Evaluating Audit Quality Using the Results of Inspection Processes Performed by an Independent Regulator

Abstract

This research adds to the audit quality literature by examining inspection findings generated by an independent regulator in an African setting. The study is concerned with the nature of weaknesses identified at both firm and engagement level, categorising inspection findings according to their possible impact on audit quality and identifying those aspects of audit practice which result in inspection findings. An exploratory research design is used. Inspection findings are reviewed and categorised with results presented graphically. Several audit quality weaknesses at the firm and engagement level are revealed. The number of audit practice deficiencies move in tandem with incidences of poor documentation standards. In addition, the frequency and impact of inspection findings are affected by: (1) the subjectivity of processes used to test balances and transactions; (2) the extent to which applicable standards are principles‐based rather than procedural; and (3) the need to develop tailored test procedures to address relevant risks. At the practical level, the findings are important for engagement leaders, regulators, audit committees and investors interested in understanding better those aspects of audit practice which are likely to result in lower‐quality audits and less reliable audit reports. At the empirical level, the study provides an original review of audit quality inspection findings from a novel setting. An exploratory design complements the largely positivist‐inspired research on audit quality and examines a practice‐focused perspective on audit quality which moves away from inferential testing of quality surrogates.

Audit quality implications of regulatory change in South Africa

“…The consensus was that audit firms are already held to a high standard of quality control because of their commitment to professionalism and the effect of other regulatory measures such as practice inspections (both internal and regulatory). This is confirmed by both the international and South African-specific literature on the relevance of regulatory inspections for audit quality (see, for example Logie and Maroun, 2020;L€ ohlein, 2016;Westermann et al, 2019). Audit partners also raised the reputational consequences of audit failures [C7] which exist independently of firm rotation.…”

Auditor Assignments and Audit Quality

“…2022). For example, Logie and Maroun (2021) stress the importance of putting sufficient effort into training auditors. Similarly, Kang et al.…”

“…First, we shed light on the process of staffing assignment decisions within the audit firm and examine its impact on audit quality. Although regulators have concerns about auditor assignments (Logie and Maroun 2021), evidence is lacking due to data limitations. Using audit data from private and listed firms, we identify the factors associated with auditor assignments and find that the auditor mismatch negatively affects audit quality.…”

“…First, we reveal that this negative effect is less pronounced for audit firms with more education and training expenditures. It indicates that audit firms' education and training can help auditors gain knowledge to tackle different kinds of clients even if they are inexperienced (Kang et al 2017;Logie and Maroun 2021), thus alleviating the influence of downward mismatch. Second, the negative effect of mismatch on audit adjustments is less pronounced for audit firms with more informatisation expenditures since audit firms' information technology improves audit team communication efficiency and reduces the cost of information acquisition and sharing (Banker et al 2002;Janvrin et al 2008).…”

Editorial: Australian Accounting Review Reaches A 30‐Year Milestone

“…The issue of audit inspections has been controversial. Logie and Maroun (2021) make a contribution to this debate by providing descriptive evidence about the quality of audit practices based on the audit inspection findings of an independent regulator in South Africa.…”