Quality Control Procedure for Statutory Financial Audit
An Empirical Study This page intentionally left blank Quality Control Procedure for Statutory Financial Audit
An Empirical Study
By
Siddhartha Sankar Saha Department of Commerce, University of Calcutta, Kolkata, India Mitrendu Narayan Roy Goenka College of Commerce and Business Administration, University of Calcutta, Kolkata, India
United Kingdom North America Japan India Malaysia China Emerald Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK
First edition 2017
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Preface ix List of Tables xi List of Exhibits xvii List of Chart xix List of Appendices xxi List of Abbreviations xxiii List of Standard Measures/Symbols and Their Explanations xxv
CHAPTER 1 Introduction 1 1.1. Preamble 1 1.2. Research Problem 4 1.3. Research Questions 5 1.4. Review of Literature 6 1.5. Research Gap 16 1.6. Objectives 17 1.7. Research Methodology 17 1.7.1. Searching the Underlying Concept 17 1.7.2. Sample Design 18 1.7.3. Collection of Data 20 1.7.4. Analytical Tools for Interpretation and Conclusion 21 1.7.5. Demographic Profile of Respondents 21 1.8. The Scheme of Work 24
CHAPTER 2 Quality of Statutory Audit of Financial Statements: A Conceptual Discussion 25 2.1. Introduction 25 2.2. Quality of Statutory Audit in Financial Statements: A Conceptual Overview 25 2.2.1. Factors of Audit Quality 26 2.2.2. Financial Reporting Supply Chain: Interactions among the Stakeholders 30 vi CONTENTS
2.2.3. Contextual Factors of Audit Quality 33 2.3. Regulatory Framework Governing Audit Quality at the International Level 37 2.4. Indian Scenario 39 2.5. Conclusions 41
CHAPTER 3 Quality Control Framework for Statutory Audit of Financial Statements in Select Countries: A Conceptual Review 43 3.1. Introduction 43 3.2. Review of Quality Control Framework in Select Countries Considering Select Parameters 44 3.2.1. Review of the Quality Control Framework in the United States of America (USA) 45 3.2.2. Review of the Quality Control Framework in the United Kingdom (UK) 69 3.2.3. Review of the Quality Control Framework in India 93 3.3. Conclusions 112
CHAPTER 4 Quality Control Framework for Statutory Audit in Select Countries: A Comparative Study 113 4.1. Introduction 113 4.2. Comparative Study of the Quality Control Framework among Select Countries 114 4.2.1. Quality Control Procedure at Firm Level 114 4.2.2. Quality Control Procedure at Engagement Level 117 4.2.3. Overall Objectives of an Independent Auditor 118 4.2.4. Audit Engagement 119 4.2.5. Use of the Work of Internal Auditors 119 4.2.6. Audit Planning 120 4.2.7. Audit Evidence 120 4.2.8. Audit Sampling 120 4.2.9. External Confirmations 121 4.2.10. Using the Work of an Expert 121 4.2.11. Auditing Accounting Estimates 122 4.2.12. Audit Documentation 122 4.2.13. Audit Report 123 4.2.14. General Issues Governing Quality of Audit 124 4.3. Conclusions 125 Contents vii
CHAPTER 5 Respondents’ Perceptions on Quality Control Procedure for Statutory Financial Audit: An Empirical Study 127 5.1. Introduction 127 5.2. Objectives of the Study 128 5.3. Selection of Variables 128 5.4. Results and Discussion 133 5.4.1. Reliability of Data 133 5.4.2. Objective 1: Analysing Opinions of CAs and Students on Each Variable under Select Parameters Using the Percentage of Respondents 133 5.4.3. Objective 2: Examining Homogeneity of Opinions between CAs and Students Using the Chi-Square Test of Homogeneity 165 5.4.4. Objective 3: Identifying the Importance Associated with Each Variable by Individual Respondent Groups Using Mean Score 184 5.4.5. Objective 4: Analysing the Significant Differences of Opinions between CAs and Students Using a Nonparametric Mann‒ Whitney Test 198 5.4.6. Objective 5: Examining Analytically the Relationship between Independent Variables and ‘Satisfactory Quality Control of Statutory Audit’ Using Pearson’s Correlation Coefficient and T-Test 219 5.5. Conclusions 237
CHAPTER 6 Concluding Observations and Suggestions 243 6.1. Introduction 243 6.2. Summary of Findings of Previous Chapters 243 6.2.1. Chapter 2 243 6.2.2. Chapter 3 244 6.2.3. Chapter 4 245 6.2.4. Chapter 5 247 6.3. Limitations of the Study 254 6.4. A Few Suggestions 254 6.5. Proposals for Further Research 255 6.6. Conclusions 256 viii CONTENTS
Appendices 259 Appendix A: Select Relevant Table for Chapter 5 260 Appendix B: Questionnaire for Primary Data 273 Bibliography 287 About the Authors 295 Index 297 Preface
nadequacies in the quality control environment for statutory audit of financial statements can go a long way towards the Ipublication of falsified financial reports over a number of years, which can ultimately bring about a massive accounting fraud impacting on the national economy and society as a whole. The quality control of statutory audit of financial statements with the backdrop of recent corporate accounting scandals and their irreversible impacts on stakeholders of those businesses is a major problem area of the current economic environment. In order to address this problem, this research has been conducted in the form of a research-oriented book that provides a compre- hensive outlook on the quality control framework for statutory financial audit. The book begins with a conceptual discussion on the quality of statutory audit of financial statements. Different factors governing the quality of statutory financial audit are iden- tified and a comprehensive framework for quality control is established. The book also conceptually reviews the quality con- trol framework for statutory financial audit in three select coun- tries (India, the UK and the US) based on select parameters and makes a comparative study among them. The most critical part of this research, which makes it different from any other research in the field, is an analysis of respondents’ perceptions on the qual- ity control procedure for statutory financial audit. On the basis of the respondents’ opinions, the research study finally suggests some measures to bring about significant progress in the field of quality control for statutory financial audit. However, the primary objective of the book is to assist pro- fessionals in the field of accounting and auditing, who are the pri- mary intended audiences of the book, in understanding the importance of quality control for statutory financial audit. Moreover, the book examines the effectiveness of the existing standards and other legal and regulatory requirements in enfor- cing quality control policies and procedures and suggests modifi- cations in those regulations. The book will be of use to academics in the commerce and management fraternity as well as students pursuing postgraduation in commerce and business x PREFACE administration and also students pursuing professional courses who require an in-depth knowledge in this field. The book would also be beneficial to researchers in finance and control, in giving them an insight into the current state of quality control for statu- tory financial audit and showing them possible paths for further research. Since the beginning of the current research, valuable advice and suggestions have been received from a number of sources. In view of this, we are pleased to put on record our sincere thanks to the partners or managers of a number of reputed chartered accounting firms, including PricewaterhouseCoopers, KPMG, Ernst & Young, etc. (located at Kolkata, India) for their valuable suggestions while formulating the questionnaire for this study. We express our gratitude to learned authors from India and abroad whose works have inspired so many ideas for our present work. We acknowledge with thanks the cooperation of librarians and staff of a number of libraries in Kolkata (including Central Library, University of Calcutta, Central Library, St. Xavier’s College, American Council Library, British Council Library, B.C. Roy Memorial Library, IIM Calcutta, etc.) for allowing us to consult relevant books, research papers and other electronic materials for our study. We also convey our thanks to the learned respondents for their thoughtful opinions through the questionnaire designed for the study. We extend our best wishes to our friends and collea- gues for their support and encouragement. We are also thankful to our respective parents and other beloved family members for their uncounted sacrifice during our completion of this research work.
