounting and scrutinizing

short clip classs. In add-on, as consequences showed the 2nd hypothesis is rejected, moreover, sing to the 3rd

hypothesis, the bulk of strongly belief that competence of IACPA member affects on observing of import fraud. By

the manner, as mentioned before the independency of hearers besides may do to detection fraud. One of the failing of

Persian accounting and scrutinizing environment is the deficiency of audit commission which audit commission can maintain external

hearers independency ; in fact every bit good as in visual aspect. For work outing such a job it is extremely suggested to Iranian

legislators form audit commission which it better audit independency every bit good as audit quality.


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