Wednesday, September 11, 2019

Does the rotation of auditors improve the quality of auditing Essay - 3

Does the rotation of auditors improve the quality of auditing - Essay Example ntial advantages of MAR fail to outweigh costs incurred and other associated risks. 3 In this context, the essay will review the available literature that analyses whether rotation of auditors improve quality of auditing. It will use deductive reasoning to derive that while there are not much empirical data that prove MAR significantly improves audit quality, at the same time, there is not much conclusive evidence that shows MAR has an adverse effect on audit quality, thus keeping the debate open. Discussion Audit, audit quality and auditor rotation In the UK, it is mandatory for all public sector organisations and large business firms to produce an annual, audited financial report. In this context, the term auditing refers to â€Å"a systematic process of objectively gathering and evaluating evidence relating to assertions about economic actions and events in which the individual or organisation making the assertions has been engaged, to ascertain the degrees of correspondence betw een these assertions and established criteria.†4 The Public Company Accounting Oversight Board (PCAOB) had recently published a report asking for public suggestions on the improvement of audit quality and auditor independence, wherein auditor rotation was taken into consideration.5 There are varying opinions on the effects of auditor rotation, and researches have revealed that existing literature fails to derive conclusively on the effects of audit rotation, hence researchers must be careful when analysing audit rotation reports from the past.6 Supporters for auditor rotation claimed that a long-term relationship between an auditor and a company develops a feeling of dependency that in turn diminishes audit quality.7 However, those against auditor rotation claimed that auditor rotation is an expensive process and the costs far exceed any derived advantages.8 Furthermore, they also claimed that auditor rotation is a hurdle, in regard developing a relationship between the firmâ €™s managers and auditors based on confidence and trust, and social exposures between the two often lead to improved audit quality, without hampering auditor independence.9 The theoretical debate on the issue of auditor rotation is based on how one views the auditor. If the auditor is seen as a medium for wealth optimisation, there are various theories that support the concept that there is an improvement of audit quality due to rotation.10 However, if one viewed the auditor as an agent for the principals, rotation is deemed disadvantageous, and a long-term relationship would allow the auditor to get a better understanding of the principals’ objectives, thus making him/her a better auditor.11 The term ‘audit quality’ denotes the probability that an auditor will find shortcomings within a firm’s accounting system (competence), and will report on them (independence).12

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