QUALITY IN AUDITS AND EXTERN QUALITY CONTROL

1. QUALITY IN AUDITS AND EXTERN QUALITY CONTROL Gabriele Hahne

2. Introduction • After the spectacular balance scandals a discussion about the rise of quality in financial audits has came up • But to take any measurements which raise the quality in financial audits it is necessary to determine who understands what is meant by the term quality • What is quality in financial audits? • Does it distinguish from the sight of the contemplator? • To answer these questions the term quality needs to be defined first

3. Quality Origin and Classification Quality in Business Administration Quality in services Quality in audits Own definition of quality in auditing

4. Origin andClassification • Quality: • Origin from the Latin word "qualitas” • Means "condition, characteristic, property or condition“ • Already: objective quality view and a subjective quality point of view • objective: the nature of an object • subjective: the evaluation or perception by the viewer

5. Origin and Classification • Both classifications of objective and subjective quality represent a unit • Due to the subjective approach one can already understand that there is not an absolute term of quality • According to this understanding subjective quality is dependent on the perceptions of the beholder

6. Quality in Business Administration • Also in Business Administration no standardized criteria for "what is quality" • Part of the economic literature: • Fulfilling customer expectations is the only correct approach, • E.g. Peter Drucker: • "Quality in a product or service is not what the suppliers put in, it is what the customer gets out and is willing to pay for it."

7. Quality in Business Administration • Garvin‘s approach divides quality in 5 classes: • transcendent approach • product-based • user-based • manufactoring-based • value-based

8. Quality in Business Administration • In the concept of quality, a study of R.W. Hoyer and Brooke B.Y. Hoyer, eight "quality gurus” have been interviewed • They divide quality into two categories: • Level One: • Quality is a simple matter of producing a product according to measurable and precisely defined criteria • Level Two: • Regardless of measurable criteria that satisfy customer expectations

9. Quality in Business Administration • Definition of Feigenbaum: • Quality is very tailored to the expectations of the recipient • Achieving a high level of quality is seen as a task of the entire enterprise, so: • Quality is a companywide task that affects all departments, the responsibility is of the CEO, but all staff is involved

10. Quality in Business Administration • Definition of Prof. Kellner: • "Quality needs be the USP of any company, • Every company and every business defines its own quality and • Trying to achieve a certain monopoly through its quality, so • The core benefit of a company is its self-imposed quality”

11. Quality in Services • In the service sector a large number of different definitions exist, eg by M. Bruhn • Service quality can be viewed as the composition of a performance that is filled with a certain level of performance, from excellent to very poor. • The expectations for the performance level can be determined by the perspective of the recipient

12. Quality in Services • The International Organization for Standardization (ISO) defines "quality" in their DIN standard for quality management as: • "Degree to which a set of inherent characteristics fulfills requirements"

13. Quality in Audits • For definitions of quality the recipient of services, the audited entities, haven’t been in the focus at all • So as one of the first, Leffson stated: • Requirements for quality are: • Ability to judge the auditor • Freedom of opinion of the auditor and • Proper judgments

14. Quality in Audits • Accordingly, quality audit was: • the suitability of the auditor (its ability to judge and sentence freedom) and • The audit procedures performed by him (proper discernment) to submit a trusted audit opinion on the conclusion • Here: does not account for subjective expectations

15. Quality in Audits • Other definitions are for example: • "In testing the degree of compliance with quality standards of testing by the auditor is to understand," • Similarly, Niehus, "audit quality is the consideration of all relevant legislation and professional pronouncements in the conduct of the audit. • A clean shutdown on meeting standards, but what about audit quality

16. Quality in Audits • Anke Müßig concludes that quality in case of examination is nothing more than the fulfillment of expectations • But what expectations? • AP (reduction of audit risk) • Management: accountant is finished as quickly as possible and finds nothing • Supervisory Board: Auditor informed promptly, "if something is not right"

17. Quality in Audits • So there is no standardized definition of "quality in the final examination," nevertheless a lot of new laws and regulations have been legislate in the recent years in order to enhance this quality

18. Own definition of the term quality in audits • According the definitions of Prof. Kellner and Feigenbaum, both the quality requirements of the company to its own quality standards and the expectations of the recipients need to meet the auditor services • At the same time, all legal and professional requirements have to be met • The definition must include product-related, manufacturing and value-oriented approaches

19. Own definition of the term quality in audits • Quality in audit does not increase by an external quality control, but it increases when quality is the responsibility of the entire company, exemplified by the auditor and every employee. • The quality is the all-determining standard in an audit company, it is the USP of the firm • Any task is according to they companies own quality standard • At the same time, the auditor needs to preserve its independce at any time and certainly observe the legal and professional rules.

20. Own Definition of Quality in Audit Companies expected Quality perceived Quality Quality in the whole Audit Company Independence ofthe Auditor legal requirements professional requirements

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