Summary of economic phd thesis the determinants of the quality of audit activities from the perception of auditors

The research utilises the framework of Audit Service Quality to launch the measurement for the differences of auditor’s and related parties’ awareness.. Ø Practical contributions: ü Th

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS OF HO CHI MINH CITY

LE THI THANH XUAN

THE DETERMINANTS OF THE QUALITY

OF AUDIT ACTIVITIES – FROM THE PERCEPTION OF AUDITORS

Major: Accounting Code: 9340301

SUMMARY OF ECONOMIC PHD THESIS

HO CHI MINH CITY, 2018

The work was completed and summited to:

University of Economics of Ho Chi Minh City

Instructors:

1 Dr Vu Huu Duc

2 Dr Le Dinh Truc

Reviewer 1:

Reviewer 2:

Reviewer 3:

The thesis will be presented and defensed at

the science council held at the University of

Economics of Ho Chi Minh City

at … o’clock, day … month… year…

The thesis is available at:

- National Library of Vietnam

- Library of University of Economics of Ho Chi Minh City

PREFACE

1 RESEARCH RATIONALE

Audit quality (AQ) plays a vital role in establishing of capital market AQ is a subject that draws attention from different information user with varied objectives among them Investors, credits concern with the ability to enhance useful information for investing and credit granting decisions Managements likely try for the balance between audit’s cost and benefit Audit firms mainly focus on the business competitiveness and risk reduction aspects In other words, AQ

is multi-aspects subject matter

For that reason, many researches have been conducted in order to determine influential factors toward AQ as a mean to have better comprehension and acceptance for AQ and to have better solutions to enhance AQ Together with studies of academic researchers, professional bodies are trying to establish

a conceptual framework for AQ In the last two decades, professional bodies such as FRC, IAASB,

conceptual framework for AQ The framework regulates elements and important properties of AQ

In Vietnam, the subject matter has brought into the spot light in recent years A number of researches of influential factors for AQ have been performed on vary point of view, however, its impact is still at moderate level Most of these

researches use auditor’s properties, audit firms or external factors at mean to exam for the auditor’s awareness to AQ, without referencing to a common framework for AQ

From the above reasons, author decide to conduct a research for “The determinants of the quality of audit activities – From the perception of auditors” The research’s approach is based on multi-dimensions framework of AQ to gain a broad picture for the subject Also, the author wants to list out suggestive solutions to improve audit activity quality in Vietnam

2 RESEARCH OBJECTIVES

The general objective is to establish influential factors for audit quality from auditor’s point of view as a foundation for proposal policies in improving AQ

Specific objectives are:

(1) To form a framework for influential features for audit activity quality from auditor’s point of view

(2) To analyse the differences of auditor’s awareness toward AQ due to experience and working environment aspects

(3) To analyse the differences between auditor’s and related party’s awareness from the angle of service providing

3 RESEARCH APPROACH

To achieve mentioned objectives, the research is divided into 2 sub-researches:

• Research 1: Auditor’s awareness of the quality of audit activities

Surveys, generated from AQ framework of IAASB with the Likert measurement, are conducted on auditor’s perspective towards factors that could control for AQ Approaches are ultilised for this research include:

o Exploratory Factor Analysis (EFA) to identify influential factors for AQ from the auditor’s perspective before confirming by the Confirmatory Factor Analysis (CFA)

o T-test: to confirm the differences among group of auditors

• Research 2: The differences between auditor’s and related parties’ awareness, including financial statement’s provider and users

The research utilises the framework of Audit Service Quality to launch the measurement for the differences of auditor’s and related parties’ awareness The One - Way ANOVA is performed for such measurement

4 RESEARCH SUBJECT AND SCOPE

§ Research subject

For the first research – the subject is auditors in Vietnam Surveys are made to auditors working in audit firms at different position

For the second research – the subject are auditors and related parties in Vietnam Survey participants include: auditors; accountants (represent for financial statement provider); individual investors (represent for external users of financial statement information)

Ø Scientific contributions:

ü Based on framework of AQ and confirmed by CFA, the research establishes a scientific significant framework for the determinants of the quality of audit activities Thus, this framework is useful for the research directions in measuring

AQ in Vietnam

ü The result identifies eight factors that contribute to audit activity quality (including: audit group competence, Audit Quality policies in audit firm; audit methodology, information provide to board of directors and board of managements; the

publicity of audit firm; external controlling; parties’ interaction; and the context), as well as the differences in AQ awareness from auditor with different experience level and working environment

ü The thesis is with the aim to clarify the concept of AQ both from the angle of audit activity quality and audit service quality This matter has not been clarified by previous studies in Vietnam