Date: July, 2017 Dr. Siddhartha Sankar Saha Place: Kolkata, India E-mail: [email protected]/ [email protected]
Dr. Mitrendu Narayan Roy E-mail: [email protected] List of Tables
Chapter 1 Table 1.1 Demographic Profile of Respondents...... 22 Chapter 5 Table 5.1 Selection of Variables...... 129 Table 5.2 Percentage of Respondents in Different Agreement Levels (Quality Control for Audit Procedure)...... 135 Table 5.3 Percentage of Respondents in Different Agreement Levels (Overall Objectives of an Independent Auditor)...... 140 Table 5.4 Percentage of Respondents in Different Agreement Levels (Audit Engagement). . . . . 143 Table 5.5 Percentage of Respondents in Different Agreement Levels (Internal Control System and Internal Auditors)...... 144 Table 5.6 Percentage of Respondents in Different Agreement Levels (Audit Planning)...... 146 Table 5.7 Percentage of Respondents in Different Agreement Levels (Audit Evidence)...... 149 Table 5.8 Percentage of Respondents in Different Agreement Levels (Audit Sampling)...... 153 Table 5.9 Percentage of Respondents in Different Agreement Levels (External Party Confirmations)...... 154 Table 5.10 Percentage of Respondents in Different Agreement Levels (Using the Work of Auditor’s Expert)...... 156 Table 5.11 Percentage of Respondents in Different Agreement Levels (Auditing Accounting Estimates)...... 157 xii LIST OF TABLES
Table 5.12 Percentage of Respondents in Different Agreement Levels (Audit Documentation). . . . 158 Table 5.13 Percentage of Respondents in Different Agreement Levels (Audit Report)...... 160 Table 5.14 Percentage of Respondents in Different Agreement Levels (General Issues Governing Quality of Audit)...... 161 Table 5.15 Percentage of Respondents in Different Agreement Levels (Quality Control Procedure for Statutory Financial Audit)...... 165 Table 5.16 Result of Chi-Square Test of Homogeneity (Quality Control for Audit Procedure)...... 167 Table 5.17 Result of Chi-Square Test of Homogeneity (Overall Objectives of an Independent Auditor)...... 170 Table 5.18 Result of Chi-Square Test of Homogeneity (Audit engagement)...... 171 Table 5.19 Result of Chi-Square Test of Homogeneity (Internal control system and internal auditors). 172 Table 5.20 Result of Chi-Square Test of Homogeneity (Audit Planning)...... 173 Table 5.21 Result of Chi-Square Test of Homogeneity (Audit Evidence)...... 175 Table 5.22 Result of Chi-Square Test of Homogeneity (Audit Sampling)...... 177 Table 5.23 Result of Chi-Square Test of Homogeneity (External Party Confirmations)...... 178 Table 5.24 Result of Chi-Square Test of Homogeneity (Using the Work of Auditor’s Expert)...... 178 Table 5.25 Result of Chi-Square Test of Homogeneity (Auditing Accounting Estimates)...... 180 Table 5.26 Result of Chi-Square Test of Homogeneity (Audit Documentation)...... 181 Table 5.27 Result of Chi-Square Test of Homogeneity (Audit Report)...... 181 Table 5.28 Result of Chi-Square Test of Homogeneity (General Issues Governing Quality of Audit). . 182 List of Tables xiii
Table 5.29 Result of Chi-Square Test of Homogeneity (Quality Control Procedure for Statutory Financial Audit)...... 183 Table 5.30 Mean Score of Individual Occupational Categories and Overall Sample (Quality Control for Audit Procedure)...... 186 Table 5.31 Mean Score of Individual Occupational Categories and Overall Sample (Overall Objectives of an Independent Auditor). . . . . 188 Table 5.32 Mean Score of Individual Occupational Categories and Overall Sample (Audit Engagement)...... 189 Table 5.33 Mean Score of Individual Occupational Categories and Overall Sample (Internal Control System and Internal Auditors). . . . . 190 Table 5.34 Mean Score of Individual Occupational Categories and Overall Sample (Audit Planning)...... 191 Table 5.35 Mean Score of Individual Occupational Categories and Overall Sample (Audit Evidence)...... 193 Table 5.36 Mean Score of Individual Occupational Categories and Overall Sample (Audit Sampling)...... 194 Table 5.37 Mean Score of Individual Occupational Categories and Overall Sample (External Party Confirmations)...... 195 Table 5.38 Mean Score of Individual Occupational Categories and Overall Sample (Using the Work of Auditor’s Expert)...... 195 Table 5.39 Mean Score of Individual Occupational Categories and Overall Sample (Auditing Accounting Estimates)...... 196 Table 5.40 Mean Score of Individual Occupational Categories and Overall Sample (Audit Documentation)...... 197 Table 5.41 Mean Score of Individual Occupational Categories and Overall Sample (Audit Report). 197 xiv LIST OF TABLES
Table 5.42 Mean Score of Individual Occupational Categories and Overall Sample (General Issues Governing Quality of Audit)...... 199 Table 5.43 Mean Score of Individual Occupational Categories and Overall Sample (Quality Control Procedure for Statutory Financial Audit)...... 200 Table 5.44 Result of Mann Whitney Test (Quality Control for Audit Procedure)...... 204 Table 5.45 Result of Mann Whitney Test (Overall Objectives of an Independent Auditor). . . . . 206 Table 5.46 Result of Mann Whitney Test (Audit Engagement)...... 207 Table 5.47 Result of Mann Whitney Test (Internal Control System and Internal Auditors). . . . . 208 Table 5.48 Result of Mann Whitney Test (Audit Planning)...... 210 Table 5.49 Result of Mann Whitney Test (Audit Evidence)...... 211 Table 5.50 Result of Mann Whitney Test (Audit Sampling)...... 213 Table 5.51 Result of Mann Whitney Test (External Party Confirmations)...... 214 Table 5.52 Result of Mann Whitney Test (Using the Work of Auditor’s Expert)...... 216 Table 5.53 Result of Mann Whitney Test (Auditing Accounting Estimates)...... 216 Table 5.54 Result of Mann Whitney Test (Audit Documentation)...... 217 Table 5.55 Result of Mann Whitney Test (Audit Report). 218 Table 5.56 Result of Mann Whitney Test (General Issues Governing Quality of Audit)...... 220 Table 5.57 Result of Mann Whitney Test (Satisfactory quality control of statutory audit)...... 222 Table 5.58 Pearson’s Correlation Coefficient and Result of t-Test (Quality Control for Audit Procedure). . 223 List of Tables xv
Table 5.59 Pearson’s Correlation Coefficient and Result of t-Test (Overall Objectives of an Independent Auditor)...... 226 Table 5.60 Pearson’s Correlation Coefficient and Result of t-Test (Audit Engagement)...... 227 Table 5.61 Pearson’s Correlation Coefficient and Result of t-Test (Internal Control System and Internal Auditors)...... 228 Table 5.62 Pearson’s Correlation Coefficient and Result of t-Test (Audit Planning)...... 230 Table 5.63 Pearson’s Correlation Coefficient and Result of t-Test (Audit Evidence)...... 231 Table 5.64 Pearson’s Correlation Coefficient and Result of t-Test (Audit Sampling)...... 234 Table 5.65 Pearson’s Correlation Coefficient and Result of t-Test (External Party Confirmations)...... 234 Table 5.66 Pearson’s Correlation Coefficient and Result of t-Test (Using the Work of Auditor’s Expert).. . 235 Table 5.67 Pearson’s Correlation Coefficient and Result of t-Test (Auditing Accounting Estimates). . . . . 235 Table 5.68 Pearson’s Correlation Coefficient and Result of t-Test (Audit Documentation)...... 236 Table 5.69 Pearson’s Correlation Coefficient and Result of t-Test (Audit Report)...... 238 Table 5.70 Pearson’s Correlation Coefficient and Result of t-Test (General Issues Governing Quality of Audit)...... 239 This page intentionally left blank List of Exhibits
Exhibit 2.1 Framework of Audit Quality...... 26 Exhibit 2.2 Interactions with Financial Reporting Supply Chain...... 31 Exhibit 2.3 Contextual Factors of Audit Quality...... 34 This page intentionally left blank List of Chart
Chart 1.1 Demographic Profile of Respondents...... 23 This page intentionally left blank List of Appendices
Table A1 Result of Kolmogorov Smirnov Test . . . . . 260 Table B1 Brief Profile of the Respondents ...... 273 Table B2 Chapter 5 Questionnaire ...... 275 This page intentionally left blank List of Abbreviations
A Agreement AASB Auditing and Assurance Standards Board AICPA American Institute of Certified Public Accountant AQR Audit Quality Review ASB Auditing Standards Board AU C Auditing Sections Clarified CA Chartered Accountant CCAI Council of Chartered Accountants of India CEO Chief Executive Officer CIA Central Intelligence Agency CPA Certified Public Accountant CPD Continuous Professional Development D Disagreement DF Degree of Freedom EQCR Engagement Quality Control Reviewer FRC Financial Reporting Council GAAPs Generally Accepted Accounting Principles GAASs Generally Accepted Auditing Standards GDP Gross Domestic Product IAASB International Auditing and Assurance Standards Board IAESB International Accounting Education Standards Board IASB International Accounting Standards Board ICAE&W Institute of Chartered Accountants of England and Wales ICAI Institute of Chartered Accountants of India ICAI Institute of Chartered Accountants of Ireland ICAS Institute of Chartered Accountants of Scotland xxiv LIST OF ABBREVIATIONS
