The effects of auditors’ workloads on audit quality

The effects of auditors’ workloads on audit quality BY RUVIMBO A CHINZOU R103428T A DISSERTATION SUBMITTED TO THE FACULTY OF COMMERCE IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE BSc HONOURS DEGREE IN ACCOUNTING GWERU, ZIMBABWE MAY 2014 i Approval Form The undersigned certify that they have supervised the student, Ruvimbo A Chinzou (R103428T) dissertation entitled: The effects of auditors’ workloads on audit quality submitted in Partial fulfillment of the requirements of the Bachelor of Commerce Honours Degree in Accounting at Midlands State University …………………………… SUPERVISOR …….……………………… CHAIRPERSON …………………………… EXTERNAL EXAMINER ……………… DATE ……………… DATE ……………… DATE i Release Form NAME OF AUTHOR: RUVIMBO A CHINZOU TITLE OF DISSERTATION: The effects of auditors’ workloads on audit quality DEGREE TITLE: Bachelor of Commerce Accounting Honours Degree YEAR GRANTED: 2014 Permission is hereby granted to the Midlands State University library to produce copies of this dissertation and lend or sell such copies for scholarly purposes only The author reserves other publication rights and neither the dissertation nor extensive extracts from it may be printed or otherwise reproduced without the author’s written permission SIGNED: ……………………… ADDRESS: 71 Area Dangamvura Mutare DATE: May, 2014 ii Dedication I would like to dedicate this dissertation to my parents Moses and Maria Chinzou for their profound support from the beginning until end, may the Lord richly bless them! iii Acknowledgements I would like to acknowledge my profound gratitude especially to the Lord Almighty who has made it possible for me to come thus far My sincere gratitude goes to my cordial supervisor Mr Mazhindu who has given me commendable guidance throughout this research and has made it worthwhile Many thanks to the Grant Thornton staff who have dedicated their time to assist me during the research especially Farai Chibisa and Benson Makumire Lastly but not least I appreciate the moral support and inspiration from my parents, siblings Rumbidzai and Rutendo, my fiancé Eugene Chaduka and my friends Charmaine Moyo, Mukudzei Shumba, Moira Mandisodza and Tafadzwa Chindedza iv Abstract This research study was triggered by the researcher’s experiences during her internship at Grant Thornton Camelsa The researcher observed that it is likely that audits performed under workload compression conditions are likely to be of lower audit quality when compared to audits performed under non-workload compression conditions The objective was to establish “remedies” to curb the effects of compressed workloads Literature was reviewed on definitions of audit quality, workload compression and relationship between audit quality and workload compression A descriptive research design was adopted and the target population was Grant Thornton Camelsa’s audit staff which was selected by judgemental and random stratified sampling The researcher used questionnaires, interviews and secondary data to obtain information.Collected data was analyzed and presented in the form of tables, pie charts and graphs The researcher found out that audit quality is compromised under workload compression conditions which are high during the first quarter of the year and recommended that Grant Thornton increase the firm capacity, introduce more permanent positions for trainees and schedule advanced deployment schedule to alert auditors what is ahead of them v Table of Contents Approval Form i Release Form ii Dedication .iii Acknowledgements iv Abstract v Table of Contents vi List of Tables xi List of Figures xii LIST OF APPENDICES .xiii CHAPTER INTRODUCTION 1.0 Introduction 1.1 Background of the problem 1.2 Statement of the problem 1.3 Main research question .3 1.4 Sub-research questions .3 1.5 Research objectives 1.6 Significance of the study 1.7 Delimitation of the study 1.8 Limitations 1.9 Abbreviations .5 1.10 Definition of Terms vi 1.11 Summary CHAPTER LITERATURE REVIEW 2.0 Introduction 2.1 Definition of audit quality 2.2 Audit Quality Measurement .7 2.2.1 Audit Quality Indicators related to operational inputs 2.2.2 Audit Quality Indicators related to Audit Process 10 2.2.3 Audit Quality Indicators related to output/results of audit 10 2.3 Quality Control Policies 10 2.4 Workload Compression 12 2.4.1 Factors influencing audit team composition 13 2.4.2 Factors Contributing towards Auditor’s workloads 14 2.4.3 Policies to manage auditors’ workloads 14 2.5 Relationship between workload compression and audit quality 14 2.6 Supervision and Management Control over staff .16 2.7 Best practices to achieve audit quality .16 2.8 Summary 18 CHAPTER 20 RESEARCH METHODOLOGY 20 3.0 Introduction 20 3.1 Research Design .20 3.2 Population, sampling and sampling techniques .22 vii 3.2.1 Population 22 3.2.2 Sampling 23 3.2.3 Sampling techniques 23 3.3 