Due to several recent accounting scandals over the last 20 years, regulatory organizations such as the SEC and AICPA have required a higher standard for auditors to comply. All audits are expected to conform to Generally Accepted Auditing Standards (GAAS), which would lead one to believe that all audits are of the same quality. This however is not the case. In this paper I will discuss the issues that most greatly affect audit quality such as the size of the audit firm, independence of the auditor, and the monetary considerations given. These factors also affect management’s decisions to select a particular audit firm.
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An area that is overlooked in regards to audit quality is the independence of the auditor. This is generally taken as a given due to Generally Accepted Auditing Standards and often times is easily disregarded when looking at audit quality. Regulatory bodies such as the AICPA and SEC define independence as a state of mind that results in unbiased and objective judgment about financial reporting matters. Independence can be affected by many things concerning the relationship with a client such as: long standing contracts, reliance on fees to clients, and personal affiliations (Pike). Complete independence is more difficult to achieve for smaller auditing firms due to the economic reliance on certain customers and the importance of retaining clients. Management is likely to choose a firm based on proximity to their location, which often results in prior affiliations and ultimately impairing the likelihood of complete independence of local auditing firms. Complete independence does not guarantee superior audit quality, but it certainly improves the chances of a material misstatement being disclosed in the auditing report.
Another aspect to consider when looking at audit quality is the monetary consideration. Audit fees are considered to be a function of client characteristics such as client size, client complexity, and client-specific risk; as well as auditor characteristics such as audit firm size and industry expertise at the national level (Choi). Generally, the larger the audit firm, the more they will charge for their services. Smaller auditing firms will combat this by offering a lower...