IESBA International Ethics Standards Board of Accountants IFAC International Federation of Accountants IFRS International Financial Reporting Standards IMF International Monetary Fund IPSAS International Public Sector Accounting Standards IPSASB International Public Sector Accounting Standard Board ISA International Standard on Auditing ISQC International Standard on Quality Control MD & A Management Discussion and Analysis N Neutral PCAOB Public Company Accounting Oversight Board PPP Purchasing Power Parity QRB Quality Review Board RQB Recognised Qualifying Bodies RSB Recognised Supervisory Body SA Standard on Auditing SA Strong Agreement SAS Statement of Auditing Standard SD Strong Disagreement SEBI Securities and Exchange Board of India SEC Securities and Exchange Commission SOX Sarbanes Oxley SQC Standard on Quality Control SQCS Statement of Quality Control Standard UK United Kingdom USA United States of America List of Standard Measures/ Symbols and Their Explanations
H0 Null hypothesis
H1 Alternate hypothesis χ2 Chi-square
FO Observed frequency
FE Expected frequency p value Probability U Test statistic of Mann Whitney test Z Standardised test statistic σ Standard deviation r Correlation coefficient This page intentionally left blank CHAPTER 1 Introduction
In matters concerning truth and justice there can be no distinction between big problems and small; for the general principles which determine the conduct of men are indivisible. Whoever is careless with truth in small matters cannot be trusted in important affairs. — Albert Einstein
1.1. Preamble Business as a social organisation is formed within society with the help of a few social members, commonly known as its stake- holders, whose financial and nonfinancial interests are fulfilled by the respective business concern. It is critical for them to be up-to-date with the working affairs of the business. Financial transactions made by the business enterprise are translated into accounting language in the form of financial statements in accordance with Generally Accepted Accounting Principles (GAAPs), statutory norms, pronouncements and announcements of the professional body, etc. This is done to fulfil the infor- mation needs of the respective stakeholders.1 Management of
1Conceptual framework for financial reporting, Statement of Financial Accounting Concept No. 8, Financial Accounting Standards Board (FASB), September 2010. Accessed from http://www.fasb.org
1 2 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT corporate enterprises comes under regulatory instructions to prepare and publish ‘financial statements’ comprising Income Statements, Balance Sheets, Statements of Changes in Equity, and Statements of Changes in Financial Position, Notes to Accounts and Schedules to Accounts. Directors Report, Management Discussion and Analysis (MD & A) and Corporate Governance Reports, etc., are also prepared as per statutory requirements to fulfil the diverse information needs of stakeholders.2 The correct decisions of users of financial statements are enabled if the state- ments possess certain qualitative characteristics such as under- standability, relevance, reliability, comparability, timeliness, and benefit over costs and verifiability.3 If all these attributes are pres- ent in a financial report, the report conveys authentic and reliable information. A quality financial report guides the stakeholders through the financial performance, financial position and future prospects of the business for the purposes of decision making,4 which ultimately protects their financial interests. In order to maintain the quality of financial statements, a competent authority external to the enterprise must verify the authenticity of financial statements with respect to accounting principles and the legal norms. Highly skilled accountants with an affiliation to a profes- sional body are appointed by the shareholders of the corporate enterprise to perform this role.5 There is no denying the fact that a quality audit is likely to detect earnings management and ensure the quality of financial reporting, thereby protecting stakeholders’ interests. Many sec- tions of stakeholders recognise audited financial statements as being free from manipulation and fraud. Thus, auditors are supposed to play a significant role in the economy in protecting stakeholders’ interests.6 On the other side, it was observed that big audit firms (e.g. Price Waterhouse Coopers, Ernst & Young,
2Framework for the Preparation and Presentation of Financial Statement in Accordance with Indian Accounting Standards. Accessed from http://www.icai.org 3Conceptual framework for financial reporting, Statement of Financial Accounting Concept No. 8, Financial Accounting Standards Board (FASB), September 2010. Accessed from http://www.fasb.org 4S. Saha, Statutory Auditors’ Objectivity in Corporate Accounting Scandal, LAP Lambert Academic Publishing, Germany, 2015. 5K. Gupta, Contemporary Auditing, Tata McGraw-Hill, New Delhi, 6th edition, 2005, pp. 7 13. 6Ibid. Introduction 3
KPMG, Deloitte) failed to impart quality audit in some companies whose financial irregularities are not investigated properly ignoring stakeholders' interest. As a result, stakeholders were betrayed and the professional integrity and ethical responsibility of the auditors were questioned.7 However, because of recent corporate account- ing scandals, the extensive growth in white-collar crime, and the ensuing lack of precision and sincerity in reporting, the accounting professions have been facing challenges as to how quality of audit can be excelled with the ultimate goal of safeguarding stake- holders’ interests. Since financial decisions of a large part of society depend upon auditors’ opinions, the regulatory authorities enforce cer- tain regulatory pronouncements for auditors within the respec- tive country.8 Professional institutes and other regulatory bodies governing statutory audit operations in several countries across the globe have come up with several professional and ethical standards for maintaining the quality of statutory audit of finan- cial statements.9 Compliance with applicable professional and ethical standards and issuing reports which are appropriate in particular circumstances is the basic prerequisite of audit quality.10 Accounting firms of auditors take responsibility for control- ling the quality of their professional engagement. They formulate quality control policies and implement them for all of their professional engagements. These policies cover the leadership responsibilities of the accounting firm, relevant ethical require- ments, acceptance and continuance of client relationships and audit engagements, assignment of engagement teams, engagement performance, and monitoring and documentation of the system of quality control. Appropriate compliance with quality control policies by all members of an accounting firm ensures the quality of their engagement. Audit and assurance, being one of the
7N. Brewster, Unaccountable: How the Accounting Profession Forfeited Public Trust, John Wiley & Sons, New York, 2003, pp. 8 10. 8S. Bakshi, Safeguarding Auditors Independence: The Profession at the Crossroad, Chartered Accountant, Vol. 52, No. 8, February, 2004, pp. 821 826. 9J. Francis, What Do We Know about Audit Quality? The British Accounting Review, Vol. 36, 2004, pp. 345 368. 10Institute of Chartered Accountants of India, Standard on Auditing (SA) 220 (Revised): Quality Control for an Audit of Financial Audit, 2010. 4 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT important professional engagements of a firm, also come under their quality control framework.11 Other professional standards and applicable regulations also take a pioneering role in control- ling the quality of statutory audit of financial statements. In India, professionally qualified chartered accountants (CAs) are supposed to play the role of independent statutory financial auditors. Professional pronouncements, like company law, audit- ing and quality control standards, and code of conduct, issued by the Central Government and professional bodies like the Institute of Chartered Accountants of India (ICAI) are issued to guide them in maintaining good faith, integrity, independence and transparency. Standard on Quality Control-1 (SQC-1), issued by the ICAI, monitors the quality control policies of a firm and Standard on Auditing (SA)-220 influences the quality control pol- icies at an engagement level. Any underperformance of these functions, or noncompliance with any binding rules, is taken into consideration as a serious matter.