ü Also, from achieving results and limitations of difference analysing for auditor’s and related parties’ awareness

of AQ, the thesis proposes a new research approach for AQ from service providing aspect for future studies

Ø Practical contributions:

ü The determination of influential factors of audit activity quality regarding to the auditor’s awareness, together with the differences between auditor’s and profession bodies’ perspective toward AQ, provide suggestions to government, profession bodies, audit firms and educational institutes for the enhancing AQ purpose

ü The evidence of difference between auditor’s and related parties’ awareness offers a multi-dimensions perspective for AQ This, in turn, implies for improving activities striking for the balance between social benefit and cost

ü Finally, the audit activity quality framework’s measurement, based on auditor’s perspective, is a useful

reference for quality assessment activities of audit firms, quality assessment and profession bodies

proposed implementation

CHAPTER 1 – INTRODUCTION FOR RESEARCH

PROBLEM

This chapter’s purpose is to systemise the previous studies

of AQ, both in Vietnam and around the world, as a mean to identify research objectives This chapter is divided into 3 parts Part 1 would list the studies of AQ in the world Part 2 mainly discuss for studies of AQ in Vietnam Part 3 would be used to identify research objectives

1.1 STUDIES OF AQ IN THE WORLD

There is substaintial number of researches of AQ all around the world It is believed to start with study of DeAngelo (1981) for more than 36 years of research for the subject matter Beside studies from academic participants, publications are also made

by profession bodies in more than past 10 years Especially, the

announcement of FRC in 2006 with the title of “Promoting

Audit Quality” Most recently, IAASB published the

Framework for Audit Quality in 2014

In general, studies on AQ mainly focus on two directions, including:

• Analyse of correlation: This direction concentrates on

the relation between AQ and influential factors of AQ Thus,

AQ is a dependent variable that is measured with vary approaches There could be a single or multi independent variables involving with the studies The direction is sub- categorised into 2 areas:

− AQ with audit output product quality

− AQ with audit firm characteristics

This direction is mainly conducted by academic participants

• Factor analysis: To analyse elements contributing to

the concept of AQ in order to form a framework for AQ For that reason, AQ is not considered as a dependent variable in this direction of research There specific areas of studies in this direction:

− Audit firm and auditor characteristics

− Elements contributing to audit process quality

− Elements of audit service quality

− Quality elements of audit activity in overall

1.1.1 Focus of the analyse of correlation

There are two areas in the analyse of correlation of AQ The

first is the correlation between AQ and audit output product

quality The second is the correlation between AQ and audit firm characteristics

1.1.1.1 The relationship between AQ and audit output

product quality

The audit output product quality is measured through: The ability to detect for material misstatement; Auditor’s opinion (direct measurement); or the quality of financial statement; and the information users’ awareness (indirect measurement)

§ Measurement AQ base on the ability to detect for

material misstatement

This research direction is based on the hypothesis that AQ has a positive relationship with the auditor’s ability to detect for material misstatement Two theories of re-presenting financial

statement and AAERs (Accounting and Auditing Enforcement

Releases) are usually mentioned Representative studies for this

direction are Dechow et al (1996); Palmrose (2000); etc

§ Measurement AQ base on auditor’s opinion

Auditor’s opinion is a mean of direct communication to financial statement users about the audit procedure The audit

opinion with “Going concern” (GC) element rise a potential of

client’s ability to maintain operation in the future Two situations are used in measuring for output audit quality, including: (1) Not expressing a GC opinion as a result of insufficient reason; and (2) Expressing a GC opinion when there is no adequate evidence Number of attentive studies are Carcello and Palmrose (1994), Francis and Krishnan (2002),

Kaplan and Williams (2012), etc

§ Measurement AQ base on the quality of financial

statement

The quality of financial statement (after the audit) is a element within AQ This hypothesis is based on the fact that financial statement is a joint-product of management and

auditor (Magee and Tseng, 1990; Antle and Nalebuff, 1991)

Therefore, there is a close and visualised relationship between

AQ and the quality of financial statement

The quality of financial statement is broad concept Other researchers mainly focus on earnings management activities for such measurement as in Jones (1991) Number of studies

applied this approach including Becker et al (1998); Francis et

al (1999); Zhou and Elder (2004); Chen et al (2011); Balsam et

al (2003); Krishnan (2003); Reichelt and Wang (2010); Chi et

al (2011)

