Audit Quality Control: Development of Self-Assessment - Malaysian ...

any deficiency that could have compromised auditquality.2.0 LITERATURE REVIEW2.1 The Search for Audit QualityThe demand for auditing services arises from aneed to facilitate dealings between the partiesinvolved in business relationships-shareholders,creditors, public authorities, employees andcustomers, etc (Arrunada, 2000). The accountingprofession has faced increasing pressure fromexternal parties to monitor and improve thequality of the audit process (Sutton, 1993). Thereare numerous of previous research done onstudying multi-aspects of audit quality. Thestrong interest in examining audit quality is partlydue to the concern of issues such corporatecollapse, expectation gaps and corporategovernance.One of the main areas in audit quality literature isthe association between audit quality with auditfirm size. As suggested by DeAngelo (1981),larger firms provide higher-quality audits becauselarger firms have fewer incentives to compromisetheir standards to ensure retention of clients incomparison with smaller firms. Audits performedby large audit firms are perceived to be of higherexpected quality than audits by small firms. Also,Palmrose (1988) finds that large auditors havelower litigation rates than small auditors.Similarly, Dupoch and Simunic (1982) also foundthat audit quality is a function of the number andextent of audit procedures performed by theauditor and that larger firms have more resourceswith which to conduct tests. In addition, Mooreand Scott (1989) demonstrate analytically thataudit firm size and the extent of audit workundertaken are positively related.Although past studies have supported that highaudit quality is related to firm size, the extent ofaudit quality for each firm requires a moreobjective measurement of audit quality. Forexample, Carcello et al. (1992) assessed auditquality based on the perceptions of auditors,prepares and users. Using twelve components ofaudit quality, Carcello et al. (1992) suggested thatfour components to be most important indetermining audit quality. The componentsinclude audit team and firm experience with theclient, industry expertise (especially within theaudit team), responsiveness to client needs, andcompliance with the general standards(competence, independence, and due care) ofgenerally accepted auditing standards (GAAS).Sutton (1993) argued that there is a need foraccounting researchers to developed objectivemeasure in evaluating process quality. Sutton(1993) has attempted to develop a set of factorsfor influencing various stages of the audit process.The selection of the factors is done by the auditorsof large audit firms. An audit quality factor isdefined to the participants as any variableaffecting the audit team’s ability to achieve thelevel of audit quality desired. He identified fourstages of audit process: engagement planning,interim fieldwork, year-end fieldwork and finaladministration. The study also develops themonitoring process or performance indicators foreach quality factors included in the respectivestages (Sutton, 1993). His results support thatthere exists a consensus among experiencedauditors on a set of key audit quality factorswhich have a significant impact on overall auditquality.Krishnan and Schauer (2000) examined theassociation between auditor size and audit qualityfor a sample of non-profit organizations. Usingthe compliance score analysis on eight GAAPreporting requirements to assess audit quality,they found that audit reporting was inconsistentamong the non-profit organizations. Of the eightreporting requirements examined, noncomplianceis highest for those that pertain specifically tonon-profit organizations such as disclosures aboutpledges and donated materials. Results also showthat the extent of noncompliance decreases as onemoves from the small non-Big 6 (now known asBig 4) to the large non-Big 6 and from large non-Big 6 to the then Big 6.The development of objective audit quality hasbeen further extended to cover firm level ratherthan engagement level only. For example, aguideline has been presented by expertrepresentatives from State Auditors Institution(SAI) concerning audit quality for public auditors.After a series of discussion and meetings, thecommittee finalize that there are three differentaudit quality attributes that should be taken careof (Mazur et al., 2005). First, it involves thequality control system. Second, the study alsoincludes one important attributes of audit qualitywhich is quality assurance. Last, the audit qualitycontrol system includes the institutionalmanagement such as managing human resources,institutional risk and external relations. This3