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INVESTIGATING THE EFFECT OF BUSINESS STRATEGY AND INTERNAL CONTROL ON AUDIT QUALITY
Corresponding Author(s) : Javad Mohammadi Mehr
Humanities & Social Sciences Reviews,
Vol. 7 No. 6 (2019): November
Abstract
Purpose: Auditing will improve the quality of financial information. However, in today's audit quality affected by the environment. The purpose of this study to investigate the effect of business strategy and internal control on audit quality in listed companies in the Tehran Stock Exchange.
Methodology: This is applied research in terms of its purpose and in terms of its method is correlation analysis with the regression approach. For this inference method, this research is descriptive-analytic. For this important statistical society, companies listed in the Tehran Stock Exchange during the years 2010-2017 for 8 years have the necessary conditions. According to the constraints defined in the research, companies with qualifying conditions of 107 companies and 856 years-company of observation were collected. To test the hypotheses, the multivariate regression technique was used using panel data.
Main Findings: The business strategy modifies the relationship between the auditor's specialty in the industry and the internal control of audit quality.
Implications: The control structure can provide an understanding of the difference between the business strategy and its diversion, which is necessary for the auditor's expertise in the industry. It is proposed to combine business strategy and audit planning, we can identify the weakness of the internal control of the system in order to improve the quality of the audit and create value for the stakeholders.
Novelty: The study considered the effects of business strategy on the relationship between internal control and audit quality.
Keywords
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- Aflatoni, Abbas and Nikbakht, Leili. (2010). "Econometric Application in Accounting Research, Financial Management and Economic Sciences" First Printing, Tehran, Terme Publishing
- Ahmadpour, A. Tavaclonia,I and Masomi ,T. (2015). The study of the moderating effect of the auditor's specialty in the industry on the relationship between board management and accruals-based profit management: empirical evidence of companies admitted to the Tehran Stock Exchange. Accounting and Audit Management Knowledge. Volume 4, Number 15, Page 93-106
- Balsam, S., G. D. Fernando, and A. Tripathy. (2011). the impact of firm strategy on performance measures used in executive compensation. Journal of Business Research, Volume 64, Issue 2, Pages 187-193. https://doi.org/10.1016/j.jbusres.2010.01.006 DOI: https://doi.org/10.1016/j.jbusres.2010.01.006
- Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013). Business strategy, financial reporting irregularities, and auditeffort. Contemporary Accounting Research, 30(2), 780–817. https://doi.org/10.1111/j.1911-3846.2012.01174.x DOI: https://doi.org/10.1111/j.1911-3846.2012.01174.x
- Deffond, M. L., and C. S. Lennox. (2015). Do PCAOB Inspections Improve the Quality of Internal Control Audits? Working paper, University of Southern California. https://doi.org/10.2139/ssrn.2574506 DOI: https://doi.org/10.2139/ssrn.2574506
- Dhaliwal, D., C. Hogan, R. Trezevant, and M. Wilkins. (2011). Internal control disclosures, monitoring, and the cost of debt. The Accounting Review 86 (4): 1131–1156. https://doi.org/10.2308/accr-10043 DOI: https://doi.org/10.2308/accr-10043
- Dichev, I. D., Graham, J., Harvey, C. R., & Rajgopal, S. (2013). Earnings quality: Evidence from the field.Journal of Accounting and Economics, 56(2–3), 1–33 (Supplement). https://doi.org/10.1016/j.jacceco.2013.05.004 DOI: https://doi.org/10.1016/j.jacceco.2013.05.004
- Eilifsen, A., Knechel, W. R., &Wallage, P. (2001). Application of the business risk audit model: A field study.Accounting Horizons, 15(3), 193–207. https://doi.org/10.2308/acch.2001.15.3.193 DOI: https://doi.org/10.2308/acch.2001.15.3.193
- Elaoud, Assawer&Jarboui, Anis, (2017). "Auditor specialization, accounting information quality and investment efficiency," Research in International Business and Finance, Elsevier, vol. 42(C), pages 616-629. https://doi.org/10.1016/j.ribaf.2017.07.006 DOI: https://doi.org/10.1016/j.ribaf.2017.07.006
- Erickson, M. B., W. Mayhew, and W. L. Felix, Jr. (2000). Why do audits fail? Evidence from Lincoln, Journal of Accounting Research, 38 (1): 165–94. https://doi.org/10.2307/2672927 DOI: https://doi.org/10.2307/2672927
- Fakhari, H. and Alizadeh, M. (2016). Investigating Economies and Economic Outcomes Optional Disclosure of Internal Control weaknesses of accepted companies in Tehran Securities Exchange, the first international conference of business intelligence and business intelligence paradigms. p 16
- FariGolAfshani, R. Sadrari,M,A. (2017), relationship between the industry's specialty of auditors and optional accruals with the role of strategy moderator in Tehran Stock Exchange, Second International Management and Accounting Conference, Sari,Iran. https://www.civilica.com/Paper-MANAGECONF02-MANAGECONF02_1049.html
- Gramling, A.,& Stone, D. (2001). Audit firm industry expertise: A review andsynthesis of the archival literature. Journal of Accounting Literature, 20, 1–27
- Habib, A., and Hasan, M. M. (2017). Business strategy, overvalued equities, and stock price crash risk. Research in International Business and Finance, 39, 389-405. https://doi.org/10.1016/j.ribaf.2016.09.011 DOI: https://doi.org/10.1016/j.ribaf.2016.09.011
- Harmon, P. (2003). Business Process Change. Morgan Kaufman Publishers. San Francisco.
