ANALYZING DIFFERENCES IN AUDITING BETWEEN

PUBLIC AND PRIVATE ENTERPRISES

ABSTRACT

For the financial accounts to be accurate and reliable, auditing procedures

must be effective. However, depending on the sort of business being audited,
auditing procedures may change. The purpose of this study was to compare
and contrast the auditing procedures used by public and private businesses.
The study employed a qualitative technique and interviewed seasoned
auditors from the public and private sectors after reviewing pertinent
literature. As important aspects of auditing processes, the research looked at
the caliber of the audit team, the audit procedure, the use of technology, and
the independence and objectivity of the auditor.
The results showed that public and private businesses have different
approaches to auditing procedures. While private sector auditors place a
higher priority on the evaluation of financial risks and the efficacy of internal
controls, public sector auditors frequently place a greater emphasis on
compliance with rules and laws. Public and private sector auditors employ
different levels of technology in their auditing techniques, with public sector
auditors depending more on manual processes than private sector auditors.
According to the study's findings, in order to assure effectiveness and
efficiency, both public and private organizations should use a personalized
approach to auditing methods. The findings of this study can help
policymakers, regulators, and auditors beter understand how public and
private firms differ in their auditing procedures and how to improve the
efficacy of auditing procedures in both industries.
The regression study of the association between the volume of audits and

III
revenue for 10 distinct firms is also included in this research. Revenue and
the number of audits had a weakly positive connection, according to the
research, but the predictor factors were ineffective in explaining the result
variable. We came to the conclusion that the predictor variables did not
significantly affect the result variable based on the regression statistics and
the ANOVA table, and thus this regression model cannot be used to
effectively predict or explain the variance in the outcome variable.
Key words: Auditing procedures, public sector, private sector, qualitative
technique, Compliance

IV
 TABLE OF CONTENT

ABSTRACT……………………………………………………. III
TABLE OF CONTENTS……………………………………… V
LIST OF TABLES……………………………………………... VII
LIST OF FIGURES……………………………………………. VIII
LIST OF ABBREVIATIONS………………………………….. IX
INTRODUCTION…………………………………………….... 1
CHAPTER I A COMPARATIVE ANALYSIS OF AUDITING
PRACTICES IN PUBLIC AND PRIVATE ENTERPRISES:
INTRODUCTION AND RESEARCH BACKGROUND………..
3
1.1. What are the differences in auditing practices between public
and private enterprises ……………………………………………… 3
1.2. What are the factors in fluencing auditing practices in public
and private enterprises?....................................................................... 6
1.3. How effective are audit practices in ensuring the accuracy and
reliability of financial reporting in public and private enteprises?........ 10
CHAPTER II ADVANCING AUDITING PRACTICES:
EXAMINING THE INTERPLAY OF AGENCY THEORY,
CHALLENGES, AND OPPORTUNITIES, AND FUTURE
RESEARCH DIRECTIONS……………………….……………. 18
2.1. Agency Theory and Auditing Practices………………..…… 18
2.2. Challenges and opportunities for improving auditing practices
23
in public and private enterprises …………………………………….

2.3. Future directions for research in auditing practices .……… 28

V
CHAPTER III AUDIT FREQUENCY IN PUBLIC AND 38
PRIVATE ENTERPRISES.……………………………………….
3.1. Factors affecting audit frequency in public and private
enterprises…………………………………………………………… 35

3.2. Relationship between Audit Frequency and Revenue: Linear…... 41

Regression ………………………………………………………... 43
CONCLUSION…………………………………………………… 48
REFERENCES……………………………………………………. 50
APPENDIX A……………………………………………………… 53

VI
 LIST OF TABLES

Table 1.1.1: Public and private companies in Azerbaijan .............................. 5

Table 1.2.1: Factors affecting auditing in public and private enterprises ....... 7
Table 1.2.2 Public and Private Enterprises…………………………………..8
Table 1.3.1: Common Issues Identified by Auditors ................................ …13
Table 3.2.1: Data Table……………………………………………………..42
Table 3.2.2: Statistics of Regression………………………………………..43
Table 3.2.3: ANOVA Statistics……………………………………………..44

VII
 LIST OF FIGURES

Figure 3.2.1 Regression model ………………...………………..... 46

VIII
 LIST OF ABBREVIATIONS

IPSAS International Public Sector Accounting Standards.

IFRS International Financial Reporting Standards.
SEC U.S. Securities and Exchange Commission.
FASB Financial Accounting Standards Board.
ASB Accounting Standards Board.
AICPA American Institute of Certified Public Accountants.
GAAS Generally Accepted Auditing Standards
PCAOB Public Company Accounting Oversight Board.
IAASB International Auditing and Assurance Standards Board.
CFO Chief Financial Officer.
AI Artificial Intelligence.
ML Machine Learning.
ESG Environmental, Social, and Governance.
USPS United States Postal Service.
BBC British Broadcasting Corporation.
CNPC China National Petroleum Corporation.
ANOVA Analysis of Variance.

IX
 INTRODUCTION

My research compares and contrasts the auditing practices employed by

public and private companies to see how they affect the accuracy and
dependability of financial statements.
Statement of Problem – My research compares and contrasts the auditing
practices employed by public and private companies to see how they affect
the accuracy and dependability of financial statements. Different ways to
auditing are used by public and private companies, and these approaches
may have an impact on the accuracy of financial reporting.
Purpose of the Study – The goal of this study is to evaluate and contrast
auditing techniques employed by public and private organizations, as well
as to establish how adherence to ethical standards and rules influences the
efficacy of these procedures
Significance of the Study - The point of this study is to help both public and
private groups understand how their auditing methods are different and how
to make them better and more effective.
Research questions – My research questions are as follows:
• Do the different accounting methods that public and private businesses use
affect their ability to do business in a fair way?
• What are the differences between how public and private businesses
evaluate financial risks and internal controls during the reporting process?
• How does technology change the businesses, public and private, do audits?
Review of the Literature – The literature study will talk about how auditing
is done differently for public and private businesses, as well as how
important it is for financial correctness and dependability. It will look at how
things like the quality of the audit team, the audit method, the use of
technology, and the auditor's freedom and objectivity affect the auditing
process.
1
Research methodology – Examining the variations in auditing practices
between public and private businesses entails reviewing the body of actual
evidence and extant literature. Analyzing previous research that have been
done on the topic is part of the literature review. As a result, it would be
easier to discover research gaps and create research topics.
A literature study and empirical research would make up the research
technique for examining variations in auditing between public and private
firms. The study's objective is to evaluate the variations in auditing
procedures between public and private organizations and to pinpoint the
variables that affect these procedures in these two categories of businesses.
Delimitations, Limitations, and Assumptions –
Delimitations: The information used in the study is restricted to that found
in financial statements and other pertinent documents from a sample of
businesses in the target area. It does not take into account the particular
auditing procedures used by certain auditors or auditing firms.
Limitations: The investigation is constrained by the quantity and caliber of
data about the chosen businesses. Limitations may also apply to the
completeness and accuracy of financial statements and other documents
used in the study.
Research novelty –This study intends to close the auditing gap by examining
the auditing methods of both public and private organizations and finding
the disparities between the two.
Structure of thesis – This research paper has an introduction, three main
chapters, a conclusion, and references.Chapter 1, you can become
acquainted with a survey of the literature on auditing in public and private
organizations. About the variations in auditing techniques between public
and private organizations in Chapter 2. The third chapter focuses on the
methods in this study, whilethe last section covers

2
 CHAPTER I
A COMPARATIVE ANALYSIS OF AUDITING
PRACTICES IN PUBLIC AND PRIVATE ENTERPRISES:
INTRODUCTION AND RESEARCH BACKGROUND

1.1 What are the differences in auditing practices between public and
private enterprises?

Auditing methods, which assess financial statements, internal controls, and

compliance with regulatory requirements, are very important to the process
of producing reliable financial reports in both the public and private sectors.
The provision of investors and creditors with the assurance that financial
statements are accurate and comprehensive is the primary purpose of an
audit.
Researchers have analyzed auditing techniques used in different sectors in
order to uncover variations and overlaps. This is in spite of the fact that there
is a continuous dispute about the efficacy of the existing auditing processes.
The primary points of difference between auditing practices used in the
public and private sectors are the scope and depth of the inspections
performed. While it is important for private companies to maximize their
profits, public companies are held to a higher standard of accountability
because of their responsibility to serve the public interest. Public
corporations are subject to higher disclosure rules, which may make audits
easier; private companies, on the other hand, have more leeway in deciding
how much information to make public.
Audits are an extremely important part of both public and commercial
businesses because they provide stakeholders with confidence that financial
reports are accurate. However, auditors in both the public and private sectors

