Rotation of auditors has also been argued to facilitate business organisations in developing better transparency in their financial reports. Moreover, auditor rotation is identified as a process assisting in better flow of information. Rotation also ascertains that the financial statements of a business organisation are reviewed frequently. In this manner, auditor rotation develops an increased accountability along with independence amid auditors. However, the policy of auditor rotation is identified to affect the audit quality to a substantial extent, as auditors with time span are aware of the risks and credibility that a business organisation is attached with. It is also ascertained that there are certain business organisations adopting the policy of auditor rotation, which are seemed to increase complexities as well as cost due to rotation during important business transactions (Whitehouse, 2013). In this regard, the essay emphasizes the audit quality and the policy of rotation of auditors. Moreover, the essay discusses about the issues that are addressed by auditors’ rotation and explains the advantages and disadvantages associated with the policy of auditors’ rotation. Discussion Defining Audit Quality In the present business scenario, financial reports of companies are deemed to be quite essential elements of identifying the performances of business organisations. In this regard, both internal as well as external auditors play effective role in the preparation of financial reports suitably (Arrunada & Paz-Ares, 1997). Contextually, audit quality has emerged as an important aspect in relation to the audited financial reports that are prepared and presented. It is therefore deemed to be the auditors’ responsibility to discover as well as identify the shortcomings in the accounting system of an organisation in order to ensure that financial reports are prepared systematically and appropriately (Velte & Stiglbauer, 2012). Correspondingly, the policy of audit quality is generally argued as based on three important factors, which include disclosure of appropriate financial statements, ascertaining that the internal control system of an organisation is efficient and provide adequate warnings in case of frauds and misrepresentations (PCAOB, 2013). The Issue that are Addressed by ‘Rotation of Auditors’ The policy of rotation of auditors is thereby adopted by business organisations with the objective of ascertaining that financial reports are prepared and disclosed appropriately ascertaining better audit quality. The policy has been adopted in order to minimise the barrier of over-familiarity that may develop amid the management of an organisation and auditors with time. In this respect, business organisations have adopted this policy in order to safeguard and protect the interests as well as confidence of investors by ensuring that quality audited financial reports are disclosed every year, representing a reliable information reflecting the current financial position of the company. The utmost objective of rotation of auditors is accordingly, to ascertain that auditing operations are performed effectively in order to enhance audit quality (PWC, 2013). In this regard, it can be comprehended
Does the Rotation of Auditors Improve the Quality of Auditing? Table of Contents Introduction 3 Discussion 4 Defining Audit Quality 4 The Issue that are Addressed by ‘Rotation of Auditors’ 4 Meaning of ‘Rotation of Auditors’ 5 Advantages of ‘Rotation of Auditors’ 6 Recommendations 11 Conclusion 11 References 12 Introduction Rotation of auditors implies to the regulatory decision that audit firms will be limited on the basis of years for which they will perform audit operations for a particular entity in the corporate sector…
Whitehouse suggested that this is only achievable through quality audit (par. 3). However, according to the U.K. Competition Commission, most audit firms and public companies in the country are too interdependent, thus compromising the objectivity and skepticism that is intended to safeguard interests of shareholders.
Further, it is expected that the mandatory auditor rotation will result in higher audit quality, results in auditor’s independence, a downturn in audit costs and to lessen big audit firms market concentration. It is to be noted, in the recent past, Italy, India and Brazil have made the auditor rotation as mandatory whereas Canada and Spain have revoked their earlier decision, whether to make auditor rotation as mandatory.
It is also used by the investors in their decision making process, related to purchase or sell of the securities. The auditors guide the investors and owners in their decision making process. The effective utilization of financial statements requires understanding of the functions of auditors as well.
There are those that argue that long-term relationships (auditor tenure) build more knowledge about the firm and its accounting procedures which, in turn, translates into more effective auditing practice and skills. Other stakeholders in the business world believe that audit quality is reduced when rotating auditors due to the lack of familiarity about business processes and accounting, thus impacting the ability of auditors to do a thorough job in assessing best practice within the organisation.
In this context, the Sarbanes-Oxley act was implemented in the US that aimed at bringing back public faith in financial reports. The Sarbanes-Oxley Act made it mandatory for the auditor to be replaced after every five years in the US. The European Commission, however, did not mandate a compulsory auditor rotation, and recommended in its proposal implementation of audit firm rotation and change of audit firms every six to nine years (European Commission, 2010).2 Globally, mixed approaches have been adopted as regard MAR, and in many countries such as the UK, audit partner rotation is given preference over firm rotation, while the regulators in Germany, the US and the UK have derived that pote
The rotation of auditors is one of the criteria that propose towards the quality of audit in most of the cases.The integrity of the financial statements is contingent upon the audit. Audit of the financial statements elaborates the dependability of the users of the financial statements upon the reliability of the information provided in the financial statement.
In general, auditing is fundamentally described as the systematic evaluation and the authentication of financial along with accounting records of a specific business organisation (Rathore, 2008; University of Mumbai, n.d.). It can thus be affirmed from a broader perspective that the auditing ensures the financial reports and the business finances of a specific organisation are appropriately reported and most vitally, effectively utilised (BMQR.org, 2011; Kumara & Sharma, 2011).
It has also challenged numerous businesses, in the event of economic crisis by translating into high systemic risks and financial instabilities. Over the past, numerous corporations collapsed because they worked on wrong assumptions that failed to fully reflect the condition of their finances.
From this definition the basic understanding of the purpose of audit is that auditors verify the financial information companies prepare and provide reasonable assurance to the shareholders and other stakeholders that this financial information is free from material
Other stakeholders in the business world believe that audit quality is reduced when rotating auditors due to the lack of familiarity about business processes and accounting, thus impacting the ability of auditors to
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