Econometric Model for Readjusting Significance Threshold Levels through Quick Audit Tests Used on Sustainable Companies

Abstract

Given the present-day economic situation, which is characterized by economic destabilization as a result of the pandemic crisis, auditors are facing the issue of establishing materiality, which is partly based on the fact that a certain level of financial misstatement influences the decisions of the involved parties. The aim of the present study is to suggest an econometric model for readjusting significance threshold levels through quick audit tests used on sustainable companies. The main objectives of the study are to emphasize the causal relationship between the manifestation of constant errors in financial reports and the inconsistency of audit opinions, as well as to put into practice the causal relationship that exists between the improvement of the audit function and sustainability itself, given companies’ crisis situation. In this particular context—based on the entire sample of companies listed in the Bucharest Stock Exchange (BVB), Bucharest Exchange Trading Plus category (BET Plus)—we estimated a number of financial indicators between 2009 and 2018 so that we could determine the materiality of accounting errors identified by auditors in order to express an opinion regarding the reliability and accuracy of financial reporting. The study’s key findings show that, given the economic crisis, the significance threshold level is a volatile test and it needs to be reconsidered taking into account the decline in the quality of reporting and, indirectly, the disclosure of financial information. From a holistic point of view, we believe that our study will have a significant impact on both practitioners and regulatory entities by shifting the qualitative approaches of analysis itself towards key prudential regulations stipulated by International Standard on Auditing (ISA) 320, ISA 450 and ISA 700. The study also highlights the process of refining information sources that can impact the significance, understanding and materiality of business decisions.

Financial sustainability of oil and gas companies—basis for building resilience strategies

“…To achieve the proposed goal, we followed the steps suggested by other authors in the literature for data collection and processing (Stahl and King, 2020). The first stage consists in the collection and formation of the working sample, consisting of financial and economic data reported by the 29 companies whose activity is oil extraction during the last 14 years (2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019)(2020)(2021)(2022). Later, based on the data collected from the financial reports, a series of indicators and financial ratios considered relevant in forecasting the economic and financial sustainability of these companies were calculated.…”

The Quality of the Audit

“…The financial statements reflect the results of the management of the company by the manager, but also the way of managing the patrimony and the entrusted resources.'' 13 "There are users who want to evaluate the way of administration or the responsibility of the management to make economic decisions: "These decisions may concern, for example, the option to keep or sell the investment in the respective enterprise or the replacement or reconfirmation of the management". But there are financial statements that do not provide all the information that users need for decision-making, because they show the financial effects of past events and do not, as a rule, provide non-financial information.''…”

“…TipoMoldova, Iași, 2011, p. 28 11 Idem, p. 28 12 Dănescu Tatiana -Audit financiar, convergențe între teorie și practică, Ed. Irecson, București p. 188 13 Zecheru V. -Managementul "Obiect'' de audit intern, Ed. Economică, 2005, p. 150 14 Idem, p.154 15 Ţurcanu, V., Bostan, I., Mateş, D., Socoliuc, M., Grosu, V., The planification of an audit of annual financial situations from the viewpoint of the international standard of audit 300, The USV Annals of Economics and Public Administration 8 (1)…”

Special Issue “Audit and Financial Control Tools Aimed at Ensuring the Sustainable Performance of Organizations”

“…In the case of the paper "Econometric Model for Readjusting Significance Threshold Levels through Quick Audit Tests Used on Sustainable Companies", the reader will notice that "it is demonstrated the need to re-evaluate the significance of accounting information both from the point of view of the desynchronization of the global economy during a crisis period and from the point of view of experiencing viable, sustainable growth in the long run. The suggested QATRMT model based on correlated economic indicators (...), brings a new perspective on the audit opinion in its relationship with the macro-and microeconomic disruptive factors that indicate the sustainability level both for a particular industry and for the company itself" [18]. It is noteworthy that the authors based their conclusion based on the entire sample of companies listed on the Bucharest Stock Exchange (BVB) and Bucharest Trading Plus (BET Plus) category, estimating a number of financial indicators between 2009 and 2018, in order to determine the importance of identified accounting errors by auditors to express an opinion on the reliability and accuracy of financial reporting.…”