3
face challenges, including the identification of fraudulent activity and the
adaptation to new regulations regarding accounting. There are additional
constraints placed on the processes of auditing, such as restricted access to
data in privately held businesses and the likelihood of unearthing illegal
activity in investigations conducted by public sector organizations[4].
There are differences in the sorts of inspections, degrees of transparency,
breadth of regulation, and types of stakeholders that are engaged in public
and private companies, despite the importance of auditing procedures in both
types of organizations. Audits, notwithstanding these distinctions, serve the
purpose of ensuring stakeholders and depend on generally accepted auditing
principles. However, auditors have to deal with challenges in both public
and private sectors, which highlights the necessity of innovation and
refinement in auditing processes.
Auditing is a crucial procedure that guarantees the financial statements used
in both public and commercial organizations are accurate and reliable.
Nevertheless, auditing procedures in these two industries are very different
from one another, despite the fact that their end goals are comparable.
Private companies have more leeway in the auditing techniques they use, in
contrast to public companies, which are subject to a greater degree of
regulatory monitoring and are required to file more reports. In this answer,
we are going to look at the primary distinctions that exist between the
auditing procedures that are used in public and private organizations.
In Azerbaijan, the discrepancies in auditing procedures that exist between
public and private businesses are relatively comparable to those that exist in
other nations. However, it is essential to keep in mind that the particular legal
and cultural context of Azerbaijan may have an effect on the way auditing
practices are carried out in the country[13].

4
 Table 1.1.1 Public and private companies in Azerbaijan
Private Companies in
Public Companies in Azerbaijan Azerbaijan
Azerbaijan Accounting
Standards IPSAS and IFRS Standards
Monitoring More stringent Less stringent
Stakeholders Government, general public, and investors Mostly investors
Audit Obligatory with stricter independence
Committee standards Obligatory
Based on reputation or
Auditor personal
Selection Bid-based competition recommendations

Likely higher due to greater inspection and Likely lower due to less
Audit Fees reporting requirements regulatory monitoring

When compared to private businesses, public companies in Azerbaijan are

held to a higher standard when it comes to the auditing procedures that must
be followed. This is because public companies are answerable to both the
government and the general public, and as a result, they are subject to a
greater number of rules and forms of monitoring. The International Public
Sector Accounting Standards (IPSAS) and the International Financial
Reporting Standards (IFRS), which set stricter criteria for reporting and
internal control, must be followed by all publicly owned businesses in
Azerbaijan.
On the other hand, Azerbaijan's private businesses are held to a far lower
standard in terms of both regulation and monitoring. Despite this, they must
continue to adhere to the Azerbaijan Accounting Standards, which are
modeled after the International Financial Reporting Standards (IFRS).
Auditing may be simplified as a result of the increased discretion afforded
to private businesses in Azerbaijan over their business operations and
financial reporting.
The types of stakeholders that are involved in public and private businesses
in Azerbaijan are also different from one another. Private businesses have a
5
narrower range of stakeholders, which mostly consists of investors, but
public companies have a wider variety of stakeholders that include the
government, the general public, and investors[6].
Regarding audit committees, businesses in Azerbaijan, whether public or
private, are obliged to have one. However, the standards for the
independence of the committee may be more stringent for businesses that
fall under the category of public companies.
The selection process for auditors in Azerbaijan's public and private
companies are also different from one another. Auditor selection in public
companies often takes the form of a bid-based competition, however in
private companies, auditors may be chosen based on reputation or on the
basis of personal recommendations.
Audit fees in Azerbaijan may be different for public and private companies.
This is likely owing to the fact that public companies are subject to a greater
degree of inspection and are required to submit more reports than private
companies.
In general, even while the variations in auditing methods between public and
private firms in Azerbaijan may be comparable to those in other countries,
the particular legal framework and cultural background of Azerbaijan may
impact the application of these practices in the nation[17].
1.2 What are the factors in fluencing auditing practices in public and
private enterprises?
Auditing practices differ significantly between public and private
enterprises, with several factors influencing these differences. These factors
include confidentiality, financial statement disclosure, stakeholder
involvement, regulatory oversight, and technology utilization. Public
enterprises are subject to more stringent confidentiality requirements and
greater regulatory oversight due to their accountability to the government,
public, and investors. As a result, public enterprises may be required to
6
disclose greater detail in their financial statements. On the other hand,
private enterprises have more flexibility in deciding what information to
disclose, which may make it easier for them to protect customer anonymity.
Additionally, private enterprises typically have less stakeholder
involvement, primarily consisting of investors. Technology utilization may
also impact the need for maintaining confidentiality and the risk of data
breaches, with public enterprises facing greater risk. In this comparative
analysis, we will explore each of these factors in greater detail and how they
impact auditing practices in public and private enterprises[1].
Table 1.2.1 Factors Affecting Auditing Practices in Public and Private Enterprises

Private
Factors Public Enterprises Enterprises

Confidentiality More stringent More flexible

Financial Statement Greater detail Less detail

Stakeholder involvement Government, Public, Investors Investors

Regulatory oversight More oversight Less oversight

Technology utilization Greater risk Lesser risk

Confidentiality is a critical component of auditing practices, and it is

important for auditors to understand the differences in confidentiality
7
requirements between public and private enterprises. Auditors are frequently
exposed to critical financial as well as operational data of the businesses they
audit, maintaining confidentiality is an essential component of auditing
methods. Auditing procedures can be impacted in a variety of ways by the
disparities in the criteria for maintaining confidentiality imposed by public
and private organizations[2].
Table 1.2.2 Public and Private Enterprises

Public Enterprises Private Enterprises

Have greater leeway in deciding what

Adhere to stricter confidentiality regulations information to make public

May find it more challenging to gather

Obligated to keep a higher degree of candor and information for audits due to greater
honesty discretion

Expected to offer a higher level of detail in May have information that is more
financial statements sensitive and want to keep it hidden

Must consider the needs of multiple stakeholders,

including government, general public, and Have a more limited range of stakeholders,
investors mostly consisting of investors

Auditors may be asked to sign confidentiality Auditors are obligated to ensure

agreements, submit to background checks, or confidentiality, but may not face as many
have their work examined by regulatory bodies stringent constraints

Must take necessary precautions to

Data breaches and cyber assaults pose a higher safeguard personal information and ensure
risk with the growing utilization of cloud-based auditors have access to the data they need
computing systems and digital platforms without jeopardizing privacy

Due to their transparency to the public and government agencies, public

firms are subject to stronger secrecy laws. They must continue to act more
openly and honestly while guarding against the unauthorized disclosure of
confidential information. Private firms, on the other hand, have greater

8
discretion over what information to make public, making it simpler for them
to safeguard client confidentiality. However, obtaining the data needed for a
successful audit in private organizations may be difficult for auditors.
Compared to private corporations, public companies are obligated to provide
more thorough financial statements, which may include delicate information
like salary, contracts, and legal disputes. Government, the general public,
and investors are just a few of the many stakeholders that public corporations
must deal with; each has specific needs. Private enterprises only have a small
number of stakeholders, principally investors who may be willing to tolerate
less privacy.
Processes for auditing both public and private enterprises must be
confidential. Regardless of the nature of the organization, auditors are
required to maintain the confidentiality of the information they obtain during
an audit. Auditors who work for publicly traded corporations, however,
could be subject to more onerous restrictions, such as signing confidentiality
agreements, going through background checks, or having their work
reviewed by regulatory agencies.
The requirement for preserving confidentiality may change as a result of the
use of technology in auditing operations. Data breaches and cyberattacks are
more likely when cloud-based computer systems and digital platforms are
used more often. Businesses, whether public or private, have a duty to
protect customer data and make sure auditors have access to the required
information without invading privacy[12].
The auditing procedures used by public and private entities vary. Public
companies are subject to tougher regulations and examination, and they are
required by regulatory organizations like the SEC to provide more particular
financial data. Private firms have greater latitude when it comes to financial
reporting regulations, but this may make it difficult for auditors to
appropriately assess their financial status.
9
Auditing procedures are influenced by a company's size, complexity, and
amount of risk. Larger and more complicated businesses, particularly those
that operate in high-risk sectors, need more thorough audits. The level of
auditing necessary also depends on the effectiveness of internal controls and
risk management procedures.
Engagement of stakeholders is crucial to the auditing process. A fair and
comprehensive audit procedure is used by public corporations with a larger
variety of stakeholders, including independent audit committees. Private
businesses could not engage stakeholders enough, which might result in
conflicts of interest and a lack of transparency.
Both public and private enterprises' auditing practices are influenced by
regulatory monitoring. Regulatory agencies like the SEC impose stricter
standards and transparency obligations for public firms. Private businesses
are required to adhere to accounting and financial reporting standards set by
groups like the FASB.
Utilizing technology has transformed auditing procedures, improving
efficiency and effectiveness. Technology is used by auditors to automate
processes, analyze data, and carry out real-time audits. However, auditors
may not have the specialized knowledge needed to use audit tools and
technologies to their maximum potential, needing constant training.
In conclusion, issues including stakeholder participation, regulatory
scrutiny, and technology use have an impact on auditing practices in both
public and private enterprises. To guarantee accurate and complete financial
statements and sustain the validity of the audit process, auditors must adjust
to these elements[20].
1.3 How effective are audit practices in ensuring the accuracy and
reliability of financial reporting in public and private enteprises?

