Corporate Governance and the Quality of Audit Process: An Exploratory Analysis Considering Internal Audit, Audit Committee and Board of Directors

Abstract

This research aims to offer a better understanding concerning the relationships between Internal Corporate Governance Mechanisms and quality of the external audit process and what are the governance mechanisms that can influence some aspects of the quality of the external audit process. Semi-structured interviews were employed in order to get detail views of the external auditors to explain and clarify how the Internal Corporate Governance Mechanisms can influence the quality of the external audit process as well as offer a better understanding of the relationships between the governance mechanisms and the quality of the external audit process. Adopting this research design (exploratory) was mainly as a response to the recent calls as there is a lack of this kind of study that investigate the relationship between the Internal Corporate Governance Mechanisms can influence the quality of the external audit process. This research focuses on the perception/insight of the Jordanian external auditors regarding the influence of Internal Corporate Governance Mechanisms on quality of the external audit process. Thus, this study uses a sample of 206 Jordanian external auditors for the survey and 13 participants from this sample for the interview. The qualitative study employed the thematic analysis to analyse the interview data. The interview results highlighted that there are different ways and stages that the ICGMs can influence the EAQ, for example, through holding effective regular meeting, ensuring the auditor compliance with the audit requirements “regular monitoring”, discussing the initial and significant audit results “draft of discussion”, taking necessary follow-up actions “feedback” as well as requesting the auditor to conduct additional tests which can in turn enhance the EAQ. The results also suggest that ICGM can assist improving different aspects of EAQ such as the quality of the evidence that are collected by the ICGM and the valuable guidance from the ICGM to the external auditor. The communication between the ICGM and external auditor can be focused on different issues related to the audit process such as auditors’ findings, the effectiveness of internal control, scope limitations and material misstatements which allow improving the effectiveness of audit process. This indicates that, the auditor must be aware of the dynamic deciding of the role of particular mechanisms in improving the external audit process. The results have implications for the practitioners and regulators who are assessing the role of ICGM in improving the reliability of the financial report and auditor’s report. The empirical findings demonstrate that different ICGM can influence different aspects of the EAQ. More importantly, the results reveal that audit practice in Jordan is experiencing some difficulties in terms of the independence of the auditor especially, for the small local firms and providing non-audit service. In addition, there is no professional body for board of director; internal audit and audit committee like Jordanian association of certified public accountant (JACPA) for the external auditor, thus, responsibilities of these mechanisms need to be formally overseen by a higher authority. For the policymakers, this study offers a unique proposition to improve the effectiveness of the ICGM to achieve EAQ. These empirical findings of this study also highlight the importance of improving EAQ as a solution for the agency problems through reducing information asymmetry, improving the disclosure practice, level of confidence and assurance of the financial reporting as well as deterring the opportunistic behaviour from different parties. This research extended the existing empirical evidence that investigated the role of the internal governance mechanisms in the audit process.