Post on 19-Jul-2018
transcript
Page 1 of 12
AUDIT QUALITY, THE INDEPENDENCE OF AN AUDITOR AND
THE IMPLEMENTATION OF AUDIT STANDARD:
A SURVEY BASED STUDY
Hisar Pangaribuan
Adventist University of Indonesia – Bandung
Abstract
The purpose of this study is to obtain empirical evidence on the influence of independence auditor and implementation of audit standard on audit quality. The research was conducted
by purposive sampling and obtained the total sample of 77 respondent external auditors
who work in public accounting firm in Jakarta. Criteria of respondents as a sample in this study is that the respondent as a senior auditor has minimum experience of two years as
an auditor. The result of this study indicated that the independence of auditor and the implementation of audit standards can be as predictor variables in order to improve audit
quality.
Key words: audit quality, independence of auditor, audit standard.
1. Introduction
There are two important characteristics that must exist in financial statements,
that is relevant and reliable. Both characteristics are difficult to measure thus information
users need third party services that are independent auditors in public accountants to
provide assurance that the financial statements are both relevant and reliable and can
increase the confidence of all parties concerned with the company (Singgih & Bawono ,
2010).
In carrying out their profession, public accountants are required to produce
quality audits. Audit quality is any possibility that an auditor when auditing its’ client's
financial report can determine the violation that happened in the client's accounting system
and report it in an audited financial statement, where in performing its duty the auditor is
guided by auditing standards and ethical code of relevant public accountants (Rapina et al,
2010).
Auditing standards established by the Indonesian Institute of Certified Public
Accountants (IAPI) in 2013 describes the auditor's general principles and responsibilities,
risk assessment and response to assessed risks, audit evidence, use of other parties' work,
audit and reporting conclusions and specific areas. The general principles are a reflection of
the personal qualities that an auditor must possess that requires the auditor to have sufficient
technical skills and training in performing the audit procedures. While other standards set
the auditor in terms of data collection and other activities carried out during the audit and
require auditors to prepare a report on the audited financial statements as a whole (IAPI,
2013). While professional ethics codes governing the behavior of public accountants in
carrying out their professional practices both with members and with the general public are
about professional responsibility, competence and professional caution, confidentiality,
professional behavior and technical standards for an auditor in carrying out his profession
(Elfarini, 2007).
Page 2 of 12
Perceptions of the quality of audit services generated by KAP (Public
Accounting Firm) will be a great benefit to investors and users of financial statements
related to audit benefits in financial reporting. Therefore, the ability to provide high quality
audit services is an important focus to be considered by the Public Accounting Firm
(Yuniarti & Zumara, 2013).
Audit quality is influenced by the attitude of independent auditors in applying
the code of ethics of the public accounting profession. The code of ethics sets out the basic
principles and rules of professional ethics that every individual in a public accounting firm
(KAP) or KAP network, whether they are members of the IAPI or not members of the IAPI,
which includes assurance services and services other than assurance as set out in
professional standards and professional codes of ethics (IAPI, 2013). The presence of
professional code of ethics of public accountants, the public will be able to assess whether
an independent auditor has worked in accordance with the ethical standards established by
his profession.
DeAngelo defined audit quality as the probability the auditor is able to find (as
seen from the competence of auditors) and be willing to report violations (as seen from the
independence of the auditor) to the financial statements of their clients (DeAngelo, 1981).
The audit quality should be good, because good audit quality can reduce the
uncertainty and reduce noise in financial reporting (Balsam, 2002). Previous study also
found that good audit quality will have a positive influence on the disclosure and will
reduce the level of information asymmetry (Silveira & Barros, 2006). Conversely, audit
failure will provide great litigation problem opportunities, bad reputation, corporate value
will deteriorate, audit fee earnings will also decline. Quality audits adversely affect the
auditor and auditee (Taqi, 2013).
The reality is that the audit quality is still low, as the evidence, it is still very
necessary to improve audit quality in ASEAN countries: In Singapore and Malaysia, the
auditor does not have the ability to audit the handling of the law. In Brunei and Vietnam,
the auditor does not have a requirement for continuing professional education audit.
Especially for Indonesia and Malaysia, the auditors required more or better knowledge of
internal quality reviews to improve the audit quality result. It is still very necessary to
improve the audit quality (Favere-Marchesi, 2000).