Auditing procedures are an essential instrument for guaranteeing the

precision and dependability of financial reporting in both public and

10
commercial organizations. Reporting on financial activity is a crucial part of
an organization's day-to-day operations, and it is imperative that this
reporting be accurate in order to preserve the faith of various stakeholders,
including investors, creditors, and regulatory agencies. Auditing practices
give stakeholders the assurance that an organization's financial reporting is
accurate, reliable, and transparent. This is accomplished by locating errors
and discrepancies, improving internal controls, ensuring compliance with
legal and regulatory requirements, and providing valuable insights and
advice.
One way in which the techniques of auditing may be beneficial to a business
is by assisting in the detection of inaccuracies in the reporting of financial
data. For instance, a corporation could have incorrectly recorded a
transaction twice, which would result in an exaggerated amount of income
if left unchecked. An auditor can uncover such inaccuracies via the use of
auditing methods and propose remedial steps to ensure that the financial
statements correctly reflect the financial status of the organization. In
addition, the techniques of auditing may assist in the improvement of an
organization's internal controls by pointing out areas of weakness and
providing recommendations on how these areas might be strengthened. This
helps avoid fraud, mistakes, and misstatements, and it also enhances the
dependability and accuracy of the reporting of financial information[23].
The methods of auditing can assist companies in preserving their reputations
and retaining the confidence of their stakeholders. Auditing techniques
contribute to the reassurance of investors and creditors that their investments
are secure by helping to guarantee that financial reporting is accurate and
dependable.
Auditing procedures are absolutely necessary for businesses and other
organizations that value their credibility and the support of their constituents.
Auditing practices give stakeholders the assurance that an organization's
11
financial reporting is accurate, reliable, and transparent. This is
accomplished by ensuring the accuracy and reliability of financial reporting,
improving internal controls, ensuring compliance with legal and regulatory
requirements, and providing valuable insights and advice. Therefore,
businesses that make investments in auditing practices have a better chance
of achieving both short-term and long-term success, as well as building a
solid reputation within their respective fields[5].
Auditing is the process of checking the financial statements and associated
documentation of an organization to ensure that they conform with
applicable accounting rules and laws, as well as to ensure that they are
accurate and dependable. Auditors are qualified experts that evaluate the
financial information supplied by an organization and utilize their expertise
and abilities to discover any mistakes, misstatements, or fraudulent acts that
may have occurred.
When conducting a review of financial statements, such as balance sheets,
income statements, and cash flow statements, auditors typically adhere to a
predetermined set of procedures that have been standardized. They may also
look at other financial records, including as invoices, receipts, and bank
statements, to make sure that the information that is shown in the financial
statements is correct and comprehensive.
Auditors are able to uncover any flaws or misstatements in the financial
reporting of a company through the process of auditing. These errors and
misstatements might take the form of inaccurate accounting entries,
omissions, or mathematical errors. Fraudulent actions, such as
embezzlement or the inappropriate use of funds, can also be discovered with
their assistance.
By delivering an audit report, auditors give stakeholders the comfort that the
financial information supplied by an organization is accurate and
comprehensive. The auditor's opinion on the financial statements is included
12
in the audit report. This opinion addresses the question of whether or not the
accounts are presented accurately in all material aspects and in accordance
with applicable accounting rules and laws.
The audit report is relied on by stakeholders in an organization, including
investors, creditors, and regulatory organizations, so that they may make
educated judgments regarding their dealings with the business. The audit
report gives assurance that the financial information given by an
organization is reliable and trustworthy, which is vital for preserving the
confidence of the organization's stakeholders and guaranteeing the
organization's continued success over the long term[18].
Table 1.3.1 Common Issues Identified by Auditors

Issue Description

Incorrect
Accounting Auditors identify accounting entries that are incorrect, such as recording
Entries revenue in the wrong period or overstating assets.

Auditors identify omissions in financial statements, such as failing to disclose a

Omissions material liability.

Fraudulent Auditors identify fraudulent activities, such as embezzlement or

Activities misappropriation of funds.

A few instances are provided below to show how auditing may assist in
locating mistakes, misstatements, or fraudulent activity within financial
statements:
Accounting Entries Auditors may find that a business has made improper
accounting entries, such as recording revenue in the wrong accounting
13
period or overstating assets. Other examples of incorrect accounting entries
include understating liabilities and understating expenses. An auditor could
discover, for instance, that a company has reported a significant sale for the
current fiscal year, but after conducting more research, the auditor might
determine that the sale ought to have been reported for the fiscal year that
follows this one. In order to guarantee that the financial statements
appropriately represent the organization's current financial status, this would
need making a modification to them[32].
Omissions: Auditors may find omissions in an organization's financial
accounts, which can lead to misstatements if the auditors are not careful. An
example of this would be if an auditor discovered that a company's financial
statements concealed a significant obligation that the company was
responsible for. The financial statements would need to be revised as a result
of this in order to guarantee that they correctly represent the organization's
current financial status.
Fraudulent actions Auditors have the potential to discover fraudulent actions
that have been carried out by either the workers of a business or the firm
itself. It's possible, for instance, that an auditor will discover that workers of
a company have been stealing money or seizing assets without authorization.
Because of this, the company would be required to take remedial action, such
as firing the workers in question and putting in place internal measures to
avoid acts of a similar nature from occurring in the future.
Auditing offers a means for finding mistakes, misstatements, or fraudulent
acts that might have an influence on the financial reporting of an
organization. All of these instances are examples of how this can be done.
Auditors may assist guarantee that the financial information supplied by an
organization is accurate and dependable by recognizing these concerns,
which is vital for preserving the trust of stakeholders and ensuring the
company's performance over the long run.
14
In order to assure the accuracy of financial reporting, auditors adhere to
auditing standards and procedures that have been set by regulatory
organizations and are generally recognized in the industry. When conducting
audits of financial statements, auditors are expected to follow these standards
and guidelines, which were designed to provide them with a framework to
work within. The audit is performed in a way that is both professional and
consistent when it is carried out in accordance with certain standards and
principles, which helps to guarantee that there are no major misstatements
in the financial statements[7].
The Auditing Standards Board (ASB) of the American Institute of Certified
Public Accountants (AICPA) is responsible for developing the generally
accepted auditing standards (GAAS), which are a set of principles for
auditing organizations. The roles of auditors, the planning and execution of
audits, and the reporting of audit results are all governed by these standards,
which give guidance. When conducting audits of financial statements,
auditors are required to work in accordance with GAAS.
To being required to observe GAAS, auditors may additionally be subject to
particular rules that have been created by regulatory authorities such as the
Public Company Accounting Oversight Board (PCAOB) or the International
Auditing and Assurance Standards Board (IAASB). These recommendations
are aimed to ensure that audits are carried out in conformity with relevant
legislation and standards, and they give further information on the
responsibilities of auditors and the conduct of audits.
Sampling: The sample of fifty invoices that an auditor examines for a
corporation reveals no faults of any kind. However, it was later found out
that the auditor had missed numerous errors in the remaining 500 invoices,
which led to significant misstatements in the financial statements. This
discovery came about as a result of the fact that the auditor did not review
these invoices.
15
Fraud occurs when an auditor examines the financial accounts of a
corporation and finds many red flags that indicate probable fraudulent
conduct. However, after further investigation, the auditor is unable to
identify any conclusive evidence of fraud, and it is later discovered that the
company's CFO had been stealing funds without being discovered for years
without being caught[9].
Errors Caused by Humans: While examining the financial accounts of a
company, an auditor discovers a number of inconsequential mistakes in the
organization's computations. However, the auditor makes the assumption
that these errors are the result of unintentional mistakes and does not
investigate further. The auditor later learns that the errors were made
intentionally in order to manipulate the financial results; however, he or she
continues to assume that these errors are the result of unintentional mistakes.
An auditor is hired to do an audit of a business's financial accounts;
nevertheless, the corporation may keep some information from the auditor
throughout the course of the audit. As a consequence of this, the auditor is
unable to see any material errors in the financial accounts, and it is only
afterwards determined that the corporation purposefully hid this information
from the auditor.
Timing: An auditor finishes auditing the financial accounts of a corporation,
but it is not until many months later that the company learns that one of its
workers has been embezzling money for several years. The auditor was
unable to identify the misstatements that were caused by the fraudulent
conduct since the audit had already been finished before it was discovered
that there had been a fraud.
Two separate auditors examine the financial accounts of a firm and come to
different judgments regarding the significance of a certain item as a result of
their examinations. One of the auditors thinks the item is significant and that
it needs to be mentioned in the financial statements, whereas the other
16
auditor thinks the item is unimportant and that it may be overlooked. These
disparities in expert opinion have the potential to undermine the
trustworthiness of the audit's findings[14].
In conclusion, these instances illustrate the limitations of auditing as well as
the obstacles that auditors encounter when attempting to provide confidence
that financial statements are free from fraud and totally accurate. Auditing is
a necessary activity, but firms must also put in place efficient internal
controls and policies in order to guarantee the accuracy and dependability of
their financial reporting.