§ Measurement AQ base on the information users’

awareness

Information user’s awareness comprises: (1) The awareness

of investors on capital market (TTCK); and (2) The awareness

of the Audit Committee In order to measure for the awareness

of investors, selective factors are introduced to the studies: ERC

– Earning Response Coefficients; Cost of capital and borrowings Number of studies are: Teoh and Wong (1993);

Copley and Douthett (2002); Pittman and Fortin (2004); Mansi

1.1.2 Focus of factor analysis

Researches in this direction are to affirm the auditor’s and related parties’ awareness toward quality attributes as elements

of AQ The first researches mainly concern with audit firm’s and auditor’s characteristics The following researches’ attention are on elements that could contribute to concept of AQ

as a mean to develop a framework for audit quality such as: elements of audit activity quality; elements of audit service

quality; or elements of overall audit activities

1.1.2.1 Audit firm and auditor characteristics

Most of the studies are based on combination of audit firms’ and auditor’s characteristics Such studies are:

Schroeder et al, 1986; Carcello et al, 1992; Beatti and Fearnley, 1995; Behn et al, 1997; Warming and Jensen, 1998; Bakar et al, 2005; Kilgore et al, 2011, 2014

EFA approach is mainly used However, a number of studies are to determine the importance of characteristics with a Likert 5-level measurement to test for the awareness of information users

1.1.2.2 Elements contributing to audit process quality

This direction of research is to determine factors based on the auditor’s assessment of the audit process quality These factors are audit procedures performed by auditors and the compliance of auditor to professional ethic The first research of this kind is Mock and Samet (1982)

Following is Sutton and Lampe (1991) This research is

then developed by Sutton (1993)

1.1.2.3 Elements of audit service quality

This direction’s approach considers audit as a service As a service, AQ is affected by information users’ requirement (both

of financial statement preparation person and financial statement information users) Thus, AQ is affected not only by technical aspect but also by service providing quality aspect The studies are formed on Parasuraman et al (1988)

SERVQUAL model The most distinctive research is Duff

(2004) which uses 5 level Likert to test evaluation level of auditors, financial statement providers and financial statement information users to elements of AQ By combining EFA and

CFA approaches, Duff proposed AUDITQUAL model This

model represents a multi-dimensions structure of AQ in which

two of the most important dimensions are Technical quality and

Service quality…

1.1.2.4 Quality elements of audit activity in overall

…AQ is considered as quality of all elements of audit activities (including: inputs, process, outcomes, and external elements) … From this point of view, several frameworks for

AQ are developed in recent years These frameworks are developed both by academic researchers and profession bodies

§ Frameworks of AQ in academic research

There are two typical frameworks in this field including Francis (2011), and Knechel et al (2012)

o Francis framework (2011)

Francis (2011) provides a common framework for elements

of AQ at different level in an overall system The framework proposes 6 unit of analysis affecting AQ

In other hand, Francis (2011) suggests that, in order to achieve a comprehension for elements of AQ, the studies should apply all units of analysis of the framework Francis also provides exemplifications on which studies could be done for each unit of analysis

§ Frameworks of AQ by profession bodies

Besides the studies from academic field, profession bodies such as FRC, PCAOB, and IAASB also try to form a framework for AQ Main purpose is to provide a tool which could be used by related parties in audit activities to assess and improve AQ

o FRC framework

FRC framework (2008) is constituted by 26 indications for

5 element of AQ, they are: (1) Culture within an audit firm; (2)

Competence and dignity of audit partner and audit staffs; (3)Efficiency of audit process; (4) Reliance and usefulness of audit report (5) Non-controlled external elements contributing

to the AQ

§ PCAOB framework

In 2012, PCAOB started a project for the development of

AQ measurement The project is at the aim to provide audit committee, investor, management, audit firms, regulation

bodies and publicity with AQI – audit quality indicators

However, the project is still under process and AQI has not been approved by concern parties

§ IAASB framework

In 2014, IAASB announced a framework for AQ This

framework focused on 5 elements: (1) Inputs; (2) Process; (3)

Outputs; (4) Interaction; and (5) Contextual

1.2 STUDIES OF AQ IN VIETNAM

In overall, studies in Vietnam are conducted from two

directions: (1) Studies with the aim to provide solutions for AQ

enhancing, and (2) Studies of influential factors for AQ

1.2.1 Studies of solutions for AQ enhancing

The very first researches for AQ in Vietnam concentrate on

finding solutions for AQ enhancing including: Ngô Đức Long

(2002), Trần Khánh Lâm (2011), Hà Thị Ngọc Hà et al (2011),

Trần Thị Giang Tân (2011), Mai Thị Hoàng Minh et al (2012), Nguyễn Thị Mỹ (2013), Phan Thanh Hải (2014)