The way to improve audit quality is that the auditor is required to understand and
use the applicable audit standards in accordance with the set requirements, and the auditor
must be independent in carrying out his / her engagement duties.
With the existence of auditing standards, the auditor is required to perform its
engagement duties in order to refer to the existing audit standards. Based on that, the
resulting audit reflects the economic events that occur and the financial records presented
under applicable accounting standards, so that the quality will be better.
Independent attitude and mentality must be owned by an auditor in carrying out
its duties, both independent in fact and in appearance. The independent attitude of the
auditor will bring the auditor to act more objectively, resulting in an objective audit opinion
which results in better audit quality.
This study will focus on knowing how audit quality can be influenced by the
independence of auditors and the implementation of standard audits.
2. Literature review and hypotheses development
Auditing standards are guidelines for auditors in carrying out their professional
responsibilities. The audit standards (SPAP) in Indonesia issued by IAPI (2013) is an
adoption of the International Standard on Auditing issued by the International Auditing and
Page 3 of 12
Assurance Standards Board which will be applied by public accountants to audit the
financial statements for periods beginning on or after 1 January 2013. This adoption is
performed as part of the process to fulfill one of the Statement of Membership Obligation
of the International Federation of Accountants, which must be complied with by the Public
Accounting profession in Indonesia. (IAPI, 2013)
The Audit Standards (PSAP) issued by IICAP consist of (a). General principles
and auditor responsibilities (SA 200 - 265), (b). Risk assessment and response to the rated
risk (SA 300-450), (c). audit evidence (SA 500-560), (d). use of the work of others (SA
600-620), (e). Audit and reporting conclusions (SA 700-720) and (f). special areas (SA
800-810).
On the other hand, it should be noted that users of the financial statements,
especially the shareholders, will make decisions based on reports made by the auditor
regarding the financial statements of a company. This means that auditors have an
important role in approving a company's financial statements. Therefore, the quality of
audit is an important thing that must be considered by the auditors in the auditing process
(Agoes, 2017).
Meutia (2004) stated that the auditor's report contains the interests of the three
groups of audited company managers, shareholders of the company; and third parties or
outside parties such as potential investors, creditors and suppliers.
Independence of Auditor and Audit Quality
The presence of auditors through its audit report is expected to boost the
confidence of investors and financial information users to increase public trust. Qualified
audit opinion and understanding in utilizing of the company's audited financial information
really be an important key for many parties, including for investors and creditors. Guidance
book for auditor and internal control guidance over financial reporting, as well as educating
the reader who is not well versed on the financial statements is an example of efforts to
increase the use of audited financial statement correctly. The quality of information through
an audit over financial statement is very highly required, even in the situation of financial
crisis, the use of audited financial information in effort to improve their trust over financial
information remains high (Murphy, 2014).
Audit quality included in the audit topics are the most spacious and warmly
discussed. Audit quality is the possibility that the auditor able to find and be willing to
report violations on their client's financial statements (DeAngelo, 1981). This definition
was adopted by many other researchers into the ability (regarding expertise) and
willingness (independent) auditor to express an event at the company in accordance with
the occurrence of actual (Johnson et al., 2002; Carey & Simnett, 2006; Velnampy et al.,
2014; Evelyn, and Christine, 2001; Hapsoro, 2012; Kane & Velury, 2005).
Previous research has found that auditor independence significantly affects the
quality of the resulting audit (Tepalagul & Lin, 2015; Saputra, 2015; Agoes & Sarwoko,
2014).
On other occasions, the results of studies in banking companies in Indonesia
found that auditor independence has a positive relationship with audit quality generated,
although significant influence was not found. This finding says that independence issues
for the auditor have become an inherent requirement for the auditor itself (Pangaribuan et
al., 2016). Tjun, et al., (2012) also said auditor independence has no significant effect on
audit quality.
H1: Independence of auditors significantly impact audit quality
Page 4 of 12
Implementation of Audit Standard and Audit Quality
In carrying out its profession, public accountants are required to produce good
quality audit. Audit quality is any possibility that an auditor when auditing its client's
financial report can determine the violation that happened in client accounting system and
report it in the audited financial report, where in performing its duty the auditor is guided
by auditing standard and ethical code of relevant public accountant (Rapina et al., 2010).