1.2. Research Problem Companies desiring to demonstrate exaggerated accounting prof- its and a strong balance sheet using complex accounting methods often find themselves in serious trouble when Government over- sight agencies (e.g. the Securities Exchange Board of India (SEBI) in India and the Securities and Exchange Commission (SEC) in the United States of America (USA)) launch an enquiry into their financial books. In many cases, a massive accounting fraud per- petrated using a systematic accounting technique for quite a long period of time has been unearthed. Financial fraud has grown to be an widely known issue in the public arena all over the world since the outrageous exposure of the financial scam of Enron and a series of other companies, including WorldCom, Satyam, etc. Until a financial fraud is detected, the management of the corporate enterprise continues publishing falsified financial reports year after year. This has the consequence of giving an ambiguous impression of their financial status. It is difficult for stakeholders to understand the possible red flags in the
11Institute of Chartered Accountants of India, Standard on Quality Control (SQC) 1: Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and Other Assurance and Related Service Engagements, 2009. Introduction 5 company’s financial statement. Naturally, when the scandal is exposed, stakeholders do not have enough time to move out of such a company, which can bring them serious financial hard- ship. Shareholders and other investors lose their invested corpus and suppliers and creditors with considerable dependence on the company face serious adversities when the company goes insolvent. Employees find themselves unemployed. Financial manoeuvring also deceives Government from the correct tax rev- enues. If the company is multinational, the impact of its demise may be far-reaching and the Government will lose possible foreign reserves. Foreign investors may be reluctant to invest in that coun- try in the future; and other companies from the same country may face difficulties in accessing the international capital market.12 A corporate fraud brings a negative impact on the national econ- omy. A series of corporate failures all over the world have shaken the foundations of investor confidence in the transparency, hon- esty and accountability of corporations and financial markets. However, inadequacies in the quality control environment for statutory audit of financial statements may go a long way towards publication of falsified financial reports over a number of years, which ultimately brings about a massive accounting fraud which can impact the national economy and society as a whole. Hence, quality control of statutory audit of financial state- ments in the backdrop of recent corporate accounting scandals and their irreversible impact on stakeholders of the respective businesses is a major problem area of the current research study.
1.3. Research Questions Keeping in mind the research problem of the study, the following appropriate research questions came about to conduct a thor- ough research into quality control for statutory audit of financial statements:
(i) Is the regulatory framework in India governing quality control for statutory audit of financial statements adequate in comparison to other developed countries?
12M. Jones, “The Creative Accounting and Fraud Environment” in Creative Accounting, Fraud and International Accounting Scandals, Wiley Publications, New York, 2010, pp. 22 26. 6 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
(ii) What is the opinion of CAs and students on quality control for statutory audit of financial statements? (iii) How far does the opinion of CAs and students converge on the theme? (iv) Have professional audit practices had any influence on the opinions of people on quality control for statutory audit of financial statements? (v) What are the important issues governing quality control for statutory financial audit? (vi) How do the issues relating to quality control for statutory audit of financial statements relate to overall audit quality?
1.4. Review of Literature Researchers from India and abroad have contributed their thoughtful research on the related fields of quality control proce- dures for statutory audit of financial statements in the forms of books, research papers, research projects, etc. In order to address those research questions, a survey of literature related to audit quality has been thoroughly conducted:
(1) Akpom and Dimpkah13 (2013) in their research paper empirically analysed the perceptions of auditors and non- auditor executives on the provision of nonaudit services, audit regulations, audit firm size, and audit market capita- lisation in a Nigerian context. The result showed that both groups agreed on the general factors that enhance statutory auditors’ independence. However, the degree of agreement differed. (2) Bakshi14 (2000) discussed the basis of professional ethics in the accounting profession. Measures to improve ethics in auditors were also enumerated. Morality, personal judgement and value orientation were the basis of the formation of this code. Ethical codes should be kept up- to-date.
