Agency Theory and Audit Quality

• Author: Burim Berisha
• Position: University of Business and Technology - Kosovo
• Pages: 69-77

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