Audit standards established by the Indonesian Institute of Certified Public
Accountants in 2013, namely general principles and auditor responsibilities, risk
assessment and response to assessed risks, audit evidence, use of other party work, audit
and reporting conclusions and areas special. Where the general principles are a reflection
of the personal qualities that an auditor must possess that requires the auditor to have
sufficient technical skills and training in performing the audit procedures. While other
standards set the auditor in terms of data collection and other activities carried out during
the audit and require auditors to prepare a report on the audited financial statements as a
whole (IAPI, 2013). Furthermore, professional codes of conduct governing the behavior of
public accountants in carrying out their professional practices both with their fellow
members and with the general public (Elfarini, 2007).
Arens (2008: 42) states that auditing standards are general guidelines to help
auditors fulfill their professional responsibilities in auditing historical financial statements.
Implementation of good audit standards can significantly affect audit quality
generated by auditors (Khadafi et al., 2014). This is because there are auditing standards as
the auditor's foundation or foundation in planning, conducting audit engagement work and
reporting audit findings. This audit standard also serves as a guide to what auditors can and
should not do in the conduct of an audit engagement.
H2: Implementation of audits of standard significantly impact audit quality
3. Research Method
This study is conducted on the basis of the writer's deep curiosity on the factors
that may affect the improvement of audit quality, especially those likely caused by the
independence of auditors and the implementation of audit standards in the assignment of
the audit. Furthermore, this study also tries to elaborate from both predictor variables that
which elements give the biggest contribution in influencing audit quality.
This study was conducted with a quantitative approach, with partial least square
statistic. Testing with partial least square approach suggests that if t arithmetic > t critical
(1.96) then Ho is rejected, if otherwise Ha is rejected (Kline, 2010).
The data was collected with questioners distributed to 77 respondents, external
auditors who work in public accounting firms in Jakarta. Criteria of respondents as a sample
in this study is that the respondent as a senior auditor and has minimum experience of two
years as an auditor.
1. Results and discussion
4.1 Outer Model Test
PLS approach in testing the hypotheses is done through two stages, that is
Goodness of fit model (Outer Model Test) to determine whether the model is already
Page 5 of 12
eligible for testing, and hypotheses testing (Inner Model Test) to determine whether the
hypothesis is acceptable or otherwise.
Fig. 1. Initial outer model test
The result of Initial outer model shows that there is a loading factor of each
endogenous and exogenous variables < 0.6. Furthermore, the loading factor which < 0.6
must be removed from the model to produce a valid model for an overall model tested.
After the loading factor < 0.6 is removed, the final outer model test is obtained as shown
in Figure 2.
Fig. 2. Final outer model test
The results of goodness of fit shows the largest factor in determining the
independence of auditors is the questionnaire related to: the act of reporting an audited
client error, the auditor's cautious attitude in making decisions during the audit, being
honest in carrying out the audit assignments and the last related With the number of audit
services that can be provided by firm audits (questionnaire numbers 7,15,4 and 12). This
means that in an effort to improve the attitude of auditor independence, the four elements
need to be concerned.
The results of goodness fit model shows that the three largest sequences in the
determination of audit standards are consecutive questionnaires with statements relating to:
the auditor's report must be supported by sufficient evidence, the auditor's professional
services must be retained in quality and related to the disclosure of the application or use of the accounting method Which is consistent over the period (questionnaire number 8.1
Page 6 of 12
and 9). This means in the effort to use a good audit standard, the three elements must be
given special attention.
The result of goodness fit model also show that the three largest sequences in
determining audit quality are consecutively related to: the audit report should find
explanation of the result of the examination, the setting of the audit objectives from the
beginning of the acceptance of the assignment and that the report should also disclose issues
that can’t be completed until the end of the examination (questionnaire number 10, 1 and
7). These three elements should be given special attention in relation to the formation of
the audit quality.
4.2 Inner Model Test and Result
The test results show that there is a positive path between audit standard with audit
quality, with a path of 0.553715. This means by establishing and applying a good audit
standard by the auditor, the quality of the audit will be better. The use of standard audits
also make the auditor perform better engagement duties, supervise for better junior auditors
and perform audit reporting better so the resulting audit quality will be better.