17
 CHAPTER II

ADVANCING AUDITING PRACTICES: EXAMINING THE

INTERPLAY OF AGENCY THEORY, CHALLENGES,
AND OPPORTUNITIES, AND FUTURE RESEARCH
DIRECTIONS

2.1. Agency theory and auditing practices

Auditing procedures are very necessary in order to guarantee the correctness
and dependability of financial reporting in both public and private
organizations. There are still certain limitations to the efficacy of auditing
processes, despite the efforts that have been made to strengthen them, and
there have been several high-profile financial scandals that have raised
concerns. Additional research is required to identify ways of enhancing the
efficiency of auditing practices and ensuring that auditors continue to be
independent and objective in their work.
Auditing procedures are necessary for verifying the correctness and
dependability of financial reporting in both public and commercial
organizations. In order for auditing techniques to advance throughout
history, the formulation of auditing standards and guidelines has been an
extremely important factor. These standards and guidelines have mostly
centered on auditing concepts such as independence, impartiality, and
professional skepticism. When evaluating the financial reporting of a
company, auditors should adhere to these principles in order to help ensure
that they keep a high level of integrity and impartiality[8].
However, there are constraints on the efficiency of auditing practices that
need to be addressed. These constraints need to be addressed. There is a

18
possibility of auditor bias occurring, for instance, when auditors have a
financial stake in the firm that is being audited or when they have built ties
with the management of the company. In addition, relying on sampling can
reduce the accuracy of audit results, and the complexity of today's corporate
environment creates additional problems for auditors. Both of these factors
might restrict the usefulness of audits.
The quality of the audit team, the sufficiency of audit processes, and the
degree of cooperation and openness from the organization that is being
audited are all elements that might impact the success of auditing techniques.
For instance, current research reveals that the use of technology-based audit
techniques, auditor experience, and industry understanding can all contribute
to an improvement in audit quality. In addition, efficient communication
with the audit committee and the internal control system of the organization
are also important factors that can contribute to the overall success of
auditing methods.
In spite of these efforts, there have been a number of high-profile financial
scandals in the past few years that have raised doubts about the effectiveness
of auditing processes. Therefore, there is a need for additional research to
identify ways to improve the effectiveness of auditing practices and address
the limitations and challenges of auditing in today's complex business
environment.
In order to solve this problem, one approach would be to make use of
emerging technology, such as data analytics and artificial intelligence, in
order to make auditing procedures more efficient. For instance, data
analytics may assist auditors in recognizing trends and abnormalities in
financial data, which paves the way for audit procedures that are both more
accurate and more efficient. In addition, the adoption of blockchain
technology has the potential to assist boost openness and accountability in
financial reporting, which in turn can help reduce the likelihood of fraud
19
occurring[10].
Another area that might benefit from more research is the influence that
enhanced openness and disclosure requirements have on the quality of
audits. For instance, mandated disclosure of internal control defects and
financial restatements can assist auditors in locating and addressing flaws in
the financial reporting of a corporation. In addition, research might explore
auditors' roles in the promotion of corporate social responsibility and ethical
behavior in businesses.
Agency theory is a well-established concept that describes the interaction
between principals (such as shareholders) and agents (such as management)
in a corporate organization. The principals in this case are the shareholders,
and the agents are the management. The information asymmetry that exists
between principals and agents, in which agents have access to more
knowledge on the operations of the firm than principals do, and the
likelihood that agents may prioritize their own interests above the interests
of the principals both contribute to the potential for conflicts of interest,
which are suggested by the theory. The techniques of auditing play an
essential part in alleviating agency difficulties by giving shareholders and
other stakeholders with independent confidence that financial reporting is
accurate and dependable. This is accomplished through the use of auditing
standards. Auditors are the agents of shareholders, and it is their
responsibility to ensure that financial statements conform with legislative
requirements and accounting standards[22].
Auditing procedures are an essential component of the financial reporting
process in both publicly traded companies and privately held businesses.
Auditing procedures are required to be followed in publicly traded
companies by regulatory agencies such as the Securities and Exchange
Commission (SEC) in the United States. This is done to safeguard the
interests of shareholders, as well as to foster openness and accountability in
20
the company's financial reporting. An independent auditor is responsible for
providing an opinion on the financial statements' correctness and
trustworthiness. It is mandatory for public companies to have their financial
statements audited by an independent auditor.
Even though auditing practices in private businesses are not always required
by law, it is critical that these procedures be carried out in order to foster
transparency and accountability. The owners of private businesses and the
investors in those businesses rely on financial reporting to help them make
educated decisions about the firm. Auditing techniques can give confidence
that financial statements are accurate and trustworthy in providing that
information. Auditing methods can serve to alleviate agency problems in
private firms by providing shareholders with independent confidence that
the financial statements correctly represent the financial condition and
performance of the company. In other words, auditing practices can help to
prevent agency problems from occurring[35].
In order for auditing techniques to be useful in resolving issues that arise
inside an organization, it is essential that auditors maintain their autonomy
and objectivity. If auditors are not independent and objective, they may be
open to pressure from management to ignore or minimize difficulties in
financial reporting. If auditors are independent and objective, management
may not be able to exert such pressure. As a result, regulatory agencies have
created norms and requirements to guarantee the auditors they employ are
independent and objective in their work.
According to research done on the topic, agency issues can have a negative
impact on the efficiency of auditing methods in both public and private
organizations. For instance, research has shown that auditors may be less
likely to notice and disclose serious misstatements in financial reporting
when management has a large ownership position in the firm. This finding
has implications for the independence of auditors. In addition, there is the
21
potential for a conflict of interest to occur when auditors provide services
other than auditing to the same firm that they are auditing. Auditing methods
continue to be an essential instrument for eliminating agency issues and
guaranteeing the accuracy and reliability of financial reporting in public and
private organizations, despite the obstacles that they face[3].
Agency theory is applicable to public firms due to the potential for
shareholders and management to have competing interests, which makes the
theory significant. Managers may, for instance, place a higher priority on
their personal interests than those of shareholders, or they may choose to
hide information that might be important to shareholders. Auditing
procedures provide shareholders with an independent guarantee that the
financial statements correctly reflect the financial condition and
performance of the firm, which is a significant step toward mitigating the
negative effects of agency issues. In addition, the board of directors, which
is comprised of shareholders and serves as their representative, plays an
essential part in supervising management and ensuring that the company is
being run in a manner that is beneficial to the shareholders.
Because of the potential for owners and management of privately held
companies to have competing interests, agency theory is also applicable to
these kinds of businesses. For instance, owners may place a higher priority
on their personal interests than those of the company, or they may suppress
information that would be useful to investors. Both of these scenarios are
problematic for the company. Auditing procedures can be of assistance in
mitigating the effects of these agency issues by delivering to investors the
independent assurance that the financial statements correctly reflect the
company's financial status as well as its performance. In addition, private
businesses have the option of appointing a board of directors, which serves
the dual purpose of monitoring management and ensuring that the firm is
being run in a manner that is beneficial to both its owners and its investors.
22
When it comes to ensuring the integrity and dependability of financial
reporting, agency theory and auditing methods are essential components of
every successful business, whether public or private. Both agency theory and
auditing methods offer stakeholders with independent assurance that
financial reporting is accurate and dependable. Agency theory describes the
possibility for conflicts of interest between principals and agents in a
corporate organization, while auditing practices give such assurance.
Auditing methods continue to be a key instrument for fostering openness and
accountability in financial reporting, despite the fact that there may be
difficulties to the efficacy of auditing practices in resolving agency
problems, such as conflicts of interest and pressure from management[16].
In both public and private organizations, the board of directors plays an
essential part in supervising management and making certain that the firm is
being managed in the manner that is most beneficial to the shareholders, also
known as owners, and investors. In order for auditing techniques to be
effective in resolving issues that arise inside an organization, it is essential
that auditors maintain their autonomy and objectivity. Auditor independence
and objectivity are protected by the existence of a set of norms and standards
that have been developed by regulatory authorities.
