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Audit quality and bankruptcy studies Free essay! Download now

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Audit quality and bankruptcy studies

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"Unfortunately for the researcher, it is not possible to directly observe audit quality unless litigation related to auditor negligence test the audit work in the courts." Discuss this statement, with reference to attempts at directly testing audit quality.

(a) What could we mean by ‘audit quality’ and why is it difficult to measure?
(b) Discuss the advantages and disadvantages of bankruptcy studies and event studies, as measures of audit quality in term of the information content of audit opinions.
(c) How useful is litigation in ensuring audit quality?


Auditing is considered as the ‘quality control’ of financial accounts. Much importance is often placed on the audit opinions given as all sorts of users of financial statements are seen to rely upon these to make financial decisions. Despite many differing opinions on the purpose of an audit, the objective is laid out in APB Statements of Auditing Standards (SAS) 100;

‘The objective of an audit of financial statements is to enable auditors to give an opinion on those financial statements taken as a whole and thereby to provide reasonable assurance that the financial statements give a true and fair view’

Auditors do not guarantee that the statements are correct and as with any procedure is unlikely to be 100% accurate, there are many risks both inherent and otherwise involved in auditing accounts.

For many years research has surrounded the level of audit quality offered by auditors to both companies and those relying on the accounts and audit opinions such as shareholders. However, it is not always easy to test audit quality.

Firstly, it is often difficult to decide what exactly is meant by ‘audit quality’. Arguably a good quality audit is one which reaches it’s objective. However when we look at the given objective of an audit it is clear that auditors are expected to give an opinion and a reasonable assurance that the accounts give a true and fair view of the accounts.

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