13U. N. Akpom & Y. O. Dimpkah, Determinants of Auditor Independence: A Comparison of the Perceptions of Auditors and Non- Auditors In Lagos, Nigeria, Journal of Finance and Accountancy, Vol. 14, 2013, pp. 1 17. 14S. Bakshi, Professional Ethics Back To Basics, Management Accountant, Vol. 35. No. 7, 2000, pp. 499 501. Introduction 7
(3) Bazerman and Lowenstein15 (1999) in their research paper critically reviewed the reasons behind auditors’ bias towards management while auditing financial statements. They observed that auditors always tried to reach a favour- able conclusion about the financial statements based on the evidence readily available to them. (4) Becker, Defond, Jiambalvo, and Subramanyam16 (1998) examined the relationships between audit quality and earnings management. Audit carried out by the Big Six firms was considered to be of high-quality and audit done by non-Big Six firms was considered as lower quality. Earnings management is captured by discretionary accruals to audit clients. A sample of 10,379 audits by the Big Six auditors and 2,179 audits by non-Big Six auditors were selected and empirically analysed. Lower audit qual- ity is associated with the highest earnings management. (5) Bhaskar17 (2009) in his research paper discussed the implications of the Public Company Accounting Oversight Board (PCAOB) in an Indian scenario with special refer- ence to the importance and limitations of Clause 49 of the Listing Agreement. According to him, an organisation similar to PCAOB should be established in India to remove the deficiencies in the current structure. (6) Brewster18 (2003) in his book reviewed the role of accoun- tants in the context of recent accounting scandals. According to him, statutory auditors had faltered in their duties in recent corporate frauds. (7) Carcello and Nagy19 (2004) analytically studied the rela- tionship between audit firm rotation and fraudulent finan- cial reporting, which was analysed based on a sample of
15M. H. Bazerman & G. Lowenstein, Why Good Accountants Do Bad Audits, Harvard Business Review, November, 2002. 16C. L. Becker, M. L. Defond, J. Jiambalvo, & K. R. Subramanyam, The Effect of Audit Quality on Earnings Management, Contemporary Accounting Research, Vol. 15, No. 1, 1998, pp. 1 24. 17S. Bhaskar, Public Company Accounting Oversight Board (PCAOB) in India, Management Accountant, Vol. 44, No. 3, 2009, pp. 194 195. 18N. Brewster, Unaccountable: How the Accounting Profession Forfeited Public Trust, John Wiley & Sons, New York, 2003. 19J. V. Carcello & A. L. Nagy, Audit Firm Tenure and Fraudulent Financial Reporting, Auditing: A Journal of Practice and Theory, Vol. 23, No. 2, pp. 55 69. 8 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
fraud companies within the period 1990 2001 with a matched pair of no-fraud companies. The study observed that a long audit relationship was not directly related to financial fraud. On the contrary, frequent audit firm rota- tion could reduce audit quality, which might ultimately cause fraudulent financial reporting. (8) Casterella, Jensen, and Knechel (2009)20 critically exam- ined the impact of peer review on audit quality based on a sample of insurance companies in the USA. According to them, peer review report actually identified quality control weakness and risky practices within accounting firms, thereby signalling audit quality. (9) Chakrabarti21 (1996) in his research paper analysed the role of professional accountants in white-collar crimes. Measures to improve the ethical sense of professionals were proposed. Punitive action, legal bindings and self- evaluation were some of the measures to improve a sense of ethics. (10) Chauhan and Gupta22 (2007) proposed ethical audit in every organisation and recommended their implementation internationally keeping in mind national differences. (11) Choi, Kim, Kim, and Zang (2010)23 empirically analysed the impact of audit firm size on audit quality based on a sample of audit clients in the USA over the period of 2000 2005. As per their opinion, the greater the size of the audit firm the better the quality of audit. (12) Clickeman24 (2009) in his book enumerated auditors’ independence and professionalism given the backdrop of a few American corporate accounting scam cases, including Enron, WorldCom, Sunbeam, etc. In each of these cases,
20J. Casterella, K. Jensen, & W. Knechel, Is Self-Regulated Peer Review Effective at Signalling Audit Quality, The Accounting Review, Vol. 84, No. 3, 2009, pp. 713 735. 21A. K. Chakrabarti, Ethics in the Era of Scam, Management Accountant, Vol. 31, No. 11, 1996, pp. 806 812. 22M. Chauhan & S. Gupta, Ethical Audit: Stakeholders Perspective, Chartered Accountant, Vol. 56, No. 5, November, 2007, pp. 751 767. 23J. Choi, C. Kim, J. Kim, & Y. Zang, Audit Office Size, Audit Quality and Audit Pricing, Auditing: A Journal of Practice and Theory, Vol. 29, No. 1, 2010, pp. 73 97. 24P. M. Clickeman, Called to Account: Fourteen Financial Frauds that Shaped American Accounting Profession, Routledge, London, 2009. Introduction 9
auditors failed to show the required independence and professionalism. (13) Copeland25 (2005) in his research paper conceptually discussed declining ethics in the accounting and auditing profession following recent corporate accounting scandals and the roles of the Big Four audit firms, regulatory authorities and academic institutions in them. The study concluded that in recent corporate failures, auditors also compromised their ethical responsibility. It was observed that regulatory authorities, Big Four audit firms and academic institutions could play a major role in reinstating ethics in the auditing profession. (14) Copley26 (1991) examined the impact of quality of audit in public sector disclosure practices. A sample of municipal governments was taken for analysis and the audit fee was considered to be a surrogate for audit quality. It was observed that a more complete disclosure by public sector municipal governments increased the reputations of indi- vidual accounting firms in terms of their audit quality. (15) Crutchley, Jensen, and Marshall27 (2007) critically dis- cussed the governance mechanism, earnings quality, growth rate, and dividend policy of fraud companies under the view of the US SEC on the basis of a sample of 97 compa- nies. The study observed that weak governance was the main reason behind scandals. Statutory auditors’ lack of independence was identified as one of the main reasons behind the weak governance structure of a company. (16) Dastur28 (1998) in his research paper identified inadequa- cies in the regulatory framework with respect to statutory auditors’ independence. Proposals for certain regulatory interventions were made.
25J. E. Copeland, Jr., Ethics as an Imperative, Accounting Horizons, Vol. 19, No. 1, March, 2005, pp. 35 43. 26P. A. Copley, The Association between Municipal Disclosure Practices and Audit Quality, Journal of Accounting and Public Policy, Vol. 10, 1991, pp. 245 266. 27C. E. Crutchley, M. R. H. Jensen, & B. B. Marshall, Climate for Scandal: Corporate Environment that Contribute to Accounting Fraud, The Financial Review, Vol. 42, 2007, pp. 53 73, Eastern Finance Association. 28J. E. Dastur, Inadequate Safeguards, Chartered Accountant, Vol. 47, No. 1, July, 1998, pp. 207 213. 10 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
(17) DeFond and Lennox (2011)29 in their research paper ana- lysed the impact of the Sarbanes Oxley (SOX) Act, 2002, on audit quality based on the situation of the audit market in the USA in the post-SOX era. They observed that many small auditors, who could not comply with the quality norms enforced by the SEC, left the market. (18) Deis and Giroux30 (1992) identified the determinants of audit quality on the basis of a sample of audits provided by small accounting firms in Texas to independent school districts. The study observed that report timeliness and audit hours significantly influenced audit quality. Audit hours can be used as a surrogate for audit quality. (19) Duska, Duska, and Ragatz31 (2011) in their book reviewed the ethical and social responsibility of several accounting firms in the context of recent corporate accounting scandals and resultant regulatory reforms. Statutory auditors faced ethical dilemmas in corporate frauds. (20) Earley and Kelly32 (2004) empirically analysed the impact of the Enron scam on the moral reasoning of accounting students using certain educational intervention tools. They proved that the Enron event did not have a significant influence on the moral reasoning of accounting students. (21) Fearnley, Beattie, and Brandt33 (2005) in their research paper critically reviewed regulatory responses to audit risks and threats to statutory auditors’ independence with respect to case studies of six companies in the United Kingdom (UK). (22) Francis34 (2004) assessed the quality of audit in publicly listed companies. Empirical researches over the previous 25 years were reviewed and audit quality was also
29M. Defond & C. Lennox, The Effect of SOX on Small Auditor Exists and Audit Quality, Journal of Accounting and Economics, Vol. 52, 2011, pp. 21 40. 30D. R. Deis & G. A. Giroux, Determinants of Audit Quality in the Public Sector, The Accounting Review, Vol. 67, No. 3, 1992, pp. 462 479. 31R. Duska, B. S. Duska, & J. A. Ragatz, Accounting Ethics, Wiley- Blackwell, London, 2011, pp. 118 122. 32C. E. Earley & P. T. Kelly, A Note on Ethics Educational Interventions in an Undergraduate Auditing Course: Is There an Enron Effect? Issues in Accounting Education, Vol. 19, No. 1, 2004, pp. 53 71. 33S. Fearnley, V. A. Beattie, & R. Brandt, Auditor Independence and Audit Risk: A Re-conceptualisation, Journal of International Accounting Research, Vol. 4, No. 1, 2005, pp. 39 71. 34J. R. Francis, What Do You Know about Audit Quality? British Accounting Review, Vol. 36, 2004, pp. 345 368. Introduction 11
discussed in the backdrop to the Enron Anderson deba- cle. According to the study, in terms of audit fees, the level of audit quality in corporate sectors was acceptable. (23) Freier35 (2005) in her working paper identified governing issues of statutory auditors’ independence with special ref- erence to the Enron scam. The study showed that a long association with the client, lax regulatory framework and provision of nonaudit services were major threats to statu- tory auditors’ independence. (24) Gerotra and Baijal36 (2002) discussed audit inspection prac- tices in difference countries. Peer review or audit inspection was an important mechanism of ensuring audit quality. (25) Ghaffari, Kyriacou, and Brennan37 (2008) empirically stud- ied the incorporation of ethics in the accounting curriculum of different universities in the UK based on a survey of some universities. According to them, ethics was already incorpo- rated in the accounting curriculum of major universities. (26) Giroux38 (2008) in his research paper presented a case study of the Enron scandal with special emphasis on a brief overview of the company, their nature of operation, nature of fraud, professional responsibility of the auditors and reg- ulatory interventions after the scandal. He concluded that Enron was one of the notable scandals of this century. Their statutory auditors, Arthur Anderson, were involved with the company’s management in perpetrating the fraud. (27) Gowthrope and Blake39 (1998) in their book conceptually discussed the emergence of ethics in the accounting profession and the responsibility of accounting bodies to enforce the ethical standards and ethical responsibility of accountants. They concluded that ethics and values were important in ethical decision making.