2.2. Challenges and opportunities for improving auditing practices in
public and private enterprises
Auditing is an essential process for ensuring the accuracy and reliability of
financial reporting in public and private enterprises. Auditors play a crucial
role in providing independent assurance that financial statements present a
true and fair view of a company's financial position and performance.
However, auditing practices face various challenges, such as complexity,
fraud, time constraints, resource constraints, and regulatory requirements.
Overcoming these challenges is critical to conducting high-quality audits
that provide value to stakeholders[2].
23
When it comes to carrying out their duties, auditors are confronted with a
wide variety of obstacles.
Complexity: It may be challenging to audit complicated financial
transactions and structures, particularly when dealing with multinational
firms, which frequently conduct business in a variety of countries and
frequently do so in accordance with a variety of legal frameworks. It may be
difficult for auditors to reconcile financial statements and verify their
integrity if, for instance, a firm operates subsidiaries in more than one
country, and each of those subsidiaries adheres to a unique set of accounting
rules.
Fraud: The danger of fraud and financial mismanagement is always there,
and it can be difficult for auditors to uncover fraudulent activities,
particularly when criminals utilize sophisticated tactics to mask their actions.
Financial mismanagement: The risk of financial mismanagement is always
present. For instance, if the management of a firm intentionally understates
costs or overstates revenues, it may be difficult for auditors to identify such
actions. This is especially true if the company's records are either insufficient
or untrustworthy.
Time constraints: It can be difficult for auditors to do their task fully and
precisely when there are tight deadlines, which can lead to errors and
oversights. For instance, if a corporation needs an audit report within a short
period of time, the auditors may not have sufficient time to evaluate all of
the pertinent documents or execute all of the essential procedures, which
may cause the quality of the audit to be compromised.
Constraints on resources: When auditors have limited resources, both in
terms of manpower and finance, it can be challenging for them to undertake
complete audits. For instance, in order for auditors to conduct a
comprehensive audit of a firm that has intricate financial systems, the
auditors may require greater resources, such as additional employees or
24
specialized skills. However, if there are not enough resources, the audit
might not be as thorough as it needs to be, which might result in inaccurate
financial reporting.
Regulatory requirements: Due to the dynamic nature of the regulatory
environment, it can be difficult for auditors to maintain compliance with all
applicable rules and keep up with the ever-changing set of regulatory
requirements. For instance, if a new accounting standard is implemented,
auditors may be required to invest more time and resources to guarantee that
they comprehend the new standards and are able to carry out the processes
necessary to comply with the standard.
The implementation of technological solutions presents a great potential to
enhance auditing procedures in both public and commercial organizations.
Auditors are now able to make better use of technology to improve the
efficacy of their job thanks to the development of increasingly sophisticated
software and data analytics tools. For instance, machine learning algorithms
can assist auditors in recognizing patterns of possible fraud or mistakes, and
cloud-based platforms can enable auditors to access and analyze data in real
time, therefore boosting both the speed and accuracy of the auditing process.
In addition, the implementation of blockchain technology has the potential
to boost transparency and accountability by producing a record of financial
transactions that is both safe and impossible to alter. Auditors can increase
their capacity to detect fraud, minimize the likelihood of mistakes and
oversights, and enhance the overall quality of their job by adopting new
technologies[17].
A greater level of professional skepticism: a greater level of professional
skepticism is an opportunity to improve auditing methods in both public and
commercial organizations. Professional skepticism is when an auditor makes
a critical evaluation of the audit evidence and is prepared to question
assumptions, evaluate the credibility of sources, and recognize potential
25
biases. Auditors may increase the quality and accuracy of their audits, as
well as contribute to the detection of fraud and mistakes, by sharpening their
professional skepticism.
Auditors who want to improve their professional skepticism might consider
enrolling in training and development programs that stress the significance
of critical thinking and skepticism as important skills. In addition, auditors
may help build a culture of skepticism inside their businesses by promoting
open communication and cultivating an atmosphere in which auditors feel at
ease challenging presumptions and voicing concerns. In addition, auditors
can make use of technology to support their attempts to be skeptical. For
example, auditors can use data analytics tools to uncover abnormalities and
inconsistencies in financial data. This can help auditors determine whether
or not there is cause for suspicion[24].
For the purpose of enhancing auditing procedures, collaboration and the
exchange of expertise may be of great use. Auditors can get fresh ideas and
views, which can help them detect and solve possible concerns in a more
effective manner, if they collaborate with other auditors and share their
expertise as well as the best practices that they have discovered.
Collaboration can also assist auditors in overcoming resource limits by
allowing them to share their experience and resources with one another.
Creating professional networks and groups is one strategy to foster
collaborative work and the exchange of information. Auditors who are
members of these groups may have the opportunity to network with their
colleagues, participate in training and development activities, and exchange
both their experiences and their expertise. Additionally, professional
associations can provide access to industry news and updates, which can
assist auditors in remaining current on recent developments and regulatory
changes.
Technology is yet another avenue for fostering collaboration as well as the
26
exchange of information. The use of digital collaboration technologies,
including as video conferencing and online forums, can provide auditors
with the ability to interact with colleagues located in other parts of the world
and exchange information with them. Cloud-based document management
solutions can also help to enhance collaboration by offering a safe platform
on which audit documentation can be shared and accessed by authorized
users.
Improving communication and reporting is another possibility for boosting
auditing methods, and improving communication and reporting is one of
those opportunities. It is vital for auditors and management to communicate
in a way that is both clear and concise in order to guarantee a successful
audit. Auditors are tasked with communicating their findings to non-
technical stakeholders in a manner that is easily digestible by those
stakeholders. In a same vein, management should maintain open
communication with auditors and supply them with all of the relevant
information to make the auditing process easier[31].
Reporting is also an essential part of performing audits effectively. Auditors
are responsible for ensuring that their reports correctly represent their
findings and are sufficiently detailed to offer a transparent depiction of the
organization's current financial situation. Reporting should be done in a
timely manner, and any faults or vulnerabilities that have been detected
should be highlighted so that management may take remedial action in a
timely manner.
Effective communication and reporting not only help to enhance the audit
process, but they also contribute to increased openness and confidence inside
the company. This, in turn, may lead to improved overall performance as
well as stronger relationships with stakeholders.
Continuous education and advancement is vital for auditors to engage in
continuous education and advancement in order to remain current with the
27
latest advances in their business, as well as rising dangers and shifting
legislation. As a result of the constant change that occurs in auditing
standards and procedures, it is essential for auditors to make investments in
their professional development in order to guarantee that they possess the
knowledge and abilities necessary to successfully carry out audits.
Attending training sessions, being active in professional organizations,
seeking further degrees or certificates, engaging in self-directed learning
through research and reading, and all of these other activities are all
examples of ways in which continuous learning and growth may take place.
In addition to expanding their technical competence, auditors can also
benefit from developing soft skills such as communication, cooperation, and
critical thinking. These abilities can strengthen their capacity to
communicate with clients, understand their requirements, and deliver
insights that add value to the relationship.
Auditors may enhance the quality and efficacy of their audits, detect new
risks and concerns, and deliver additional insights that bring value to their
customers by investing in continual learning and development. Auditor job
prospects can also be improved by ongoing training and education, which
helps auditors maintain their competitive edge in a sector that is undergoing
significant transformation[18].
2.3. Future directions for research in auditing practices
Auditing practices play a critical role in ensuring the accuracy and reliability
of financial reporting, and they are essential for maintaining public trust in
corporate institutions. However, auditing practices are constantly evolving
in response to changes in the business environment, technological
advancements, and new regulatory requirements. As such, there is a need for
ongoing research to understand the impact of these changes on auditing
practices and to identify areas for improvement. In this regard, there are
several key areas of research that could help shape the future of auditing
28
practices, including the impact of technology on auditing, ethical
considerations, internal auditing, audit firm culture, integrated reporting,
auditing standards, and globalization.
Since the use of technology in auditing is on the rise, there is a growing
demand for research into the ways in which recent technological
advancements, such as blockchain, artificial intelligence, and machine
learning, influence more conventional auditing procedures. It's possible that