- Higgins, D., T. C. Omer, and J. D. Phillips. (2015). The Influence of a Firm’s Business Strategy on its Tax Aggressiveness. Contemporary Accounting Research 32 (2): 674–702. https://doi.org/10.1111/1911-3846.12087 DOI: https://doi.org/10.1111/1911-3846.12087
- Hoitash, R., Hoitash, U., and Kurt, A., (2016). Do Accountants Make Better Chief Financial Officers? Journal of Accounting and Economics61: 414-432. https://doi.org/10.1016/j.jacceco.2016.03.002 DOI: https://doi.org/10.1016/j.jacceco.2016.03.002
- Ittner, C., and Larcker, D. (1997). Product Development Cycle Time and Organizational Performance. Journal of Marketing Research, 34 (1) , 13-23. https://doi.org/10.1177/002224379703400102 DOI: https://doi.org/10.1177/002224379703400102
- Johnstone, K., C. Li, and K. Rupley, (2010(, Changes in corporate governance associatedwith the revelation of internal control material weakness and their subsequent tremediation, Contemporary Accounting Research 27, 1–53. https://doi.org/10.1111/j.1911-3846.2010.01037.x DOI: https://doi.org/10.1111/j.1911-3846.2010.01037.x
- Kathleen M. Hamm,(2018), Quality Control: The Next Frontier, https://pcaobus.org/News /Speech/Pages/hamm-quality-control-next-frontier.aspx
- Khajavi,S and Ebrahimi,M. (2015) Audit and Conservatism Quality: Evidence from the Companies Accepted in Tehran Stock Exchange, Journal of Accounting and Audit Research, Volume : 7 - Issue : 27 - Page:4 -19.
- Kinney Jr., W. R., and M. L. Shepardson. (2011). Do control effectiveness disclosures require SOX 404 (b) internal control audits? A natural experiment with small US public companies. Journal of Accounting Research 49 (2): 413–448. https://doi.org/10.1111/j.1475-679X.2011.00400.x DOI: https://doi.org/10.1111/j.1475-679X.2011.00400.x
- Krishnan, G. V. (2003). Does Big 6 auditor industry expertise constrain earnings management? Accounting Horizons, 17, 1–16 (Supplement). https://doi.org/10.2308/acch.2003.17.s-1.1 DOI: https://doi.org/10.2308/acch.2003.17.s-1.1
- Kurdler, A E and JavanQalandari.M, (2016). Effect of auditor's specialty on earnings quality and price synchronization. Accounting and auditing reviews. Volume 23, Number 2, Pages 137-154.
- Michelon, G., Bozzolan, S. and Beretta, S. (2015), Board monitoring and internal control system disclosure in different regulatory environments, Journal of Applied Accounting Research, 16 (1), 138-164. https://doi.org/10.1108/JAAR-03-2012-0018 DOI: https://doi.org/10.1108/JAAR-03-2012-0018
- Miller,T. Cipriano,M. Ramsay,R, (2012) "Do auditors assess inherent risk as if there are no controls?", Managerial Auditing Journal, Vol. 27 Issue: 5, pp.448-461, https://doi.org/10.1108/02686901211227931 DOI: https://doi.org/10.1108/02686901211227931
- Miettinen, J. (2014). Audit quality and the relationship between auditee’s agency problems and financial information quality: Research proposal, Available online at: http://www.researchgate.net/publication/٢٥٣٣٧٩٩٣٥_Audit_quality_and_the_relationship_between_auditee's_agency_problems_and_financial_information_quality_Research_proposal.
