Critique Paper on Completing the Audit and Post-Audit Reponsibilities

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2013
Antonio, Mark Earl Angelo P.
ACT162 – B74
3/3/2013
2013
Antonio, Mark Earl Angelo P.
ACT162 – B74
3/3/2013
Critique Paper #03: Completing the Audit and Post-Audit Responsibilities Critique Paper #03: Completing the Audit and Post-Audit Responsibilities

Summary
The first article of Moez Bennouri, entitled “Does Auditors’ Reputation ‘Discourage’ Related Party Transactions? The French Case” studies the relationship between the frequency of RPTs and the external auditors’ reputation. Regulators, standard setters and market participants consider related party transactions a major problem in financial markets. The quality of external auditing may be proposed as an important governance mechanism to alleviate the propensity of insiders to use related party transactions. The study tests the prevalence of audit quality to reduce the number of these transactions. Audit quality is positively correlated with audit reputation. 85 French firms over the period 2002-2005 were used as sample. The French legal system concentrates on the reputation dimension of audit firms, as a motivation that mitigates the propensity of insiders to initiate related-party transactions. The results show that high quality external audit firms reduce significantly the frequency of related-party transactions. The effect of audit quality seems to be the most important variable explaining the frequency of related-party transactions. These results are obtained after controlling for the selection bias related to the choice of external auditors, using a two-step Heckman procedure.

The second article of Feng Chen, et al, entitled “Fair Value Measurements and Auditor versus Management Conservatism: Evidence from the Banking Industry” showed the relationship between conservative financial reporting and the subjective nature of fair value measurements. The adoption of FAS 157 coincided with the economic difficulties brought by financial crisis and is seen by the researcher as a motivator amongst managers in manipulating earnings in the banking industry. Since the measurement of Level 3 Assets is of subjective nature, auditors might want to reduce the litigation risks by being conservative in terms of valuing their assets. This study provides evidence on the role of auditor in mitigating the agency problem between managers and shareholders and analyses the impact of FAS 157 on auditors and managers.

Lastly, the article “IT and the Audit” by George H. Tucker, CPA, discussed the impact of Information Technology on auditing nowadays. There is a dramatic increase in the trend towards the use of IT systems on all businesses. In fact, most are aiming for a paperless economy. However, issues such as auditors’ consideration of IT and their skills specialization should be addressed so as to determine the effect of IT on the audit, to understand IT controls or to design and perform tests of IT controls and substantive tests. IT has a major influence on companies and their auditors in preparing financial statements so this is a field one should have technical knowledge and competence over. Critique Paper #02

The first article of Dessalegn Getie Mihret entitled “Reliance of External Auditors on Internal Audit Work: A Corporate Governance Perspective”, as the title suggests, shows the linkage between external auditors on internal audit work in a corporate governance perspective. He started off by giving an abstract of the article he wrote. Here, he showed the four components of corporate governance and described, in an overview, how the study is conducted about (methodology). The article defined keywords such as external audit, internal audit, corporate governance, external audit market and Ethiopia. The setting for the study is situated at Ethiopia, which is a developing country, and results of such study may be a guide in studying the same topic on countries with the same context. The whole article is very technical in such a sense that there are a lot of...
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