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The impact of external auditing on the quality of financial statements of limited liability companies in Kosovo
Abstract
This paper describes the importance of an external audit and its contribution on increasing the quality of financial statements of limited liability companies (LLC) for the period of 2004-2010 in Kosovo. In the theoretical framework of the study, regularity on the audit of financial statements is designed to be a causal factor for the quality of financial statements, expressed through the types of audit opinions on the audited financial statements. The empirical basis of the study is on data collected from all licensed auditors in Kosovo, who have performed financial audits in Kosovo LLC's, in the period of 2004-2010. The comparative method was used to determine differences in the quality of financial statements LLC's which audited its financial statements for the first time, compared with the LLC's that have performed the audit of its financial statements for a period longer than one year, classifying them according to the type of activity, annual turnover, and number of employees. Surveys were used as the method for collecting and analysing necessary information. Our research is based on analysis of the quantitative values of the independent variables and type of opinion and recommendations contained within the audit report and management report. To ensure quality of the data, we have utilised the Critical Incident Technique (CIT). Using CIT it was possible to expand the number of areas related to the impact of the relevant factors on the quality of financial statements. Identified areas provided a solid foundation to establish two basic dimensions for evaluating quality of financial reporting through comparison - type of opinion and recommendations. We collected a total of 188 critical cases that were reviewed and classified them into twelve area dependent variables (dimensions that affect the quality financial statements) and two areas that are related to the independent variable (type audit opinion and recommendations of the auditor).
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Examines whether two key audit committee characteristics combined, activity and independence, reduce likely fraud or aggressive financial statement actions. Utilizes evidence on potential of Blue Ribbon Committee (1999) recommendations regarding composition of audit committees, and further involves a sample of 156 firms — 78 subject to SEC Accounting and Auditing Enforcement Releases and 78 similar sized non-sanctioned firms. Closes by stating future research may be required regarding young and mature firms - that could affect monitoring.
Auditors participating in a survey identified oversight of financial reporting and the external audit process, and ensuring quality internal controls, as the most important functions of effective audit committees. Financial literacy or expertise, independence, and a strong commitment to perform the job effectively were noted as important attributes. The results also suggest that although audit committees have enough power to confront management on contentious issues, they are not very effective in helping to resolve financial reporting disputes. Management was identified as a key influence in affecting the nature, extent, and quality of communication between the auditor and the audit committee. Most auditors believe that it is not important for each member of the audit committee to be an expert, but it is important that they are financially literate.
Audit committee performance has come under close scrutiny in recent years from a variety of policy-makers, interest groups and researchers. In particular, the adequacy of audit committee oversight has been challenged. At the same time, audit committees are under pressure to increase the scope of their oversight work. This study examines audit committee oversight from the internal perspective of active U.S. audit committee members. A two-part survey used Wolnizer's (1995) list of seventeen prescribed audit committee objectives related to accounting and reporting, auditors and auditing, and corporate governance in general as a basis to assess audit committee members' abilities to recognize their assigned objectives and explore their perceptions of the key tasks and issues currently addressed by audit committees. The results indicate that audit committee members appreciate the importance of all audit committee members having sufficient expertise in oversight areas related to accounting, auditing and the law. However, some respondents agreed they lacked sufficient expertise in many or all of these areas. In addition, the findings indicate that audit committee members tend not to recognize their assigned responsibilities, but agree with the proposed expansion of committee responsibilities. Using a multimethod approach, internal control evaluation was consistently listed and ranked as the most important oversight responsibility. These findings provide insight into the priority perceived by audit committee members as to their oversight responsibilities, and the adequacy of U.S. reporting disclosures as signals of audit committee work.