- Moradi, Dariush (2017). Study of the Effect of Audit Quality on Reporting Quality, National Conference on Modern Research in Management, Economics and Humanities, Kazeroun, Azad University, Kazeroon Branch.
- Newton, N. J., J. S. Persellin, D. Wang, and M. S. Wilkins. (2016). Internal control opinion shopping and audit market competition. The Accounting Review 91 (2): 603–623. https://doi.org/10.2308/accr-51149 DOI: https://doi.org/10.2308/accr-51149
- Qarzai, F. Ghasemi ,G and Pour Ehtesham,M.(2017), Determining the relationship between the characteristics of the audit committee on investment efficiency, The first national conference on modern research in Iran and the world in management, economics and accounting, and humanities, Sabzevar, Iran, https://www.civilica.com/Paper-MEAHBTM04-MEAHBTM04_186.html
- Robin and Zhang (2015) Do Industry-Specialist Auditors Influence Stock Price Crash Risk? AUDITING: A Journal of Practice & Theory, Vol. 34, No. 3, pp. 47-79. https://doi.org/10.2308/ajpt-50950 DOI: https://doi.org/10.2308/ajpt-50950
- Sarwoko and Agoes, (2014), An Empirical Analysis of Auditor's Industry Specialization, Auditor's Independence and Audit Procedures on Audit Quality: Evidence from Indonesia, Procedia - Social and Behavioral Sciences, Volume 164, Pages 271-281. https://doi.org/10.1016/j.sbspro.2014.11.077 DOI: https://doi.org/10.1016/j.sbspro.2014.11.077
- Shah wisey, Farhad; FarhadMirzaee and Abdollah Abdi Baraftabi (2016), Investigating the Relationship between Corporate Governance Mechanisms with Emphasis on Audience Industry Expertise with Profit Management of Companies Accepted in Tehran Stock Exchange, Fourth International Conference on Applied Research in Applied and Management, Tehran, ShahidBehshti.
- SuXijia and Wu Xi. (2017) Public Disclosure of Audit Fees and Bargaining Power between the Client and Auditor: Evidence from China, The International Journal of Accounting, Volume 52, Issue 1, Pages 64-76, https://doi.org/10.1016/j.intacc.2017.01.001 DOI: https://doi.org/10.1016/j.intacc.2017.01.001
- Verschoor, C.C. (2002), “Audit committees focus on risk managementâ€, Internal Auditing, July/August, pp. 27-32.
- Yuana, R., Chengb, Y., & Yea, K. (2016). Auditor Industry Specialization and Discretionary Accruals: The Role of Client Strategy. The International Journal of Accounting, 51(2), 217–239. https://doi.org/10.1016/j.intacc.2016.04.003 DOI: https://doi.org/10.1016/j.intacc.2016.04.003
- Zhang, Y., J. Zhou, and N. Zhou. (2007). Audit committee quality, auditor independence, and internal control weaknesses. Journal of Accounting and Public Policy, 26 (3): 300–327. https://doi.org/10.1016/j.jaccpubpol.2007.03.001 DOI: https://doi.org/10.1016/j.jaccpubpol.2007.03.001
References
Aflatoni, Abbas and Nikbakht, Leili. (2010). "Econometric Application in Accounting Research, Financial Management and Economic Sciences" First Printing, Tehran, Terme Publishing
Ahmadpour, A. Tavaclonia,I and Masomi ,T. (2015). The study of the moderating effect of the auditor's specialty in the industry on the relationship between board management and accruals-based profit management: empirical evidence of companies admitted to the Tehran Stock Exchange. Accounting and Audit Management Knowledge. Volume 4, Number 15, Page 93-106
Balsam, S., G. D. Fernando, and A. Tripathy. (2011). the impact of firm strategy on performance measures used in executive compensation. Journal of Business Research, Volume 64, Issue 2, Pages 187-193. https://doi.org/10.1016/j.jbusres.2010.01.006 DOI: https://doi.org/10.1016/j.jbusres.2010.01.006
Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013). Business strategy, financial reporting irregularities, and auditeffort. Contemporary Accounting Research, 30(2), 780–817. https://doi.org/10.1111/j.1911-3846.2012.01174.x DOI: https://doi.org/10.1111/j.1911-3846.2012.01174.x
