Examining the impact of audit quality (expertise, tenure, audit size) on the possibility of renewing financial statements

Master's thesis in the field of accounting

Abstract

The purpose of the research is to examine whether the quality of auditing in the current period has an effect on the possibility of re-presenting the financial statements in the future period. For this purpose, the relationship between the factors affecting the audit quality in the current period and the possibility of re-presenting the comparative figures of financial statements in the future periods in companies listed on the Tehran Stock Exchange was investigated. In order to test the hypotheses of the research after the initial data collection and screening, using a sample consisting of companies that are active in various industries, more than 105 companies-years were investigated in a period of nine years (1380-1380). In order to calculate and classify the research variables, Excel software has been used, then using the multiple logistic regression analysis available in SPSS software, we have tested the research hypotheses. To check the quality of the audit, the three criteria of the auditor's tenure, the auditor's expertise in the industry and the size of the audit firm have been used. Among the criteria of audit quality, there is only a significant relationship between the tenure of the auditor and the possibility of renewing the financial statements in companies listed on the Tehran Stock Exchange.

Key words: quality of audit, tenure of the audit, expertise of the auditor in the industry, size of the auditor,

-1- Introduction

All companies that have gone bankrupt in the United States in recent years. have been, before that they have renewed their financial statements. In most cases, the re-presentation of financial statements indicates the existence of problems in the company's internal control system and strategic system (Zia 2006)[1]. Re-presentation creates a sense of uncertainty about the credibility of the management and reporting system of companies, especially when the re-presentation shows the badness of financial reporting in previous periods. If the management tries to mislead the shareholders, their trust in the information provided by the management will decrease and subsequently, the investors' view of the company will change to a great extent. In fact, the renewed financial statements presented in a clear and explicit manner provide a message and a sign about the unreliability of the financial statements of the past periods and their low quality (Zia 2006). The auditor documents this confidence through the collection and evaluation of audit evidence and finally through the audit report and provides it to the investors. Auditors determine the reliability of financial statements by comparing the way financial information is presented with accepted accounting principles and standards (Hass Yaganeh 1385).

The forward research investigates whether the increase in audit quality in the current period will reduce the possibility of significant distortion in the items included in the financial statements of the current period and the subsequent re-presentation of financial statements in the future period? Increasing audit quality means increasing the auditor's effort to discover possible significant errors and distortions in financial statements. Increasing efforts by the auditor can lead to a decrease in the probability of not discovering important errors and distortions (Shibano 1990, Matsumura and Tucker 1992, Dai 1993, Hilgeist 1999) [2]. In this way, it is expected that the increase in audit quality means a negative relationship between the audit quality in the current year and the re-presentation of financial statements in the next period. Despite the importance of this issue for auditing knowledge, few empirical studies have explicitly tested this theoretical prediction.

This chapter describes the topic of the research, its objectives and necessity, questions and hypotheses, a summary of the methodology, statistical population, sampling method and information analysis method. In the following, the thematic, spatial and temporal scope of the research, the definitions of some of the words used in the research and at the end of the research structure are presented.

1-2-Description and expression of the subject

Based on the theoretical concepts of financial reporting, the purpose of financial statements (accounting) is to provide summarized and classified information about the financial status, financial performance and financial flexibility of the business unit..

1-2-Explanation and presentation of the subject

Based on the theoretical concepts of financial reporting, the purpose of financial statements (accounting) is to provide summarized and classified information about the financial status, financial performance and financial flexibility of the business unit, which is useful for a wide range of users of financial statements in making economic decisions. be made In fact, the main goal of accounting is to provide information that expresses the financial effects of transactions, operations, and events affecting the financial status and results of the business unit, and in this way helps investors, creditors, and other users in making economic judgments and decisions (Committee for Compilation of Financial Accounting Standards, 2016).

Accounting system, by reporting the financial activities of the business unit, has the ability to convey information about what others are not aware of. For financial information to be useful in users' decision-making, accounting and financial reporting purposes require that relevant information be reported in an appropriate and complete manner. The financial information provided by the accounting system can be useful and used in the economic decision-making process of users only when it meets the minimum standards (Emetadi and Farajzadeh Dehkordi 2011). Companies that provide audited financial statements have higher quality information content and profits. Accruals depend on managers' judgments, and companies with more accruals are more difficult to audit. A higher quality audit is more likely to uncover questionable accounting practices. Because high-quality audit institutions have more expertise, resources and incentives to discover mistakes and fraud. Audit quality has always been the focus of the audit profession as a criterion for the correct performance of audit activity. In fact, increasing the quality of the audit means increasing the auditor's effort to discover possible important mistakes and distortions in the financial statements. If a restatement is made in the financial period, while it was possible that the misstatements leading to the restatement in previous periods were discovered and reported by the auditor, it is clear that the quality of the audit report was low. The definition that D'Angelo (1981) states of audit quality includes two characteristics: (1) technical ability to identify misstatements of financial statements and (2) sufficient independence to correct misstatements of statements. finance In this way, the evaluation of audit quality is done through the evaluation of the inputs of the audit process, including: the quality of the auditor and the quality of the audit implementation, as well as its outputs, i.e. the quality of audit reporting. The inputs of the audit process (including auditor quality and audit execution) are invisible, which has created many problems for researchers to evaluate audit quality. On the other hand, the auditor's report, which is both visible and part of output-based criteria, is used as a tool that directly measures audit quality. Two examples of direct criteria based on audit quality output are the discovery of tax distortions and the possibility of publishing a going concern report by the auditor before the bankruptcy of the company. The main obstacles for using direct measures based on audit quality output have been the low variety of these measures, exclusive nature of data, low rate of occurrence, and limited generalizability. This inherent limitation creates the need for indirect audit quality measures. In this research, criteria such as auditor's tenure, audit size and auditor's expertise in the industry have been introduced as indirect measures of audit quality. Due to the indirectness of these criteria, none of them alone can reflect the audit quality. For this reason, in this research, all three measures of the tenure of the auditor, the size of the auditor and the expertise of the auditor in the industry are used as representatives of audit quality (Woodland and Reynold 2003). The ever-increasing expansion of societies and the complexity of their specific issues have created an increase in the need for relevant economic information and, as a result, an increase in demand for the existence of systems and processes that provide such information. These factors have increased and expanded the need for auditing as a part of the entire information transfer process. Auditing by emphasizing the effectiveness of operations saves money and reduces losses caused by mistakes (Mojtahedzadeh 2016). The role of audit in reducing distortions is not only fundamental for audit research, but also has deep practical implications.