as a result of these changes, the role and duties of auditors may also shift;
thus, looking into the effects of these innovations might be valuable. The use
of new technology has the potential to enhance auditing in a variety of ways,
including increased productivity, more precision, and an overall
improvement in quality. Blockchain technology is able to aid auditors in
confirming the legitimacy and integrity of financial transactions by
providing a record of all financial transactions that is both safe and
immutable. Because of this, errors and fraudulent activity could be
prevented[25].
When financial data is analyzed with AI (artificial intelligence) and ML
(machine learning), auditors may reap significant benefits from
characteristics such as the recognition of patterns and anomalies in the data,
which are otherwise difficult for humans to identify. The application of
artificial intelligence and machine learning by auditors enables quicker and
more accurate analysis of enormous data sets, which in turn enables faster
and more accurate detection of risks and problems.
Although there are a number of advantages to be gained from incorporating
technology into auditing processes, there are also a number of challenges
that need to be conquered. A significant challenge involves ensuring that
audit data are kept private while yet being accurate. Auditors require
information that can be verified from trustworthy sources and is protected
from efforts to hack it.
29
Another challenge is ensuring that auditors have the knowledge and
experience necessary to make effective use of cutting-edge equipment.
Participation in continual learning and professional development is required
of auditors if they are to remain current with the most recent advancements
in technology and effectively integrate these advancements into their
auditing work[33].
It is possible that incorporating technology into auditing procedures will
significantly improve the techniques' quality, efficiency, and effectiveness.
However, these benefits won't materialize unless auditors continue to invest
in their education and training, which keeps them current on the challenges
and opportunities presented by advances in technology.
Integrity and Accounting Standards: There are a number of ethical problems
that auditors face that might be investigated, such as how they should handle
conflicts of interest, how they should maintain their independence, and how
they should respond to pressure from management and clients. The findings
of this study might potentially contribute to the development of new
guidelines and standards for auditing processes.
More research needs to be done in this area so that we can improve upon the
ethical principles and rules of conduct that are currently in place for auditors,
as well as fill in the gaps that exist in those guidelines. It might also
investigate the ways in which the cultures and values of audit companies
influence the ethical behavior of their staff and customers.
This area of investigation might explore the idea that non-financial factors
like as environmental, social, and governance (ESG) considerations have an
influence on auditing methodologies and ethical decision-making, and it is
possible that this option will be investigated. Auditors might wish to
consider ways to include environmental, social, and governance (ESG)
components into their work since an increasing number of individuals are
concerned about the impact that enterprises have on the wider world.
30
Auditing procedures that protect and promote integrity, openness, and
accountability are crucial to the usefulness of auditing as a vehicle for
effective corporate governance. Without such procedures, the public's faith
in financial reporting would be severely undermined.
Even though internal auditing is critically important to both corporate
governance and risk management, there is a paucity of research on the
subject. Two areas that may benefit from more research are the quality of
financial reporting and the efficacy of internal auditing as a tool for
identifying and preventing fraud. These are also areas in which greater
investigation is warranted. One such topic that may profit from additional
research is the question of how internal auditors can collaborate with
external auditors and other stakeholders, such as regulators and audit
committees, to enhance the quality of the auditing process as a whole. As
part of this process, you should investigate the potential benefits of joint
auditing, which is an approach in which internal and external auditors work
together to carry out an audit that is more comprehensive and integrated[19].
Other possible research topics in the field of internal auditing include the
impact that outsourcing internal audits has on the quality of audits, the role
that internal auditors play in evaluating and managing cybersecurity risks,
and the utilization of data analytics and other emerging technologies in order
to improve internal audit practices. In general, a deeper understanding of
internal auditing may lead to improved corporate governance and risk
management systems, which, in turn, can lead to financial reporting that is
both more trustworthy and more accurate.
It is possible for the culture of audit companies to have a significant impact
not just on the quality of audits but also on the auditors' ability to behave
ethically. Studying the factors that contribute to a strong audit corporate
culture, such as leadership, training, and incentives, may result in
improvements in audit quality and ethical conduct. These improvements
31
may be a direct outcome of the study. Also, research could investigate the
ways in which factors such as aggressive audit practices and a lack of
emphasis on ethics and quality at audit firms affect both the quality of audits
and the public's view of the auditing profession. If companies and regulators
have a complete understanding of the factors that lead to a positive audit firm
culture and the consequences of a poor one, they can take steps to enhance
the culture of the profession and encourage ethical behavior among auditors.
This will allow them to take action to improve the culture of the profession
and encourage ethical behavior among auditors.
A more recent approach of corporate reporting known as "integrated
reporting" has arisen in recent years with the purpose of better informing
stakeholders about the financial, environmental, and social performance of
a corporation. When it comes to giving assurance on non-financial
information, auditors encounter a number of challenges and possibilities,
both of which provide for fascinating research issues regarding the auditor's
engagement in integrated reporting. In studies that study auditors' roles in
integrated reporting, both the benefits and drawbacks of auditors providing
assurance on non-financial information, such as environmental and social
performance, might be subjected to scrutiny. This study has the potential to
establish auditing standards and principles for integrated reporting, which is
becoming an increasingly important subject in the realm of corporate
reporting. Investigating the challenges that auditors have when attempting
to provide assurance on non-financial information is another way to improve
the quality and credibility of integrated reports[2].
Auditing standards are an important component in the process of formulating
auditing processes and ensuring the quality of audits. Future research might
look at the effectiveness of present auditing standards, identify which
auditing standards need to be updated or revised, and investigate the
potential influence of new auditing standards or standards that will be
32
introduced in the near future on auditing procedures. These are all plausible
routes for future study. It is vital for auditors to adhere to auditing standards
in order to guarantee that they will regularly and reliably generate high-
quality outcomes. It is necessary to update auditing standards in order to stay
up with the dynamic nature of the business and regulatory contexts.
Research in this area may investigate how well the auditing standards now
in place function, highlighting areas that could benefit from further
development. A line of inquiry along these lines may investigate how the
existing standards influence audit quality and determine whether there are
any holes in the system that need to be repaired.
The Role of Auditors in International Business: The increasingly globalized
character of company necessitates the modification of auditing practices so
that they can keep pace with these changes. Two areas that require more
research are the effects that globalization has had on the quality and
effectiveness of audits, as well as the challenges auditors have while
negotiating the cultural and legal differences across countries. As a result of
globalization, the number of corporate transactions that take place across
international borders has expanded, which provides auditors with new
challenges. When auditing multi-national corporations, it is necessary to
have a comprehensive understanding of the regional traditions, legal
systems, and business practices. As a result of globalization, auditors now
have to go through a greater quantity of financial data that is more difficult
in order to find instances of fraud and inaccuracy[34].
In the future, there may be a need for more research into the process of
developing standardized audit procedures that are capable of being carried
out in a number of different jurisdictions. Just two examples of how
globalization could be studied to improve audit quality and efficiency
include the potential advantages of worldwide regulatory harmonization and
the part that technology plays in making it possible to conduct audits across
33
international borders. It is essential to have a solid understanding of both the
potential and the risks that are present in this field in order to guarantee that
auditing practices are able to adjust to the shifting demands of a worldwide
corporate environment.
In conclusion, a great deal more research is required in a wide variety of
aspects of auditing methods. Blockchain, artificial intelligence, and machine
learning are examples of technologies that have the potential to improve the
quality and efficiency of auditing operations. However, these technologies
also bring new challenges that need to be solved. If the auditing profession
is to keep its reputation, more consideration needs to be given to ethical
problems like as conflicts of interest, independence, and environmental,
social, and governance (ESG) aspects. Additional research might also be
necessary in the areas of corporate reporting, internal auditing, and the
company cultures of auditing firms. By delving deeper into these spheres,
auditors, companies, and regulators can gain a better understanding of the
opportunities and threats posed by the progression of technological
development, shifts in the business environment, and the changing
expectations of stakeholders. This, in turn, can lead to improved auditing
practices and improved corporate governance.