Deffond, M. L., and C. S. Lennox. (2015). Do PCAOB Inspections Improve the Quality of Internal Control Audits? Working paper, University of Southern California. https://doi.org/10.2139/ssrn.2574506 DOI: https://doi.org/10.2139/ssrn.2574506
Dhaliwal, D., C. Hogan, R. Trezevant, and M. Wilkins. (2011). Internal control disclosures, monitoring, and the cost of debt. The Accounting Review 86 (4): 1131–1156. https://doi.org/10.2308/accr-10043 DOI: https://doi.org/10.2308/accr-10043
Dichev, I. D., Graham, J., Harvey, C. R., & Rajgopal, S. (2013). Earnings quality: Evidence from the field.Journal of Accounting and Economics, 56(2–3), 1–33 (Supplement). https://doi.org/10.1016/j.jacceco.2013.05.004 DOI: https://doi.org/10.1016/j.jacceco.2013.05.004
Eilifsen, A., Knechel, W. R., &Wallage, P. (2001). Application of the business risk audit model: A field study.Accounting Horizons, 15(3), 193–207. https://doi.org/10.2308/acch.2001.15.3.193 DOI: https://doi.org/10.2308/acch.2001.15.3.193
Elaoud, Assawer&Jarboui, Anis, (2017). "Auditor specialization, accounting information quality and investment efficiency," Research in International Business and Finance, Elsevier, vol. 42(C), pages 616-629. https://doi.org/10.1016/j.ribaf.2017.07.006 DOI: https://doi.org/10.1016/j.ribaf.2017.07.006
Erickson, M. B., W. Mayhew, and W. L. Felix, Jr. (2000). Why do audits fail? Evidence from Lincoln, Journal of Accounting Research, 38 (1): 165–94. https://doi.org/10.2307/2672927 DOI: https://doi.org/10.2307/2672927
Fakhari, H. and Alizadeh, M. (2016). Investigating Economies and Economic Outcomes Optional Disclosure of Internal Control weaknesses of accepted companies in Tehran Securities Exchange, the first international conference of business intelligence and business intelligence paradigms. p 16
FariGolAfshani, R. Sadrari,M,A. (2017), relationship between the industry's specialty of auditors and optional accruals with the role of strategy moderator in Tehran Stock Exchange, Second International Management and Accounting Conference, Sari,Iran. https://www.civilica.com/Paper-MANAGECONF02-MANAGECONF02_1049.html
Gramling, A.,& Stone, D. (2001). Audit firm industry expertise: A review andsynthesis of the archival literature. Journal of Accounting Literature, 20, 1–27
Habib, A., and Hasan, M. M. (2017). Business strategy, overvalued equities, and stock price crash risk. Research in International Business and Finance, 39, 389-405. https://doi.org/10.1016/j.ribaf.2016.09.011 DOI: https://doi.org/10.1016/j.ribaf.2016.09.011
Harmon, P. (2003). Business Process Change. Morgan Kaufman Publishers. San Francisco.
Higgins, D., T. C. Omer, and J. D. Phillips. (2015). The Influence of a Firm’s Business Strategy on its Tax Aggressiveness. Contemporary Accounting Research 32 (2): 674–702. https://doi.org/10.1111/1911-3846.12087 DOI: https://doi.org/10.1111/1911-3846.12087
Hoitash, R., Hoitash, U., and Kurt, A., (2016). Do Accountants Make Better Chief Financial Officers? Journal of Accounting and Economics61: 414-432. https://doi.org/10.1016/j.jacceco.2016.03.002 DOI: https://doi.org/10.1016/j.jacceco.2016.03.002
Ittner, C., and Larcker, D. (1997). Product Development Cycle Time and Organizational Performance. Journal of Marketing Research, 34 (1) , 13-23. https://doi.org/10.1177/002224379703400102 DOI: https://doi.org/10.1177/002224379703400102
Johnstone, K., C. Li, and K. Rupley, (2010(, Changes in corporate governance associatedwith the revelation of internal control material weakness and their subsequent tremediation, Contemporary Accounting Research 27, 1–53. https://doi.org/10.1111/j.1911-3846.2010.01037.x DOI: https://doi.org/10.1111/j.1911-3846.2010.01037.x
Kathleen M. Hamm,(2018), Quality Control: The Next Frontier, https://pcaobus.org/News /Speech/Pages/hamm-quality-control-next-frontier.aspx
Khajavi,S and Ebrahimi,M. (2015) Audit and Conservatism Quality: Evidence from the Companies Accepted in Tehran Stock Exchange, Journal of Accounting and Audit Research, Volume : 7 - Issue : 27 - Page:4 -19.
