Lecture 2 Audit quality ethics

7102AFE Corporate Auditing
Lecture 2:
Audit quality and ethics
(Chapter 3, Arens et al)

Department of Accounting, Finance & Economics

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Audit quality and corporate governance
 Audit quality:
» How well an audit detects and reports material misstatements » Detection reflects auditor competence
» Reporting reflects ethics or auditor integrity

 Regulatory mechanisms in Australia emphasise:
» Accountability and transparency

 Corporate governance:
» Describes the control and direction of corporations
» Is about how stakeholders and external agencies control or influence those responsible for directing and managing the corporation Department of Accounting, Finance & Economics

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ASX Corporate Governance Council’s Principles of good corporate governance
 Principle 1 – Lay solid foundation for management and oversight
 Principle 2 – Structure the board to add value
 Principle 3 – Promote ethical and responsible decision making
 Principle 4 – Safeguard integrity in financial reporting
 Principle 5 – Make timely and balanced disclosure
 Principle 6 – Respect the rights of shareholders
 Principle 7 – Recognise and manage risks
 Principle 8 – Remunerate fairly and responsibly

Department of Accounting, Finance & Economics

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Expectation gap
 Differences between the views of auditors and the expectations of other stakeholders regarding:
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The appropriate roles and responsibilities of auditors; and
The performance of auditors

 Causes of expectation gap:
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The nature of auditing, including reliance on sampling and subjective evidence The application of hindsight rather than what was known and reasonable at the time
Self interest of complainant seeking compensation for losses
Self interest of auditors protecting their audit fees
Changes in social expectations; and
Ignorance or misunderstanding of the roles of participants in corporate governance Lack of understanding by financial statement users of the difference between:
 Business