34
 CHAPTER III
AUDIT FREQUENCY IN PUBLIC AND PRIVATE
ENTERPRISES

3.1. Factors affecting audit frequency in public and private enterprises

The frequency of audits is an essential component of financial reporting and
internal control systems in organizations of all types, including those that are
publicly and privately owned. It is a term that refers to the regularity with
which audits are carried out for the purpose of ensuring that financial
statements are trustworthy, accurate, and comply with all rules and
regulations that are relevant. The frequency of audits is determined by a
number of variables, including regulatory requirements, risk concerns,
company-specific considerations, financial performance, and industry-
specific factors. Regulatory requirements are particularly important. This
study investigates the characteristics that influence the frequency of audits
in public and private organizations, as well as the consequences such factors
have for financial reporting and internal control systems. The report also
addresses the disparities in audit frequency that exist between public and
private organizations, as well as the factors that contribute to their existence.
The degree to which public and private organizations are subjected to audits
is heavily influenced by the regulatory criteria that must be met. Publicly
listed corporations in the United States are subject to requirements
surrounding financial reporting and audits that are far more strict than those
that apply to private enterprises. While the Public Company Accounting
Oversight Board (PCAOB) is in charge of auditing standards and best
practices, the Securities and Exchange Commission (SEC) is the principal
regulatory agency responsible for monitoring the financial reporting of
publicly listed corporations[21].
35
The SEC requires all publicly traded corporations to have their yearly
financial statements examined by a third-party auditor as part of the
compliance requirements for being listed on the stock market. The audit has
to be conducted in accordance with Generally Accepted Auditing Standards
(GAAS) as well as the auditing standards established by the PCAOB.
Inspections of audit firms that provide audits for public corporations are
carried out by the Public Company Accounting Oversight Board (PCAOB)
to verify that the firms are in compliance with the applicable rules and
procedures. It is crucial for investor trust and market stability that public
firms continue to maintain a high standard of financial reporting and
compliance with all applicable laws and regulations. These regulatory
requirements guarantee that this standard is maintained.
Private businesses, on the other hand, are not required to comply with the
same regulatory standards as public businesses, so they have more leeway
when it comes to deciding how often they should undergo audits. Private
businesses are obligated to comply with all rules and regulations that are
relevant to them, including tax laws and regulations that are particular to
their industry. This compliance may include audits or other types of financial
reporting. Audits may also be carried out on a voluntary basis by private
firms, with the goals of ensuring compliance with laws and regulations,
improving internal controls, or providing confidence to stakeholders[7].
Due to the absence of governmental monitoring, however, private
enterprises may find it difficult to determine how often they should have
their systems audited. Without governmental control, private corporations
may be more likely to engage in fraudulent activities or make false assertions
about their financial position, both of which might be detrimental to the
companies' reputations as well as their financial performance. When
establishing the frequency of their audits, private firms must, as a result, give
careful consideration to the risks connected to the operations of their
36
businesses as well as the variables that are unique to their industries.
The frequency of audits in both public and private organizations is mostly
determined by the regulatory criteria that must be met. Audits of financial
statements must be performed annually for both publicly traded and
privately held organizations, although the former are subject to stricter legal
obligations than the latter. Although they have greater leeway in deciding
the frequency of their audits, private enterprises are still required to comply
with all laws and regulations that are in effect. In general, compliance with
regulatory regulations is absolutely necessary for ensuring accurate and
trustworthy financial reporting, which is critical for maintaining investor
confidence and market equilibrium[3].
When establishing audit frequency in public and private organizations, risk
variables are another key element that must be taken into account. The
degree of risk that an organization is exposed to can differ based on a number
of different aspects, such as the size and complexity of the business, the
sector in which it operates, and the nature of its activities. Companies with a
higher level of risk may be subject to more regular audits to guarantee the
accuracy and dependability of the financial information they disclose.
For instance, businesses operating in highly regulated sectors like healthcare
or finance may be subject to a greater number of risk factors and may be
required to undergo audits at more regular intervals in order to assure
compliance with rules and locate possible sources of risk. In a similar vein,
businesses that have complicated financial structures, such as those that
operate on a global scale or have a large number of subsidiaries, may be
required to undergo audits on a more regular basis in order to guarantee that
their financial reporting is accurate and transparent.
The determination of audit frequency is impacted not only by external risk
factors but also by internal risk variables such as the control environment
and control activities. A robust control environment and control activities
37
can cut down on the possibility of mistakes or fraud, which in turn can lessen
the frequency of audits that are required. On the other hand, an environment
with poor control may raise the likelihood of mistakes or fraudulent activity,
necessitating more regular audits to identify and address possible threats.
Risk considerations are an essential consideration in establishing audit
frequency. This is due to the fact that organizations with a greater risk profile
require more regular audits in order to guarantee accurate and trustworthy
financial reporting. A comprehensive risk assessment can be of assistance to
companies in determining the right amount of audit frequency that is
required for effective risk management[35].
Company-specific factors are an additional essential aspect that plays a role
in the establishment of the audit frequency in both public and private
organizations. When establishing the frequency of audits, it is important to
take into account both the specific features of each organization as well as
the risks that such qualities present.
For instance, businesses that conduct complicated business operations or
those that operate in high-risk areas such as healthcare or financial services
may be required to undergo audits on a more regular basis in order to
guarantee compliance with rules and to detect and manage risks. In a similar
vein, businesses that have a previous record of accounting problems or
financial restatements may be required to undergo more frequent audits in
order to win back the trust of investors and guarantee the integrity of their
financial reporting[29].
On the other hand, smaller businesses that have operations that are less
complicated and fewer stakeholders may be able to rely on audits that take
place less frequently in order to satisfy their reporting responsibilities.
Alterations to the operations of a firm or changes in its financial performance
may also be grounds for a reevaluation of the frequency with which audits
are conducted. For instance, if a firm experiences considerable development
38
or expansion, it may require audits to be carried out on a more regular basis
in order to verify that its internal controls and the methods by which it reports
financial information are sufficient to deal with the expanded size of
operations.
In general, factors that are unique to the company play a significant part in
the process of determining the frequency of audits. As a result, businesses
need to carefully evaluate the specific aspects of their operations as well as
the risks they face in order to ensure that they are conducting audits at the
appropriate frequency in order to preserve the accuracy and reliability of
their financial reporting[32].
The performance of the company's finances is a crucial component in
deciding the frequency of audits, as it has the potential to influence the risk
of inaccurate financial reporting or anomalies as well as the requirement to
provide confidence to stakeholders.
In both public and private organizations, the frequency of audits may also be
influenced by characteristics that are particular to the industry in question.
There may be certain regulatory requirements or risk considerations that are
specific to certain sectors, and these may need more regular audits. For
instance, businesses that deal with sensitive information, such as healthcare
and financial services, may be subject to certain rules that call for audits to
verify compliance and safeguard against fraud and data breaches. These
audits are necessary to prevent data breaches and fraud.
Additionally, businesses that are exposed to fast technology advances or
market volatility may require more regular audits to guarantee that financial
reporting is correct and up to date. This is done to verify that financial
statements are not misleading. For instance, the technology sector is
characterized by a fast rate of innovation, which can result in intricate
requirements for financial reporting and a greater likelihood of mistakes or
misleading representations in financial statements.
39
In addition, some sectors could be exposed to a higher level of scrutiny from
investors or regulatory organizations, which might make it necessary to
conduct audits on a more regular basis in those sectors. Companies working
in the energy business, for instance, may be subject to more regular audits to
guarantee compliance with environmental rules and financial reporting
standards. This is because the energy industry is one of the most strictly
regulated industries.
It is possible for industry-specific characteristics to have a major influence
on the audit frequency of both public and private businesses; thus, businesses
that operate in a variety of sectors should take these considerations into
consideration when developing their audit schedules. Companies may assure
accurate and dependable financial reporting, as well as compliance with
regulatory requirements and the confidence of investors by acting in this
manner. The frequency with which financial reports and internal controls are
audited is an important component of these systems for both publicly traded
and privately held companies and businesses. The requirements imposed by
regulatory agencies are a significant factor in determining the frequency of
audits, with publicly listed organizations in the United States being subject
to stricter restrictions than private enterprises. The frequency of audits is also
determined by risk factors including the size and complexity of the business,
as well as the activities that are conducted by the organization. Audit
frequency can also be affected by internal risk variables such as the control
environment and control activities. When selecting the frequency of audits,
a company's particular circumstances, such as the intricacy of its business
operations and the nature of the sector in which it competes, should also be
taken into consideration. Compliance with regulatory standards and the
conduct of a thorough risk assessment are two of the most important steps
that must be taken in order to guarantee reliable and accurate financial
reporting, as well as to preserve investor confidence and market equilibrium.
40
3.2. Relationship between audit frequency and revenue: Linear
regression
The dataset provided comprises information on numerous organizations,
such as their revenue in billions of dollars and the number of audits
conducted, which was acquired from online resources (S&P 500, World
Bank, Government Agencies). This study aims to investigate the relationship
between the number of audits and the revenue generated by these companies.
According to the findings of the regression analysis, the expected income (y)
may be calculated using the equation (slope=-2.676385792,
intercept=1916.390034) y = -2.6764x + 1916.4, where x is the number of
audits. According to the coefficient of -2.6764, every extra audit is
anticipated to result in a $2.6764 billion drop in income on average.
The low R-squared value of 0.01 does, however, highlight the fact that only
a small percentage of the income volatility can be attributed to the number
of audits. Furthermore, the coefficient's p-value of 0.7835 suggests that it is
not statistically significant. This suggests that, based on this research, there
is not enough data to draw a firm conclusion about a linear relationship
between the volume of audits and income.
The anticipated revenue and the actual revenue for each observation differ
significantly, as further analysis of the residual values indicates. This raises
more concerns about the strength of the correlation between audits and
revenue since it shows that the regression model's predictions do not closely
match the actual data points[28].
The dataset offered contains statistics on the amount of income that various
businesses earn as well as the total number of audits that each business has
completed. This information is being gathered in order to conduct a
regression analysis to investigate the link between the volume of audits and
the income produced by these businesses.
We intend to determine whether there is a significant correlation between
41
the quantity of audits and the income of the firms by performing a regression
analysis. This study can help inform decision-making processes and offer
useful insights into the possible effects of audits on financial performance.
The dataset includes each company's matching number of audits and revenue
amounts expressed in billions of dollars. USPS, Amtrak, BBC, Indian
Railways, CNPC, Amazon, Apple, Samsung, Toyota, and Coca-Cola are
among the businesses in the dataset. These firms' revenue and audit data have
been gathered to assess any potential relationships between these variables.
We can better comprehend the direction and size of the link between audits
and revenue thanks to the findings of the regression analysis. The study may
also shed light on the importance and degree of this link, allowing us to make
inferences about how audits affect business income.