Data Sources .25 3.3.1 Primary sources of data 25 3.3.2 Secondary sources of data .26 3.4 Research Instruments .27 3.4.1 Questionnaires .27 3.4.2 Personal interviews 28 3.4.3 Types of Questions 28 3.5 Data Triangulation 31 3.6 Data Collection 32 3.7 Data validity and reliability 32 3.8 Data Analysis 33 3.9 Data Presentation 33 3.10 Summary 34 CHAPTER 35 DATA PRESENTATION AND ANALYSIS .35 4.0 Introduction 35 4.1 Data Response rate 35 4.1.1 Questionnaire Response rate 35 4.1.2 Interview response rate 36 4.2 Data Presentation and Analysis 36 viii 4.2.1 Gender 36 4.2.2 Position 36 4.2.3 Audit Experience 37 4.2.4 Professional Qualifications 37 4.2.5 Period in which the firm has the most clients to attend to 38 4.2.6 Deadlines are met during the busy period .40 4.2.7 The deadlines are negotiable 41 4.2.8 The deadlines are tight 42 4.2.9 Tight time budgets have an impact on audit quality .43 4.2.10 Busy period work demands have an effect on auditors’ behaviour 44 4.2.11 Dysfunctional behaviour in auditors is a result of workload compression 45 4.2.12 Work load Compression during the busy period has an effect on audit quality 47 4.2.13 Audit quality is affected adversely to a greater extent by the workload compression 48 4.2.14 Measures in place to manage workload compression 50 4.2.15 The ISQC1 implementation is a good control to manage audit quality 52 4.2.16 Policies implemented to manage audit quality 53 4.2.17 The ISQC implementation is effective .55 4.2.18 The IFAC Code of ethics is a control to regulate auditors’ conduct and behavior .56 4.2.19 The implementation of the IFAC Code of ethics has an impact on audit quality .58 4.2.20 The IFAC Code of ethics influences audit quality to a greater extent 59 4.2.21 There is a negative correlation between workload compression and audit quality .60 4.2.22 Peer review is a good practice to achieve audit quality 61 4.2.23 The audit team members determine workload pressure 62 ix This position is supported by interview question ‘How are audit teams selected in order to reduce workload compression?’ in which the responses given were that audit teams are selected qualitatively more importantly and then quantitatively Experience and qualification are considered before deploying auditors as team members have an impact on audit quality Using the mode the researcher concluded that audit team composition affects audit quality 4.2.25 Best practices to achieve audit quality This Likert item aimed at evaluating if the best practices apply to achieve audit quality The table below show the responses obtained Table 4.25 Best Practices to achieve audit quality Response Strongly Agree i)Quality review of 16 completed audits Percentage 61.53% ii)Staff performance appraisal Percentage 34.62% iii)Professional training Percentage 15 57.69% iv)External Communication relationship with stakeholders Percentage 26.92% Agree Unsure Disagree Total Strongly Disagree 10 38.46 % 17 0% 0% 0% 100% 0 26 65.38 % 10 0% 0% 0% 100% 0 26 38.46 % 15 3.85% 0% 0% 100% 0 26 0% 0% 100% 57.69% 15.38% 26 64 Fig 4.21 Best Practices to achieve audit quality As shown by the table 4.25 16/26 (61.53%) strongly agree, 10/26 (38.46%) agreed, 0/26 (0%) are unsure, 0/26 (0%) disagreed and 0/26 (0%) strongly disagreed that quality review of completed audits is a best practice adopted by the firm 26/26 (100%) agreed whilst 0/26 (0%) did not agree Using the mode the researcher concluded that quality review of completed audits is a best practice adopted to achieve audit quality As shown by the table 4.25 9/26 (34.62%) strongly agree, 17/26 (65.38%) agreed, 0/26 (0%) are unsure, 0/26 (0%) disagreed and 0/26 (0%) strongly disagreed that staff performance appraisal is a good practice adopted by the firm to achieve audit quality 26/26 (100%) agreed whilst 0/26 (0%) did not agree Basing on the mode the researcher concluded that staff performance appraisal is a good practice adopted to achieve audit quality 65 As shown by the table 4.25 15/26 (57.69%) strongly agree, 10/26 (38.46%) agreed, 1/26 (0%) is unsure, 0/26 (0%) disagreed and 0/26 (0%) strongly disagreed that professional training is a good practice to achieve audit quality 25/26 (96.15%) agreed whilst 1/26 (3.85%) did not agree Using the mode the researcher concluded that professional training is a good practice to achieve audit quality As shown by the table 4.25, 7/26 (26.92%) strongly agree, 15/26 (57.69%) agreed, 4/26 (0%) is unsure, 0/26 (0%) disagreed and 0/26 (0%) strongly disagreed that external communication relationship with stakeholders is a good practice to achieve audit quality 22/26(84.62%) agreed whilst 4/26(15.38%) did not agree Using the mode the researcher concluded that external communication is a good practice to achieve audit quality 4.3 Interview Questions These are the responses which were given by the audit senior and audit manager during the interviews