Agency Theory and Audit Quality

AuthorBurim Berisha
PositionUniversity of Business and Technology - Kosovo
Pages69-77
69
Balkan Journal of Interdisciplinary Research
IIPCCL Publishing, Graz-Austria
ISSN 2410-759X
Acces online at www.iipccl.org
Vol. 6 No.1
May, 2020
Agency Theory and Audit Quality
Dr. Burim Berisha
University of Business and Technology - Kosovo
Abstract
Auditing plays a vital role in reducing both: information asymmetry by empirically conf‌i rming
the validity of f‌i nancial statements and agency problems. The principal- agent conf‌l ict illustrated
in agency theory, where principal (owner) lack reasons to believe their agents (managers)
because of information asymmetries and contradictory motives. Information asymmetry deals
with the study of decisions in transactions where one party has more or superior information
than other. Agents (either directors or auditors) may be trustworthy without further incentives
to align interest or monitoring strategies such as audit or increased regulation. However, the
simple agency model would recommend that agents are untrustworthy because managers,
auditors will have their own interests and motives. Independent auditor from the board of
directors is of huge importance to shareholders and key factor to deliver high audit quality.
International Standards on Auditing (IAS) deals with the overall objectives set out for an
independent auditor with its nature and scope allowing the independent auditor to meet these
objectives in terms of conducting the audit of f‌i nancial statements.
Audit evidence which refers to the information used by the auditors in order to reach certain
conclusion on the basis of which audit opinion is formulated. Audit evidence is formulated on
the basis of information from both the accounting records in the f‌i nancial statements and the
other information concerning the entity.
Professional judgment that is required in an audit by the IAS refers to the application of
relevant training, knowledge and experience in an audit engagement with in the specif‌i ed
context of auditing, accounting and ethical standards, in a way to smoothen the economic
decision making regarding the courses of action that are feasible to the circumstances of the
audit engagement.
Quality control procedures should be taken into consideration during the audit engagement
level which could provide the auditor with reasonable assurance regarding the compliance of
audit with the professional standards and applicable legal and regulatory requirements; and
report issued by the auditor is under appropriate circumstances.
Kosovo ranks to be one of the small countries in the Balcan region. Taking the history of
business establishments in Kosovo into consideration, we see that the corporate enterprises
in Kosovo are relatively new. Thus, it was by the end of nineteenth century when debates
and discussions started to breakout regarding the revision of the laws concerning audit of the
f‌i rms.
Introduction
“The quality of audit services is def‌i ned to be the market-assessed joint probability
that a given auditor will both (a) discover a breach in the client’s accounting system
and (b) report that breach” (DeAngelo, 1981, p. 186).
One of the important a ributes of auditing is related to audit quality in a way that
audit-f‌i rms lower the information risk by providing the f‌i rm-specif‌i c f‌i nancial re-
ports integrity and improving its quality. Audit quality is positively associated to the
integrity of f‌i rms’ f‌i nancial reports and negatively associated with the f‌i rm-specif‌i c

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