Table 3.2.1 Data Table

Analysis of Regression
Information about the regression analysis and the importance of the variables
is provided in the summary result. What each component of the result
implies is as follows:

42
Table 3.2.2 Statistics of Regression

The following summary result was derived from the regression analysis that
was done on the supplied dataset:
Statistics of Regression
Multiple R: This stands for the correlation between the independent variable
(Number of Audits) and the dependent variable (Revenue in billions). The
multiple R value in this instance is 0.0999548, showing a shaky positive
connection.
R Square: The coefficient of determination quantifies the percentage of the
dependent variable's variation that the independent variable can account for.
Only around 0.99% of the income fluctuation, according to the R square
value of 0.009990962, can be attributed to the number of audits.
Relative R Square: This is a modified R square that takes the quantity of
predictors and sample size into consideration. The introduction of the
independent variable does not significantly increase the model's explanatory
power, according to the modified R square value of -0.113760168.
Standard Error: This depicts the residuals' standard deviation, which
gauges the typical separation between the observed data points and the
expected values. The regression model's standard error, which is
3159.272673, reveals the usual size of the mistakes.
Observations: In this example, the regression analysis employed 10 data
points, or observations.
43
The number of audits and the income produced by the firms in the dataset
have a marginal and negligible association, according to these regression
results. The low R square and adjusted R square values imply that additional
variables that were left out of the analysis could have a more significant
impact on revenue. Furthermore, the independent variable's coefficient has
a significantly high p-value (0.783520347), indicating that it is not
statistically significant in explaining revenue.
It is essential to remember that the regression findings should be carefully
interpreted, taking into account the dataset's constraints and the unique
environment in which the study was carried out.
ANOVA:
The following summary result was derived from the regression analysis
that was done on the supplied dataset:
Table 3.2.3 ANOVA Statistics

The statistical method known as ANOVA, or analysis of variance, is used to

examine the variation in a data set and establish the relevance of various
components or variables. It displays the findings of the study for the
regression model within the context of the specified ANOVA table.
A breakdown of the ANOVA table is shown below:
Regression:
The regression model has 1 degree of freedom, which represents the quantity
of independent variables in the model.
The regression model's sum of squares is 805,809.446 (SS, sum of squares).
By dividing the total of squares by the associated degrees of freedom, the
44
mean square value, or MS, is determined. The mean square in this situation
is also 805,809.446.
F (F-statistic): The F-statistic calculates the difference between the
regression's mean square and the residuals' mean square. In this instance, the
F-statistic is 0.080734309.
Probability of attaining an F-statistic as severe as the computed one is
indicated by the significance F, which is represented by the p-value. The p-
value in this instance is 0.783520347, which is a high number.
When the degrees of freedom for the regression are subtracted from the total
degrees of freedom, the residuals have 8 degrees of freedom.
The residuals' sum of squares, or the data's unexplained volatility, is
79,848,030.55.
MS: The residuals' mean square is 9,981,003.819.
Total: df: The whole model has nine degrees of freedom, which includes the
residuals and regression.
SS: 80,653,840 squares make up the entire sum of squares, which represents
the overall variety in the data.
The ANOVA table shows how much of the overall variance in the
independent variable (Number of Audits) can be accounted for by the
dependent variable (Revenue in billions). In this instance, the F-statistic
(0.080734309) and low R-squared value (0.009990962) indicate that the
independent variable did not significantly affect the dependent variable.
It is critical to notice that the coefficient is not statistically significant
because the p-value for the independent variable (X Variable 1) is equally
high (0.783520347). This supports the finding that the Revenue in billions
is not much impacted by the number of audits.
To evaluate the accuracy and significance of the regression model, the
ANOVA table offers statistical metrics and significance tests.
These columns provide additional information about the coefficients. The
45
standard error represents the estimated standard deviation of the coefficient.
The t Stat is the ratio of the estimated coefficient to its standard error,
indicating the significance of the coefficient. The P-value represents the
probability of observing a t Stat as extreme as the one calculated if the null
hypothesis (no relationship) were true. The Lower 95% and Upper 95%
values represent the 95% confidence interval for the coefficient, while the
Lower 95.0% and Upper 95.0% values represent the confidence interval for
the estimated change in the dependent variable.
This output suggests that the regression model is statistically significant, and
both the intercept and the Average Prices variable have significant effects
on the Trade Balance.

Figure 3.2.1 Regression model

According to the data you gave, there appear to be two sets of regression
results: one based on the actual data and the other on the anticipated data.
An explanation of the data is provided below
For the actual data:
y = -2.6764x + 1916.4 is the regression equation. The relationship between
46
the independent variable (x) and the dependent variable (y) is depicted in
this equation.
The slope of the regression line, which depicts how the dependent variable
changes for a change of one unit in the independent variable, is indicated by
the coefficient -2.6764.
The dependent variable's value when the independent variable is zero is
represented by the intercept, which is 1916.4.
Only 1% of the variance in the dependent variable can be explained by the
independent variable, according to the R2 value of 0.01. This suggests that
the influence of the independent variable on the dependent variable is
minimal or nonexistent.
The low R2 value indicates that the regression model might not be a good
match for the actual data and that the dependent variable might be influenced
by other variables not taken into account in the model.
In summary, based on this research and the provided dataset, there is
insufficient evidence to support a strong and significant linear relationship
between the volume of audits and business income. The low R-squared value
and non-significant coefficient suggest that additional variables or factors
not included in the analysis may have a more significant impact on revenue.
Therefore, caution should be exercised when interpreting these results and
considering the implications of audits on financial performance.

47
 CONCLUSION

There has been a rising dispute in recent years over the link between audit
frequency and revenue. While some experts feel that regular audits can
increase a company's income, others say that the benefits of frequent audits
are frequently exaggerated. This has caused a great deal of consternation and
uncertainty among firms and auditors alike.
The results of a regression research based on data sets from ten different
firms show that there is a weak positive relationship between the number of
audits and income. However, the strength of this link varies based on a
variety of factors. Furthermore, the study's predictor variable(s) were found
to be ineffectual in explaining the outcome variable.
The independence of auditors is a major element influencing the link
between audit frequency and income. In order to deliver fair and impartial
evaluations, auditors must maintain their independence. When auditors are
not independent, the confidence of their assessments is jeopardized, which
can harm a company's income.
The size of the organization also influences the association between audit
frequency and income. Because they have less resources to discover and
remedy mistakes or fraudulent acts, smaller businesses may benefit more
from periodic audits. Larger organizations, on the other hand, may not
realize considerable benefits from regular audits since they already have
solid internal control mechanisms in place.
Furthermore, a company's industry might influence the link between audit
frequency and income. For example, highly regulated businesses may
necessitate more regular audits to ensure compliance with regulatory
standards. Companies in high-risk areas, such as banking or healthcare, may
also require more regular audits to manage risks and avoid fraud.
Given these findings, it is evident that there is no one-size-fits-all solution
48
for audit frequency. The choice to conduct more frequent audits should be
based on a careful review of each company's individual circumstances.
Furthermore, organizations should not conduct more frequent audits only to
increase revenue, as the link between audit frequency and income is
frequently exaggerated.
While audit frequency is an important part of the auditing process, its
relationship with income is complicated and diverse. Auditors must be aware
of the different aspects that might influence this connection and deliver fair
and impartial judgments based on each company's unique circumstances.
Finally, the decision to conduct more frequent audits should be based on a
comprehensive assessment of the risks and advantages of such audits.

49
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 APPENDIX A

Table 3.2.1 Data Table

Table 3.2.2 Statistics of Regression

Table 3.2.3 ANOVA Statistics

53
Figure 3.2.1 Regression model

54