held by the researcher 4.3.1 Have you ever accepted a weak client explanation because of budget pressure? The interviewees said that they have never really accepted a weak client explanation but there are aspects which can be hurriedly addressed and if these aspects fulfill procedures on the audit program they can be left without further questioning This is so since there will be not much time to be thorough on insignificant or immaterial items or aspects 4.4 Summary This chapter covered data presentation and analysis, questionnaire response rate, interview response rate, questionnaires questions presented singly and analyzed Chapter will be on summary, recommendations and conclusion 66 CHAPTER FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.0 Introduction The preceding chapter was on data presentation and analysis This chapter will cover a summary of the whole research, major findings of the research, conclusion and recommendations of the study 5.1 Chapter Summaries This study was based on the effects of auditors’ workloads and their effects on audit quality Chapter covered the background of the problem which was the effects of auditors’ workloads on audit quality The objectives of the research were to find out if there are any firm’s documented policies to manage auditors’ workloads during the busy season, if the policies are implemented, how they are implemented, to establish the relationship between compressed workloads and audit quality, establish if there are any reviews over the controls of workloads and to find out if there are any best practices adopted to counter the effect of these workloads on audit quality Chapter of the study served assessing other scholars’ opinions on the research It covered the definition of audit quality and Brown (2004) describes audit quality as the extent and ability to detect and report material misstatements The key author to define audit quality and is acknowledged by many other scholars is DeAngelo (1980) and says that audit quality shows the ability of an auditor to detect material misstatements in the financial statements and the auditors’ willingness to give an appropriate audit report based on audit findings It also covered the relationship between workload compression and audit quality and this was described by Lopez-Acevado (2011) that they are negatively correlated The key author to write on auditors’ workload compression is Lopez -Acevado (2011) who describes workload compression as the increase in density of work that has to be done by a person within a stipulated time and this is characterized by fatigue and tight time budgets and reporting deadlines which lessen the capacity of an auditor to detect or report any existing exceptions 67 Chapter was on the research design and methodology The researcher used the descriptive research design because the research largely relied on primary and secondary data Stratified random sampling and judgmental sampling were the techniques used to come up with the sample to which questionnaires were administered Interviews were also done as part of the data collection Ranjit Kumar was the popular author to describe the research designs and methodologies used Chapter covered the data presentation and analysis of the data collected through questionnaires, interviews as well as secondary sources such as journals Under this chapter were also the questionnaire response rate and their credibility in relation to the study Demographic questions were analyzed for purposes of authenticity of data collected and the research as a whole Data was presented through pie charts, bar graphs and tables 5.2 Major Findings The following were the major findings of this research • There is no documented policy specific to manage auditors’ workloads The firm adopts the internationally recognized professional policies such as IFAC Code of Ethics and ISQC1 which have elements to use as policies to manage auditors’ workloads and professional conduct • The policies are implemented by way of training sessions where training workbooks are filled in by auditors and filed in staff personal files The controls over these policies are reviews, personal files where every training, hearing, achievements or awards are documented and kept • Controls over implementation and documentation of policies are in place but are not regularly reviewed • The more the workload the lower the audit quality Tight time budgets are not negotiable therefore deadlines have to be met In pursuit to meet deadlines in time there are certain aspects which may be left hanging and not done thoroughly • There are no documented criteria to select audit team members for an audit engagement All audit staff except for managers and partners are regarded as audit clerks who are of different levels depending on how far they are with their 68 professional studies and are considered to be