Table 1. Path Coefficients
Aud_Quality
Aud_Quality
Audit_Stand 0.553715
Independence 0.318880
It also found that there is a positive path between independence and audit quality,
with a path of 0.318880. This means that the presence of an independent auditor in engaging
the audit engagement will result good audit quality, since the auditor will be more objective
in performing the engagement duties.
Table 2. Overview
Composite
Reliability
R
Square
Cronbachs
Alpha Communality Redundancy
Aud_Quality 0.834334 0.612218 0.763309 0.457429 0.226739
Audit_Stand 0.874477 0.828078 0.539492
Independence 0.896506 0.871366 0.522006
Overall it was found that the model was valid to be tested, it is proved that all the
values of composite reliability and cronbachs alpha have been > 0.7. It is also found that
the R square value of the model is 61.22%, which means that the model shows the
contribution of auditing standard and independence of auditor in determining audit quality
is 61.22%. Other factors that can determine audit quality for 38.78% is auditor quality
control standard, professional code of ethics and other factors outside of this study.
Fig. 3. Inner Model Test
Page 7 of 12
The result of hypothesis testing shows that t statistics of each exogenous variable
to endogenous variable > 1.96 means the auditing standard application and auditor
independence (exogenous variable) effect audit quality (endogen variable) significantly.
Based on the prerequirement, if t arithmetic > t critical (1.96) then Ho is rejected, if on the
contrary then Ha is rejected (Kline, 2010).
Table 3. Total Effects (Mean, STDEV, T-Values)
Original
Sample (O)
Standard
Deviation
(STDEV)
Standard
Error
(STERR)
T Statistics
(|O/STERR|)
Audit_Stand -> Aud_Quality 0.553715 0.072791 0.072791 7.606942
Independence -> Aud_Quality 0.318880 0.101795 0.101795 3.132575
Testing result show that the application of auditing standards in auditing
engagement Have a significant effect on audit quality. The testing result also show that the
independence of the auditor will improve the quality of the audit result. The attempts to
generate audit quality through these two predictors are very important to be concerned in
the practice of the audit profession in the field.
2. Conclusions and recommendations
Audit quality is one of the most important concerns for users of financial statements,
wherein financial statements are presented by management and verified through audits into
reliable financial information in assisting users to make decision.
The results of this study indicate that the existence of auditing standards as the
foundation of auditors in planning audits, executing audits and reporting audit findings can
improve the audit quality. The auditor will do the job of engagement better with obvious
guidance. Users of financial information will be more confident in using the information
because of the presence of good audit quality.
Independence of auditor is another important concern in an effort to improve audit
quality. The existence of an independent auditor (in attitude and appearance) within the
audit engagement will result an objective audit report in accordance with the audit findings
that result better audit quality. Further study is needed to know the impact of good audit
Page 8 of 12
quality. The impact can be on the internal company, regulator or government and also to
investors and creditors.
References
Agoes, S. (2017). Auditing: Petunjuk Praktis Pemeriksaan Akuntan oleh Akuntan Publik.
Edisi Kelima. Penerbit Salemba Empat.
Agoes, S. & Sarwoko, I. (2014). An empirical analysis of auditor’s industry specialization,
auditor’s independence and audit procedures on audit quality: Evidence from
Indonesia. International Conference on Accounting Studies 2014, 18-19 August
2014, Kuala Lumpur, Malaysia.
Balsam, S. (2002). Accrual Management, Investor Sophisticated, and Equity Valuation:
Evidence from 10-Q Fillings. Journal of Accounting Research, vol. 40, no. 4, pp.
987-1012.
Carey, P. & Simnett, R. (2006). Audit Partner Tenure and Audit Quality. The Accounting
Review 81, 2006.
DeAngelo. L.E. (1981). Auditor independence, “low balling” and disclosure regulation.
Journal of Accounting and Economics. 3.
Elfarini, Eunike Christina. 2007. Pengaruh Kompetensi dan Independensi Auditor
Terhadap Kualitas Audit. Semarang: Universitas Negeri Semarang.
Evelyn, Y., & Christine, A. J. (2001). Governance and Audit Quality: Is There an Association? Australian Accounting Standards Board & International
Federation of Accountants Public Sector Committee. Dikunjungi dari
http://aaahq.org/audit/midyear/ 02midyear/papers/yeoh&jubb.htm.