35D. Freier, Compromised Work in the Public Accounting Profession: The Issue of Independence, GoodWork® Project Report Series, Number 35. Accessed from http://pzweb.harvard.edu 36S. Gerotra & M. Baijal, Prominent Peer Review Practice around the Globe Ensuring Quality Audit, Chartered Accountant, Vol. 51, No. 1, 2002, pp. 76 83. 37F. Ghaffari, O. Kyriacou, & R. Brennan, Exploring the Implementation of Ethics in UK Accounting Programs, Issues in Accounting Education, Vol. 23, No. 2, 2008, pp. 183 198. 38G. Giroux, What Went Wrong? Accounting Frauds and Lessons from Recent Scandals, Social Research, Vol. 75, No. 4, 2008, pp. 1205 1238. 39C. Gowthrope & J. Blake, Ethical Issues in Accounting, Routledge, London, 1998. 12 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
(28) Hill, McEnroe, and Stevens40 (2005) in their research paper empirically analysed the opinions of 336 CPAs on provision of nonaudit services, structure and functions of the PCAOB, retention of audit working papers, etc. According to them, provisions relating to statutory audi- tors’ independence in the Act and structure and functions of the PCAOB were required to be revised. (29) Hodge41 (2003) in his research paper empirically analysed perceptions of respondents on earnings quality, reliance on financial statements for making investment decisions and auditors’ independence. The study showed that reliance on financial statements for taking investment decisions and perceived auditors’ independence decreased over time. (30) Jeong and Rho (2004)42 analysed the quality of audit of select firms listed in the Korean Stock Exchange during the period 1994 1998 to identify the quality difference in large and medium-sized audit firms. In terms of audit qual- ity, no significant difference was found between the Big Six and non-Big Six firms. (31) Jones43 (2011) in his edited book elaborated on the nature, motivation and techniques of accounting fraud and how it differs from creative accounting. Selected corporate accounting scam cases were also discussed in his book. In each of these cases, it was observed that statutory auditors were responsible for perpetrating the fraud. (32) Koumbiadis and Okpara44 (2008) in their research paper analysed stages of ethical behaviour of accounting students based on perceptions of 300 students enroled in 5-year
40N. T. Hill, J. E. McEnroe, & K. T. Stevens, Auditor’s Reactions to Sarbanes Oxley and PCAOB, The CPA Journal Special Auditing Issue Innovations in Auditing, 2005, pp. 33 35. 41F. D. Hodge, Investors’ Perception of Earnings Quality, Auditor Independence and Usefulness of Audited Financial Information, Accounting Horizons, Vol. 17, Supplement, 2003, pp. 37 48. 42S. Jeong & J. Rho, Big Six Auditors and Audit Quality: The Korean Evidence, The International Journal of Accounting, Vol. 29, 2004, pp. 175 196. 43M. Jones, Creative Accounting, Fraud and International Accounting Scandals, John Wiley & Sons, New York, 2011. 44N. Koumbiadis & J. O. Okpara, Ethics and Accounting Profession: An Exploratory Study of Accounting Students in Post Secondary Institutions, International Review of Business Research Papers, Vol. 4, No. 5, October November, 2008, pp. 147 156. Introduction 13
accounting courses in different universities in New York. The results showed that students studying at different stages of ethical behaviour responded to the questions differently. (33) Lennox (2009)45 examined the impact of nonaudit services on audit quality with respect to voluntary disclosure of nonaudit services by quoted companies in the UK. (34) Lin and Hwang (2010)46 analysed the impact of audit qual- ity on earnings management based on 48 prior studies. The authors identified that auditor tenure, auditor size and spe- cialisation, and audit fee directly influenced audit quality. (35) Maloo47 (1993) in his research paper critically reviewed the roles and responsibilities of statutory auditors. He observed that people generally had a misconception about the duty, roles and responsibilities of auditors. Fraud com- mitted within accounting regulation might not be detected by auditors. (36) Mayper, Pavur, Merino, and Hoops48 (2005) empirically analysed the impact of accounting education on the ethical values of accounting students based on a few ethical theo- ries and the opinions of accounting students. As per their opinions, more reforms in accounting education were needed to make students aware of the ethical dimensions. (37) McPhail and Walters49 (2009) in their book gave a detailed insight into the ethical responsibilities and inde- pendence of statutory auditors. They also stated that the code of conduct had huge importance to statutory audi- tors. International harmonisation of code of ethics could help the ethical decisions of auditors in cross-country engagements.
