Background to Auditing and Role of Auditor
| Author | Burim Berisha |
| Position | University of Business and Technology - Kosovo |
| Pages | 42-51 |
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l.
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o
. 1
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arc
h,
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0
A
cademic Journal o
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Business,
A
dministration, Law and Social Science
s
II
PCCL Publishin
g
, Graz-
A
ustri
a
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cces online at www.ii
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ccl.or
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42
Background to Auditing and Role of Auditor
Dr. B
u
r
i
m B
e
r
i
sh
a
U
niversity o
f
Business and Technology - Kosovo
Abs
tr
a
ct
F
inancial markets crisis since 2007 has unfolded many issues regarding the supervision
o
f fi nancial institutions, fi nancial reporting and auditing as of core importance to many
r
egulatory bodies in order to ensure proper-functioning framework in the internal market.
A
n audit, along with both adequate supervision and corporate governance, can contribute
t
owards the fi nancial health of the companies by providing assurance in terms of bringing
fi nancial stability into their reports (
E
uropean Commission [
E
C], 2010, p. 3). The assurance
provided by the auditors reduces the risk of misstatements and ultimately the cost of failure
t
o be su ered by the fi rm’s stakeholders’ also reduces. Market trust and confi dence is restored
b
y the audit as it contributes to the protection of investors’ investments and reduces the cost
o
f capital for companies. Therefore, the auditors have been entrusted by the law to conduct
s
tatutory audits and that their role is of importance towards fi nancial health.
A
uditors in the capital market provide their services for a valuable function of lending their
c
redibility over the fi nancial statements of public listed companies in an a empt to reduce
t
he information risk. The fairness and credibility of the audit depends upon the nature of the
a
estation provided by the auditors (Lu & Sivaramakrishnan, 2009, p. 71). For audit quality the
s
ize of the city-based audit o ce can be a crucial determinant to be taken into consideration
a
long with the size of the national-level audit fi rm, due to the fact that the city-based o ces o
f
au
d
i
t-fi rms s
e
rv
e
t
o
b
e
s
e
m
i
-
au
t
o
n
o
m
ou
s w
i
th th
ei
r
o
wn cl
ie
nt b
a
s
e
.
I
n early years the quality may be impaired in auditor-client relationship. Carcello and Nagy
(2004, p. 57) found that generally there is no evidence which proves that if auditor tenure is
l
ong, audit quality is impaired. There are certain reasons to why audit quality is supposed to
b
e lower in the early year.
O
ne reason could be that in early years, the auditor is new to the
c
lient and doesn’t possess much knowledge about the client’s business, operations, controls,
a
ccounting policies and systems.
A
nother reason could be that the new auditor is unaware o
f
t
he industry error pa erns.
A
relationship between both fi nancial statement error pa erns and
fraudulent fi nancial reporting, and, industry group has been revealed by previous studies.
F
raudulent fi nancial reporting prevails more to an extent where you have a fresh auditor
having less knowledge about the client’s industry
.
Ke
y
words
:
A
udit quality, auditor-client relationship, auditing in SM
E
s, auditing in Kosovo,
I
nternational Standards on
A
uditin
g
(
IA
S), role of auditor, auditor size, auditor rotation, non
-
a
udit services, and auditor independence.
I
ntr
oduc
t
io
n
Financial markets crisis since 2007 has un
f
olded man
y
issues regarding the su
p
ervision
o
f
fi
nancial institutions,
fi
nancial re
p
orting and auditing as o
f
core im
p
ortance to man
y
r
egulator
y
bodies in order to ensure
p
ro
p
er-
f
unctioning
f
ramework in the internal
m
ar
k
et.
A
n au
d
it, a
l
ong wit
h
b
ot
h
a
d
e
q
uate su
p
ervision an
d
cor
p
orate governance,
c
an contribute towards the
fi
nancial health o
f
the com
p
anies b
y
p
roviding assurance
i
n terms o
f
bringing
fi
nancial stabilit
y
into their re
p
orts (
E
uro
p
ean Commission [
E
C],
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