1.2.2 Studies of influential factors for AQ

Studies on influential factors for AQ in Vietnam still at

moderate quantity Recent studies could be named such as: Bùi

Thị Thủy (2014), Hoa Pham et al (2014), Phan Văn Dũng (2016), Phan Thanh Hai (2016), and Pham Kim Ngoc et al (2017)

1.3 RESEARCH PROBLEM AND OBJECTIVES

1.3.1 Research gap

From the systemisation and research for studies in Vietnam and around the word, the author finds research gaps for the subject matter, including:

ü The measurement of elements for AQ is not built on

suitable framework;

ü Research method is merely based on EFA The result of

this method is not confirmed for the relevant of practical data; and

ü It is not yet distinguished AQ concept from quality of an

activity or quality of a service angles

ü It is not yet examined for the awareness of related

parties to AQ

1.3.2 RESEARCH OBJECTIVE, RESEARCH

QUESTIONS AND RESEARCH APPROACH

From the above research gaps, the thesis would try to: ü Determine influential factors for audit activities base

on a suitable framework;

ü Preform the confirmative test for the audit activity

quality model using CFA;

ü Clarify the concept of audit activity quality and audit

service quality; and

ü Testify the differences between the awareness of auditor

and related parties for AQ under service providing perspective

To be specific, the study is with the aim to determine elements affecting AQ from the auditor’s perspective in Vietnam as a foundation for suggestive solutions regarding to

AQ enhancing

Research specific objectives are:

(1) To form a framework of influential factors for audit activity quality base on auditor’s perspective

For this objective, the study attempts to answer the following questions:

Q1 Which factor regulates the audit activity quality base on auditor’s perspective?;

Q2 Is there any different factor between auditor’s perspective and profession framework for audit quality? and

Q3 To what extent are the different factors between auditor’s perspective and profession framework for audit quality?

(2) To analyse the difference for quality awareness due to the experience and working environment of auditor

For this objective, the study attempts to answer the following questions:

Q4 Is there any difference in the awareness for contributing factors to audit activity quality among groups of auditors with vary experience and working environment?; and

Q5 To what extent is the difference in the awareness for contributing factors to audit activity quality among groups of auditors?

(3) To analyse the difference between auditor’s and related parties’ awareness to AQ from a service providing angle

For this objective, the study attempts to answer the following questions:

Q6 How does auditor and related parties evaluate important factors of AQ from an angle service providing point of view? and

Q7 Is there any difference in the evaluation between auditor and related parties for these factors?

In order to achieve mentioned objectives, the study comprises two following researches:

§ Research 1: Auditor’s awareness of the quality of

audit activities

Specific workloads are:

o To generate a model for auditor’s concepts about

audit activity quality basing on the IAASB framework for AQ

o To analyse the auditor’s awareness due to number

of year experience and working environment toward determinant factors of audit activity quality

• Research 2: The differences between auditor’s and

related parties’ awareness

Specific workloads are:

o To develop a measurement approach for auditor’s

and related parties’ awareness to AQ base on Duff framework for audit service quality (2004)

o To analyse the difference in the awareness between

auditor and related parties on the elements of audit service quality

CHAPTER 2 – LITERATURE REVIEW

This chapter is to summarise related concepts and properties of AQ as a mean to form a foundation for the study Part 1 is used to discuss the properties of auditing that lead to two approaches for AQ: Audit activity quality and audit service quality In part 2 and part 3, the author discusses each of mentioned approach in depth

2.1 AUDIT QUALITY – A MULTI-DIMENSIONS CONCEPT

AQ is a multi-dimensions concept This multiple dimension character has a root from the nature and property of auditing

2.1.1 Nature of auditing

Auditing is mechanism to protect for capital market, in which audit firm has not only to follow rigorous law and professional ethic but also to compete for their own growth The nature of auditing deeply affects to the concept of AQ

AQ has to fulfil social expectation and to create the competitive advantage for audit firms

2.1.2 Auditing properties

Auditing is a professional service with the following properties:

• There are both direct and indirect clients

• Final products are audit report and audited financial

statement with a hidden value-added service

• Auditor is required to have appropriate competence

and to maintain the independence

• Audit process must follow applicable standards

With the above properties, it could be seen that the AQ must ensure both core service and value-added element

2.1.3 The duality of AQ

The nature and property of auditing, as mentioned previously, create the duality of AQ:

• Audit quality, under economic activity point-of-view, is

affected by mechanisms of law and regulations in order

to protect the capital market

• Audit quality, under service providing point-of-view, is

the matter of service quality provided by audit firms

2.2 QUALITY OF AUDIT ATIVITIES

2.2.1 Definitions of audit and quality of audit activities

• Definitions of audit

There are several definitions for audit, such as:

− Definition of Committee on Basic Auditing Concept

(Report of the Committee on Basic Auditing Concept, 1972, p.18): “Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users”;

− Definition of A.A Arens et al (2012, p.4): “Auditing is

the accumulation and evaluation of evidence about information

to determine and report on the degree of correspondence between the information and established criteria Auditing should be done by a competent, independent person”; or,

− According to IFAC, auditing is the independent

auditors examination and present their opinions about financial statements

…All these definitions show that auditing is an activity comprising elements of inputs, process and outcomes Inputs of audit activity are auditors with adequate competence and independence Audit process embraces test and procedures followed the Audit Standards The outcomes of auditing are audit report, audited financial statement, and other reports for the usage of board of directors and board of management

• Audit activity quality definition

According to IAASB: “A quality audit is likely to have

achieved by an engagement team that: Exhibited appropriate values, ethics and attitudes; Was sufficiently knowledgeable, skilled, and experienced and had sufficient time allocated to perform the audit work; Applied a rigorous audit process and quality control procedures that complied with law, regulation and applicable standards; Provided useful and timely reports;

and Interacted appropriately with relevant stakeholders”

(IAASB, 2014, p.4)

From the IAASB’s definition, it could be seen that AQ is considered as the quality of an activity AQ is rather a combination of all auditing process elements

2.2.2 Development of framework for the quality of audit

activities

In 2011, Francis suggests a framework with 6 units of

analysing affecting the AQ, including: (1) Audit inputs; (2)

Audit process; (3) Audit firm; (4) Market structure and market share of audit; (5) Institutional norms; and (6) Economic consequences from audit result For each unit, Francis

illustrates researches for better understanding, however, he does not suggest any specific element…

In 2012, Knechel et al shape a framework with 21 quality

indicators, grouping into four categories: Inputs; Process; Outputs; and Contextual In comparing to the previous

frameworks, Knechel et al‘s framework is considered as being

completed

In 2014, IAASB issues the framework for AQ This

framework describes 5 main elements of AQ, including: Inputs;

Process; Outputs; Interaction; and Contextual

Differing from preceding frameworks, IAASB’s framework introduce element of “Interaction” Interaction among related parties in the audit process is believed to have an effect to AQ

This could be seen a break-through in audit quality framework developing as related parties’ interactions with auditors could

have a major impact on the awareness of AQ (Boyle, 2015)

This element seems does not stress enough in previous frameworks

2.2.3 IAASB framework for audit quality

This framework is based on numerous of materials on AQ policies and related aspect of AQ It took many years to form this framework with the contribution from many organisations

and individuals, such as: IFAC, FRC, PCAOB, EU, IOSCO

(International Organization of Securities Commissions), ICAEW (Institute of Chartered Accountants in England and Wales’s), etc; and academic researchers

The framework defines 5 main elements of AQ: (1)

INPUTS; (2) PROCESS; (3) OUTPUTS; (4) INTERACTION); and (5) CONTEXTUAL These elements are interacted, and all

contributes to AQ Each element and its influence are described within the framework

2.3 AUDIT SERVICE QUALITY

2.3.1 The concepts of service quality

This concept begins with the distinction between service and tangible product A number of differences are: intangibility, comprising with many activities; producing and selling process are inseparable; interactions between customer and supplier;

and the complexity in quality assessment (Gronroos, 1982)

Depending on research subject and environment, there are vary definitions for service quality According to Gronroos (1982), service quality could be evaluated by comparing customer’s expectation before and after the consuming of service Gronroos (1982) suggests a model to measure for

service quality basing on: Technical quality; Functional

quality; and Corporate image

As suggesting by Parasuraman et al (1985), service quality

is the deviation between customer’s expectation and customer’s experience after using the service It means that the service quality is accepted if it meets or surpasses the customer’s expectation Otherwise, service quality is considered as inferior

one Parasuraman et al (1985) service quality model confirms

the difference between customer’s expectation and experience for the service consuming

A research from Lehtinen and Lehtinen (1991) suggests that service quality measured on: process quality; quality of outcomes

2.3.2 The concepts of audit service quality

DeAngelo (1981, p.186) defines that: “The quality of audit

services is defined to be the market-assessed joint probability that a given auditor with both (a) discover a breach in the client’s accounting system, and (b) report the breach” Even

though this definition is still not clear from the angle of service quality, the definition expresses the AQ from users’ perspective