45C. Lennox, Non-Audit Fees, Disclosure and Audit Quality, The European Accounting Review, Vol. 8, No. 2, 1999, pp. 239 252. 46J. Lin & M. Hwang, Audit Quality, Corporate Governance and Earnings Management: A Meta Analysis, International Journal of Accounting, Vol. 14, 2010, pp. 57 77. 47M. C. Maloo, The Expectation Gap and Risk of Audit: Who to Blame for Escalating Insurance Cost? Chartered Accountant, Vol. 42, No. 2, 1993, pp. 74 78. 48A. G. Mayper, R. J. Pavur, B. D. Merino, & W. Hoops, The Impact of Accounting Education on Ethical Values: An Institutional Perspective, Accounting and the Public Interest, Vol. 5, 2005, pp. 32 55. 49K. McPhail & D. Walters, Accounting and Business Ethics, Routledge, London, 2009, pp. 132 150. 14 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
(38) Mukherjee50 (2000) in his research paper critically reviewed several case studies on auditors’ independence with special reference to the appointment procedure, role of government and professional bodies. He concluded that auditors were supposed to protect the interest of stakeholders and impart more independence in their auditing services. (39) Narielvala51 (1998) in his research paper conceptually ana- lysed the contribution of a code of ethics in building and pro- tecting statutory auditors’ independence. He commented that the code should be flexible and multidisciplinary in nature. (40) Roy52 (2008) identified the growth of forensic accounting practices in India and their advantages over ordinary financial auditing. (41) Saxena53 (1993) in his research study critically analysed the US economic environment and regulatory framework gov- erning statutory auditors’ independence. He concluded that financial statements were useful to stakeholders only when statutory auditors were independent from management. (42) Shah54 (2000) in his research study comparatively ana- lysed the Indian regulatory framework and the framework proposed by the International Federation of Accountants (IFAC) concerning statutory auditors’ independence. The study observed that Indian regulations were constantly converging with global regulatory requirements. (43) Singh55 (2009) in his research endeavour thoroughly reviewed provisions of the current regulatory framework in relation to the enforcement of professional standards. The study concluded that statutory auditors should
50S. Mukherjee, Fight against Corruption by Accountants, Management Accountant, Vol. 35, No. 7, 2000, pp. 487 491. 51P. M. Narielvala, Code of Conduct for a Profession: A Torch to the Succeeding Generation, Chartered Accountant, Vol. 47, No. 1, July, 1998, pp. 153 161. 52A. Ranjan Roy, Forensic Accounting: A New Paradigm for Cranny Consulting, Research Bulletin, Vol. XXXII, 2008, pp. 98 103. 53P. Saxena, Auditor’s Independence: Learning from America’s Experience, Chartered Accountant, Vol. 42, No. 2, August, 1993, pp. 71 73. 54P. N. Shah, Do the Right Thing, Chartered Accountant, Vol. 49, No. 5, November, 2000, pp. 8 13. 55H. Singh, Responsibility of the Auditor with Respect to Compliance with Standards of Auditing, Chartered Accountant, Vol. 57, No. 10, 2009, pp. 1696 1705. Introduction 15
comply with the applicable professional standards for pro- tection of stakeholders’ interest. (44) Tendeloo and Vanstraelen (2008)56 analysed audit quality and earnings management based on a sample of private firms in European countries. They observed that audit quality differentiation existed between Big Four and non- Big Four audit firms. (45) Thibodeau and Freier57 (2010) in their book analysed a few American corporate accounting scams with the help of certain parameters, including the professional responsibil- ity of statutory auditors. They observed that statutory auditors failed to show professional responsibility in each of those scandals. Factors influencing statutory auditors’ independence were identified. (46) VanderBauwhede and Willekens (2002)58 analysed audit quality differentiation between Big Six and non-Big Six accounting firms using a sample of 1,302 Belgian compa- nies. The result showed that audit quality differentiation did not exist between Big Six and non-Big Six firms. (47) Vittal59 (2000) in his research paper thoroughly studied and comparatively analysed professional ethics of the accounting profession in select countries including India. He commented that there should be integration of an ethi- cal code in India and other countries around the world. (48) Wells60 (2011) in his book critically reviewed fraud case studies submitted by fraud examiners across the globe. Methods of frauds, detection of fraud and judiciary pro- ceedings of a fraud case are discussed in his book.
56B. Tendeloo & A. Vanstraelen, Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market, European Accounting Review, Vol. 17, No. 3, 2008, pp. 447 469. 57J. Thibodeau & D. Freier, Auditing and Accounting Cases: Investigating Issues of Fraud and Professional Ethics, McGraw-Hill Irwin, New York, 2010. 58H. VanderBauwhede & M. Willekens, Evidence on (the lack of) Audit Quality Differentiation in the Private Client Segment of the Belgian Audit Market, Research Report 0240, Department of Applied Economics, Catholic University, Leuven, 2002. 59N. Vittal, Ethics and Code of Conduct, Chartered Accountant, Vol. 49, No. 5, November, 2000, p. 19. 60J. T. Wells, Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Book, Wiley, Hoboken, New Jersey, 2011. 16 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
(49) Zhang, Zhou, and Zhou61 (2007) investigated the rela- tionship between audit committee quality, auditor inde- pendence and disclosure of internal control weaknesses. The study showed that a relationship existed among audit committee quality, auditor independence and disclosure of internal control weaknesses.
1.5. Research Gap A survey of literature provides a comprehensive outlook on the quality of statutory audit of financial statements. Important areas covered under the literature reviewed are discussed as follows:
(i) A considerable extent of the literature examined quality of audit in recent corporate accounting scandals. (ii) A major section of studies deliberate on regulatory responses to those audit failures. (iii) Only regulatory reforms may not be adequate to improve the quality of audit to a great extent. For that purpose, upgrading of statutory auditors’ independence and ethical responsibili- ties towards their audit engagement is highly essential. A huge number of books and research studies from foreign and Indian publications are available on this issue. (iv) The quality of audit and its influence on earnings quality is also examined in select empirical researches. (v) Several literatures have been identified that analyse the impact of select issues on the quality of statutory audit.
While there is a huge number of studies in the field of audit qual- ity, there are still some gaps in the existing literature. Hence, review- ing the existing literature pertaining to the current study shows a research gap which leads to the objectives of the present research work. The following are the important aspects of the research gap:
(i) As far as is known, no in-depth studies have been made on quality control procedures for the statutory audit of finan- cial statements;
61Y. Zhang, J. Zhou, & N. Zhou, Audit Committee Quality, Auditor Independence, and Internal Control Weaknesses, Journal of Accounting and Public Policy, Vol. 26, 2007, pp. 300 327. Introduction 17
(ii) None of the studies consulted so far empirically analysed the opinions of practicing CAs and students pursuing a chartered accountancy course on quality control proce- dures for statutory financial audit; (iii) The impact of select quality control issues in light of the Standard on Quality Control-1 (SQC-1) and select impor- tant auditing standards on quality of audit has not been analysed in any foreign or Indian studies. 1.6. Objectives Keeping in mind the research gap, the major objectives of the study taken into consideration are as follows:
(i) To conceptually discuss the quality of statutory audit of financial statements (refer to Chapter 2); (ii) To review conceptually the quality control framework for statutory audit of financial statements in select countries including India (refer to Chapter 3); (iii) To make a comparative study of the quality control frame- work for statutory audit in select countries including India (refer to Chapter 4); (iv) To study analytically the respondents’ perceptions on quality control procedures for statutory financial audit (refer to Chapter 5); (v) To make a suitable conclusion to the study (refer to Chapter 6). 1.7. Research Methodology The present study is exploratory in nature. The methodology adopted in pursuing the study has been organised in the follow- ing paragraphs.