Favere-Marchesi, M. (2000). Audit Quality in ASEAN. International Journal of
Accounting. vol. 35, no. 1. Accounting and Regulatory Issues. Association for
Investment Management and Research.
Hapsoro, D. (2012). Pengaruh Kualitas Corporate Governance , Kualitas Audit, Dan
Earnings Management Terhadap Kinerja Perusahaan. Jurnal Ekonomi dan Bisnis,
Vol. 6, No. 3 November 2012 Hal. 203-214.
Institut Akuntan Publik Indonesia (IAPI). 2013. Standar Profesional Akuntan Publik.
Penerbit Salemba Empat. Jakarta.
_________________________________. 2013. Standar Pengendalian Mutu. Penerbit
Salemba Empat. Jakarta.
Johnson, V.E., Khurana, I.K. & Reynolds, J.K. (2002). Audit Firm Tenure and the Quality
of Financial Reports. Contemporary Accounting Research 19.
Kane, G.D. & Velury, U. (2005). The impact of managerial ownership on the likelihood of
provision of high quality auditing services. Review of Accounting & Finance. 4
(2), 86.
Khadafi, M., Nadirsyah, A., & Syukriy. (2014). Pengaruh Independensi, Etika dan Standar
Audit terhadap Kualitas Audit Inspektorat Aceh. Jurnal Akuntansi, Volume 3,
No. 1, Februari 2014.Kline, R.B., (2010). Principles and Practice of Structural
Equation Modeling. 3rd edition. the Guilford Press. New York London.
Meutia, I. (2004), Pengaruh Independensi Auditor Terhadap Manajemen Laba untuk KAP
Big-5 dan Non Big-5. Jurnal Riset Akuntansi Indonesia. 7(3), 333-350.
Page 9 of 12
Murphy, M.L. (2014). Improving Audit Quality: An Interview with Cynthia M. Fornelli,
an Executive Director of the Center for Audit Quality. The CPA Journal (February 2014).
Pangaribuan, H., Simbolon, R.F., & Simbolon, D., (2016). Kualitas Audit Berdasarkan
Persepsi Auditor Independen. Ekonomis; Jurnal Ekonomi dan Bisnis. Vol. 10,
No. 1. Maret 2016.
Silveira, A.D.M.D. & Barros, L.A.B.D.C. (2006). Correlate Governance Quality and Firm
Value in Brazil. Journal of Financial Economics. at:
http://ssrn.com/abstract=923310
Rapina, Saragi, L.W., & Carolina (2010), Pengaruh Independensi Eksternal Auditor
Terhadap Kualitas Pelaksanaan Audit (Studi Kasus pada beberapa KAP di
Bandung). Akurat Jurnal Ilmiah Akuntansi , No 2 .
Saputra, W. (2015). The Impact Of Auditor‘s Independence On Audit Quality: A
Theoretical Approach. International Journal of Scientific & Technology
Research Volume 4, Issue 12, December 2015.
Singgih, E. M., & Bawono, I.R. (2010). Pengaruh Independensi Pengalaman,Due
Professional Care dan Akuntabilitas terhadap Kualitas Audit.SNA XIII. UJSP.
Purwokerto.
Taqi, M. (2013). Consequences of Audit Quality in Signaling Theory Perspective. GSTF
International Journal on Business Review (GBR). Vol.2 No.4, July 2013.
Tepalagul, N. & Lin L. (2015). Auditor Independence and Audit Quality; A literature
review. Journal of Accounting, Auditing and Finance. Vol. 30, issue 1, 2015.
Tjun, L.T., Marpaunt, E.I. & Setiawan (2012). Pengaruh Kompetensi dan Independensi
Auditor Terhadap Kualitas Audit. Jurnal Akuntansi. Vol.4 No.1 Mei 2012: 33-
56
Velnampy, T., Sivathaasan, N., Tharanika, R. & Sinthuja, M. (2014). Board Leadership
Structure, Audit Committee and Audit Quality: Evidence from Manufacturing
Companies in Sri Lanka. International Journal of Business and Management;
Vol. 9, No. 4. Yuniarti, R., & Zumara, W.M. (2013). Audit Quality Attributes and Audit Client
Satisfaction. International Journal of Humanities and Management Sciences. Volume 1,
issue 1 (2013).