under training and not permanently employed by the firm 5.3 Conclusion The research was a success as it obtained findings which related to the practical events in an audit firm Findings show that audits performed under compressed workloads are likely to be of lower audit quality than those done at the time of the year when there are less clients to attend to 5.4 Recommendations The following recommendations arise from the research: • The firm can have a documented policy to manage auditors’ workloads and specifically the maximum number of hours they can put in as overtime and paid for the extra time Ehlem (2011) supports this position when he cites that there are remedies available to relieve workload pressures in public accounting firms and one of the techniques was well defined overtime bonus • Increase the firm capacity so as to deploy larger teams in order to meet deadlines without compromising quality This is supported by Dronkers when he cites that candidates for a team is a key factor and some of the aspects to be considered is the availability of potential audit team members and the organizational area to be audited • Regular reviews of staff’s personal files should be done in order to identify individual weaknesses in staff so as to train them to improve • Create more permanent posts for the firms’ audit clerk trainees so as to retain more experienced and qualified personnel who have proven to be passionate about audit • Inform auditors in time of the deployment schedules so that they are aware of the clients ahead of them It makes the audit faster when one is more familiar with the client system and knows the issues associated with it Ehlem (2011) also encourages the use of flex time by projecting monthly or quarterly work schedules with the concern of persuading staff to be aware of what is expected of them during the busy season 69 5.5 Areas for further research Areas for further research would be the effects of auditors’ workload compression on technical variables such as sampling and audit materiality 5.6 Summary This chapter covered chapter summaries, major findings, conclusion of the research, recommendations and areas for further research 70 Reference List Agoglia C.P et al, 2007 The Effect of risk Misstatement and workload pressure on the choice of workpaper review format Deloitte, 2011 Focus on Audit Quality, Canada Ehlen C.R, Auskes G.R, and Rivers R.A 2011 Jornal of Applied Business Research: Reducing stress from workload Compression-Coping strategies that work in CPA firms Volume 16 Issue no.1, Taylor& Francis Online Hale D, Peersman G, Rugg D, Kiwango E, 2011 An Introduction to Triangulation, UNAIDS Monitoring and Evaluation Fundametals Hernandez H, 2008 Quality audit as a driver for compliance to ISO 900:2008, Canada Vancouver, Westport Innovation Herrbach O., 2010 Audit quality, audit behaviours and the psychological contract Volume 10 Issue no.4, Taylor & Francis Online Jackson and Stent, 2010 Auditing note for SA students 7th Edition, South Africa, Lexis Nexis Kumar, R, 2011 Research methodology 3rd Edition, New Delphi, APH Publishing Lopez A and Dennis M, 2011 Seasonal Workload Compression Effects on Audit Quality, University of Akansas Lopez D M and Pitman M, 2013 Auditor workload compression and busy season portfolio changes U.S evidence, The University of Texas at San Antonio Lopez D.M and Peters G.F, 2012 The effect of workload compression on audit quality Volume 31 Issue no.4,American Accounting Association 71 Manoharan P.K, 2010 Research methodology, New Delphi, APH Publishing Masourie A, Pirayesh R, Salehi M, 2009, International Journal of Business Management: Audit Competence and Audit quality- Case in Emerging Economy Volume 4, Issue no 2, Taylor and Francis online Nuzli M, 2011 Auditor stress: Antecedents and relationships to audit quality, Edith Cowan University, Perth Australia Powell E and Steele S, 1996 Collecting Evaluation Data: An overview of sources and methods Sigauke N 2013,Audit risk: An investigation into workload compression and materiality towards audit quality, Midlands State University Van Nederpelt and Baas P, 2012 49 Factors that influence the Quality of Secondary data sources, The Hague Heerlen, Statistic Netherlands Willeken M and Simunic D.A, 2011 Journal on Accounting and Business Research: Precision in auditing standards, effects on auditor and director liability and the supply and demand for audit services, Publisher Routledge IAASB handbook on audit quality 2011, An IAASB Perspective http://www.taylor&francis online.com/journal http://www.businessdictionary.com 72 APPENDIX I COVER LETTER Midlands State University Faculty of Commerce Department of Accounting P Bag 9055 Gweru April 2014 The Manager Grant Thornton 135 Enterprise Road Highlands Harare Dear Sir/Madam RE: RESEARCH ASSISTANCE REQUEST I am a final year student at the above mentioned institution and I am currently carrying out a research on the topic ‘Auditors’ workload and its effects on audit quality.’ I am carrying out this research in partial fulfillment of a Bachelor of Commerce Accounting Honors Degree I am kindly requesting for your assistance in the form of responses to the questions in the questionnaire and interview guide attached to this letter The information that you provide on this questionnaire will be highly confidential and used strictly for academic purposes Yours faithfully Ruvimbo Chinzou Registration No R103428T 73 APPENDIX II QUESTIONNAIRE Dear Respondent My name is Ruvimbo Chinzou and I am a final year student at Midlands State University undertaking a Bachelor of Commerce Accounting Honors Degree I am doing a research on the topic ‘Auditors’ workload and its effects on audit quality.’ As part of my research, this questionnaire has been designed to obtain information from various participants who are more inclined to the public audit industry and your contribution is highly appreciated Feel free to contribute as your contributions will be kept confidential and are limited for the purpose of this research and academic purposes only Please tick the appropriate box 1.a) Gender Male Female b) Position Manager Supervisor Audit Senior Audit Junior c) Audit Experience (years) Over d) Professional Qualifications First Degree CTA ICAEW CA(Z) ACCA OTHER…………………… At what time of the year you have the most clients to attend to (busy period)? 1st Quarter nd Quarter rd Quarter th Quarter Deadlines for finalizing and completing audits are met in time during the busy period 74 Strongly Agree Agree Unsure Disagree Strongly Disagree Unsure Disagree Strongly Disagree Unsure Disagree Strongly Disagree Disagree Strongly Disagree The deadlines are negotiable Strongly Agree Agree The deadlines are tight Strongly Agree Agree Tight time budgets have an impact on audit quality Strongly Agree Agree Unsure 7.Busy period work demands have an effect on auditors’ behaviour Strongly Agree Agree Unsure Disagree Strongly Disagree Dysfunctional behaviour in auditors is a result of work load compression Strongly Agree Agree Unsure Disagree Strongly Disagree 9.Work load compression during the busy period has an effect on audit quality Strongly Agree Agree Unsure Disagree Strongly Disagree 10 Audit quality is affected adversely to a greater extent by the workload compression Strongly Agree Agree Unsure Disagree Strongly Disagre 11 The following measures are in place on workload compression Strongly Agree i ii iii iv Agree Unsure Disagree Strongly Disagree Peer review Partners’ review Team building Deploying audit team members with various expertise 75 12 The ISQC implementation is a good control to manage audit quality Strongly Agree Agree Unsure Disagree Strongly Disagree 13 The following policies are implemented to manage audit quality Strongly Agree Policy i ii Agree Unsure Disagree Strongly Disagree ISQC1 IFAC Code of ethics 14.The ISQC implementation is effective Strongly Agree Agree Unsure Disagree Strongly Disagree 15.The IFAC Code of ethics is a control to regulate auditors’ conduct and behaviour Strongly Agree Agree Unsure Disagree Strongly Disagree 16 The implementation of the IFAC Code of ethics has an impact on audit quality Strongly Agree Agree Unsure Disagree Strongly Disagree 17 The IFAC Code of ethics influences audit quality to a greater extent Strongly Agree Agree Unsure Disagree Strongly Disagree 18.There is a negative correlation between workload compression during the busy period and audit quality Strongly Agree Agree Unsure Disagree Strongly Disagree 19 Peer review is a good practice to achieve audit quality Strongly Agree Agree Unsure Disagree Strongly Disagree 20 Audit team composition determines workload pressure Strongly Agree Agree Unsure Disagree Strongly Disagree Disagree Strongly Disagree 21 Audit team composition affects audit quality Strongly Agree Agree Unsure 76 22 The following are best practices adopted to achieve audit quality Strongly Agree i ii iii iv Agree Unsure Disagree Strongly Disagree Quality review of completed audits Staff performance appraisal Professional training External Communication relationship with stakeholders Any other comments to alleviate workload compression ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ……………………Thank You! 77 APPENDIX III INTERVIEW GUIDE Interview Questions Do you feel the busy season workload pressure has an impact on auditors’ performance? Have you ever accepted a weak client explanation because of time budget pressures? How are auditors’ workloads managed? What factors influence audit team composition during the busy season? How are audit teams selected in order to reduce workload compression? Do you feel that work load pressure has an impact on audit quality? What factors would you consider in assessing audit quality? 78