1.7.1. SEARCHING THE UNDERLYING CONCEPT To investigate the area under study, at the beginning, an endeav- our has been made to look into the accessible literature on corpo- rate accounting scandals and quality of audit in order to gather a conceptual idea on regulatory requirements behind audit quality and its failure in recent corporate accounting scandals. Based on this theoretical knowledge, a modest effort has been made to formulate the plan of work to make empirical study on quality control procedures for statutory audit of financial statements. 1.7.2. SAMPLE DESIGN 18
Chapters Sample Drawn Basis of Sampling Time Period for Survey AUDIT FINANCIAL STATUTORY FOR PROCEDURE CONTROL QUALITY
Chapter 2 • The chapter incorporates a conceptual discussion on audit quality. No sample is required to be drawn for that purpose Chapter 3 • The World Bank, Central Intelligence Agency (CIA) and Judgemental samplinga is Secondary data for this International Monetary Fund (IMF) rank all the used to sort out those chapter have been countries in the world individually in terms of their three countries from a collected from July 2014 national gross domestic product (GDP) calculated as per group of 10 countries to December 2014 purchasing power parity (PPP) method • In the list published by each of these three organisations at the end of 2013, the top 10 countries have been selected. Three countries, the United States of America (USA), the United Kingdom (UK) and India are persistently present in the group of the first 10 countries in each of these lists • Therefore, these three countries have been selected as final sample countries Chapter 4 • Countries selected in Chapter 3 are considered as sample countries in this chapter Chapter 5 • Primary respondents for this chapter come from two • Exact population sizes A primary data survey for major occupational groups: (a) practicing chartered of the respondent this chapter was accountants (CAs); and (b) students pursuing a chartered categories could not be completed between the accountancy course, as they are very much connected retrieved. Hence, periods of July 2014 to with the theme of the research study random sampling could December 2014 (Continued ) Chapters Sample Drawn Basis of Sampling Time Period for Survey • The list of partnership firms in the Eastern region not be applied for published by the Institute of Chartered Accountants of selection of respondents India (ICAI) has been used as the sample frame for CAs. • Apart from that, An initial sample of 250 respondents was selected from respondents selected that list based on random • A published document on the list of students enroled in a sampling may not chartered accountancy course in the Eastern region could respond at all. This not be found. Hence, students studying in different could impair the colleges and universities in West Bengal, India, who also empirical objectives happened to be pursuing a chartered accountancy course • Hence, convenience were identified as the sample frame. An initial sample of samplingb is used where 200 respondents was selected from them respondents for the final sample are picked up based on the convenience of the researcher aN. K. Malhotra, Marketing Research: An Applied Orientation, Pearson Education Asia, 3rd edition, 2003, pp. 335 336. Introduction bF. N. Ho, B. S. Ong, & S. Lee, A Multicultural Comparison of Shopping Patterns among Asian Consumers, Journal of Marketing Theory and Practice, Vol. 5, No. 1, Winter, 1997, pp. 42 51. 19 20 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
1.7.3. COLLECTION OF DATA
Chapters Nature of Survey Method and Sources of Data Data
Chapter 2 Secondary • ‘A Framework for Audit Quality: Key Environments that Create Environment for Audit Quality’ issued by the IFAC in 2014 is a major source of literature for this chapter • Books and journal articles and other legislations in the relevant area are also referred to for conceptual discussion Chapter 3 Secondary • Books, journal articles, working papers, legal case decisions and online material are the main sources of data for this chapter. Libraries in Kolkata were visited and relevant books for this study have been collected • Online databases of the libraries have been reviewed to gather other secondary materials. Disposed and pending legal case decisions on the related issues have also been collected from online sources Chapter 4 Secondary • Review of quality of control framework for statutory audit of financial statements in Chapter 3 is the major source of information for this chapter Chapter 5 Primary • A survey for collecting data for this chapter was conducted in Kolkata, West Bengal, one of the biggest metropolitan cities in India. A pretested, close-ended, structured questionnaire on a five-point scale was designed as the data collection tool. Certain parameters of a quality control framework have been identified. Consideration is given to several literatures including several ‘Standards on Auditing’ (SAs) issued by the ICAI and consultation with reputed accounting firms in Kolkata, 94 critical issues (also called independent variables) are identified under each of those parameters having considerable influence on the ‘Quality Control Procedure for Statutory Financial Audit’ (called dependent variables) • Each variable has five levels of agreement attached with it [where, 1: Strong Disagreement (SD); 2: Disagreement (D); 3: Neutral (N); 4: Agreement (A); and 5: Strong Agreement (SA)].a Respondents, based on their degree of agreement with a particular variable, put their mark on the appropriate field indicating their opinion on that variable • Initial sample for CAs and students was set at 250 and 200 respondents, respectively. According to the plan of field survey, questionnaires were sent to the accounting firms and several educational institutes in Kolkata to obtain the opinions of practicing CAs and students pursuing a chartered accountancy course. Within the stipulated period, 373 complete responses were received, comprising 227 CAs and 146 students aC. R. Kothari, Research Methodology: Methods and Techniques, New Age International Publishers, 2nd edition (revised), 2010, pp. 84 87. Introduction 21
1.7.4. ANALYTICAL TOOLS FOR INTERPRETATION AND CONCLUSION
Chapters Nature of Analysis Statistical Tool (if any) Package (if any)
Chapter 2 Conceptual discussion on Not required Not quality of audit based on select required parameters
Chapter 3 Review of quality control for Not required Not statutory auditor of financial required statements in India and abroad based on select parameters
Chapter 4 Comparative analysis of the Not required Not quality control for statutory required audit of financial statements
Chapter 5 • Analysis of the opinions of • Percentage of SPSS respondents based on their respondents in 20.0 degree of agreement with a different levels of particular variable agreement • Analysis of the homogeneity • Chi-square test of of opinion between CAs and homogeneity students • Analysis of the opinion of • Mean score individual respondent groups • Analysis of the impact of • Nonparametric professional experience on Mann Whitney test opinions of respondents • Analysis of the relationship • Correlation coefficient between individual IVs under and t-test each parameter and the DV, ‘Quality Control Procedure for Statutory Financial Audit’
1.7.5. DEMOGRAPHIC PROFILE OF RESPONDENTS A brief demographic profile of respondents under the study is given here (Table 1.1). Demographic profile of respondents is graphically repre- sented as follows (Chart 1.1). Table 1.1. Demographic Profile of Respondents. 22 Demographic Profile Based on Gender ULT OTO RCDR O TTTR IACA AUDIT FINANCIAL STATUTORY FOR PROCEDURE CONTROL QUALITY
Male % Female %
367 98.4 6 1.6
Demographic Profile Based on Age
Young (age less than % Middle-aged (age % Experienced (age % 30 years) between 30 and more than 50 50 years) years)
159 42.6 125 33.5 89 23.9
Demographic Profile Based on Occupation
CAs % Students %
227 60.9 146 39.1
Source: Compilation of Primary Data using SPSS 20.0. Introduction 23
Chart 1.1: Demographic Profile of Respondents.
Demographic Profile Based on Gender Findings
As observed in Table 1.1 and Chart 1.1, almost all the respondents in the current study are male, though this was not intentional
Demographic Profile Based on Age Findings
Most of the participants of this current research were young (Table 1.1). A good participation of middle-aged and experienced respondents was also observed (Chart 1.1)
Demographic Profile Based on Occupation Findings
It is observed in Table 1.1 and Chart 1.1 that participation of CAs in public practice is more than that of students pursuing a chartered accountancy course 24 QUALITY CONTROL PROCEDURE FOR STATUTORY FINANCIAL AUDIT
1.8. The Scheme of Work In order to proceed with an empirical study on quality control for statutory audit of financial statements, the entire research has been made through six chapters as follows:
Chapter 1 Introduction (Background of the Research; Research Problem; Research Questions; A Profile of Survey of Literature and Research Gap; Objectives; Research Methodology; etc.) Chapter 2 Quality of Statutory Audit of Financial Statements: A Conceptual Discussion Chapter 3 Quality Control Framework for Statutory Audit of Financial Statements in Select Countries: A Conceptual Review Chapter 4 Quality Control Framework for Statutory Audit in Select Countries: A Comparative Study Chapter 5 Respondents’ Perception on Quality Control Procedure for Statutory Financial Audit: An Empirical Study Chapter 6 Concluding Observations and Suggestions