Kinney Jr., W. R., and M. L. Shepardson. (2011). Do control effectiveness disclosures require SOX 404 (b) internal control audits? A natural experiment with small US public companies. Journal of Accounting Research 49 (2): 413–448. https://doi.org/10.1111/j.1475-679X.2011.00400.x DOI: https://doi.org/10.1111/j.1475-679X.2011.00400.x
Krishnan, G. V. (2003). Does Big 6 auditor industry expertise constrain earnings management? Accounting Horizons, 17, 1–16 (Supplement). https://doi.org/10.2308/acch.2003.17.s-1.1 DOI: https://doi.org/10.2308/acch.2003.17.s-1.1
Kurdler, A E and JavanQalandari.M, (2016). Effect of auditor's specialty on earnings quality and price synchronization. Accounting and auditing reviews. Volume 23, Number 2, Pages 137-154.
Michelon, G., Bozzolan, S. and Beretta, S. (2015), Board monitoring and internal control system disclosure in different regulatory environments, Journal of Applied Accounting Research, 16 (1), 138-164. https://doi.org/10.1108/JAAR-03-2012-0018 DOI: https://doi.org/10.1108/JAAR-03-2012-0018
Miller,T. Cipriano,M. Ramsay,R, (2012) "Do auditors assess inherent risk as if there are no controls?", Managerial Auditing Journal, Vol. 27 Issue: 5, pp.448-461, https://doi.org/10.1108/02686901211227931 DOI: https://doi.org/10.1108/02686901211227931
Miettinen, J. (2014). Audit quality and the relationship between auditee’s agency problems and financial information quality: Research proposal, Available online at: http://www.researchgate.net/publication/٢٥٣٣٧٩٩٣٥_Audit_quality_and_the_relationship_between_auditee's_agency_problems_and_financial_information_quality_Research_proposal.
Moradi, Dariush (2017). Study of the Effect of Audit Quality on Reporting Quality, National Conference on Modern Research in Management, Economics and Humanities, Kazeroun, Azad University, Kazeroon Branch.
Newton, N. J., J. S. Persellin, D. Wang, and M. S. Wilkins. (2016). Internal control opinion shopping and audit market competition. The Accounting Review 91 (2): 603–623. https://doi.org/10.2308/accr-51149 DOI: https://doi.org/10.2308/accr-51149
Qarzai, F. Ghasemi ,G and Pour Ehtesham,M.(2017), Determining the relationship between the characteristics of the audit committee on investment efficiency, The first national conference on modern research in Iran and the world in management, economics and accounting, and humanities, Sabzevar, Iran, https://www.civilica.com/Paper-MEAHBTM04-MEAHBTM04_186.html
Robin and Zhang (2015) Do Industry-Specialist Auditors Influence Stock Price Crash Risk? AUDITING: A Journal of Practice & Theory, Vol. 34, No. 3, pp. 47-79. https://doi.org/10.2308/ajpt-50950 DOI: https://doi.org/10.2308/ajpt-50950
Sarwoko and Agoes, (2014), An Empirical Analysis of Auditor's Industry Specialization, Auditor's Independence and Audit Procedures on Audit Quality: Evidence from Indonesia, Procedia - Social and Behavioral Sciences, Volume 164, Pages 271-281. https://doi.org/10.1016/j.sbspro.2014.11.077 DOI: https://doi.org/10.1016/j.sbspro.2014.11.077
Shah wisey, Farhad; FarhadMirzaee and Abdollah Abdi Baraftabi (2016), Investigating the Relationship between Corporate Governance Mechanisms with Emphasis on Audience Industry Expertise with Profit Management of Companies Accepted in Tehran Stock Exchange, Fourth International Conference on Applied Research in Applied and Management, Tehran, ShahidBehshti.
SuXijia and Wu Xi. (2017) Public Disclosure of Audit Fees and Bargaining Power between the Client and Auditor: Evidence from China, The International Journal of Accounting, Volume 52, Issue 1, Pages 64-76, https://doi.org/10.1016/j.intacc.2017.01.001 DOI: https://doi.org/10.1016/j.intacc.2017.01.001
Verschoor, C.C. (2002), “Audit committees focus on risk managementâ€, Internal Auditing, July/August, pp. 27-32.
Yuana, R., Chengb, Y., & Yea, K. (2016). Auditor Industry Specialization and Discretionary Accruals: The Role of Client Strategy. The International Journal of Accounting, 51(2), 217–239. https://doi.org/10.1016/j.intacc.2016.04.003 DOI: https://doi.org/10.1016/j.intacc.2016.04.003
Zhang, Y., J. Zhou, and N. Zhou. (2007). Audit committee quality, auditor independence, and internal control weaknesses. Journal of Accounting and Public Policy, 26 (3): 300–327. https://doi.org/10.1016/j.jaccpubpol.2007.03.001 DOI: https://doi.org/10.1016/j.jaccpubpol.2007.03.001