QUESTIONAIRES
A. INDEPENDENCE OF AUDITOR
Please give tick mark () in columns (1 to 5), according to the scale which best suits you.
Variable X Independence Questionnaire No Statement Strongly
Agree
(5)
Agree
(4)
Neither
Agree or
Disagree
(3)
Disagree
(2)
Strongly
Disagree
(1)
Length of Relationship with Client (Audit Tenure)
1 An auditor should have a
relationship with the same
client for at least 3 years
2 I make an effort to stay
independent when auditing
3 I do not report all the
violations that has been done
by my client because of the
Page 10 of 12
length of relationship with my
client
Pressure from the client
4 Sometimes I must act
dishonestly as to not lose my
client
5 If I do not conduct audit well, I
may receive sanctions from
my client
6 I do not report all the
violations that my client has
because I received an
exhortation from my client
7 I am not brave enough to
report my clients violation
because my client may replace
me with another auditor
8 If the audit fee from a client is
a large part of the total revenue
of an accounting firm, then
this will damage the
independence of public
accountants
9 The facilities that I receive
from the client make me hesitant and limits me in
conducting audit
Review of the auditors’ peers (peer review)
10 I do not need reviews from my
peers to assess my auditing
procedure because it there are
no benefits in it
11 I act honestly to avoid
assessment from peers (auditor
peers) in the team
Non-audit services
12 Other than conducting audit
services, an accounting firm
may conduct other services to
the same client
13 I do not easily believe the
clients statements while
conducting audit
14 Non-audit services conducted
to clients may damage the
independence of a public
accountants’ appearance
15 I always make an effort to be
careful in making decisions
while auditing.
Page 11 of 12
Audit Standard
NO. STATEMENT
VALUE
Strongly
Disagree
(1)
Disagree
(2)
Neither
Agree or
Disagree
(3)
Agree
(4)
Strongl
y
Agree
(5)
1. Independence must be maintained in providing
professional services during the audit
2. The auditor must use its professional capabilities
carefully and thoroughly throughout the audit process
3. Audit planning should be made to the best of all audit
stages to properly assess risk and supervision of the
assistant
4. The auditor should understand the client's internal
control that will serve as the basis for the auditor to
plan the audit.
5. The audit evidence obtained must be sufficient and
appropriate to support the auditor's opinion on the
fairness of the audited financial statements
6. The selection of elements for audit evidence testing
should be effective in achieving the objectives of the
audit procedure.
7. Audit results from the client's internal auditor will
help the external auditor in performing his
assignment.
8. The auditor's report shall contain the auditor's
opinion supported by the evidence concerning the
condition of the financial statements as a whole.
9. The auditor should disclose the inconsistency in
applying the client's accounting principles in his / her
report if there is any change in accounting principles
that may affect the reasonableness of the financial
statements.
10. A specific objective framework for a fixed financial
reporting framework should be presented as specified
by the authorized organization
AUDIT QUALITY
NO. STATEMENT
VALUE
Strongly
Disagree
(1)
Disagree
(2)
Neither
Agree or
Disagree
(3)
Agree
(4)
Strongly
Agree
(5)
Page 12 of 12
1. Upon receiving the assignment, the auditor sets
objectives, scope, inspection methodology.
2. In all my work must be reviewed by the boss in a
tiered manner prior to the report of the result of the
examination.
3. The process of obtaining and testing evidence
should be done to the maximum to support the
conclusions, audit findings and related
recommendations.
4. Auditors administer audit documents in the form of
audit works papers and are properly stored in order
to be effectively taken, referenced and analyzed.
5. In carrying out the examination, the auditor must
comply with the codes of conduct.
6. The examination report contains objective findings
and conclusions of the examination results, as well
as constructive recommendations.
7. The report discloses matters which are issues that
have not been resolved until the end of the
examination.
8. The report should be able to express the
acknowledgment of a successful achievement or an
improvement action that has been carried out by the
examination object.
9. The report shall state the explanation or response of
the officer / party of the examination object on the
result of the examination.
10. The resulting report must be accurate, complete,
objective, convincing, clear, concise, and timely so
that the information provided is of maximum
benefit.