Read Roy, M. N., & Saha, S. S. (2016).

Relationship of statutory auditors’ competence and independence with audit quality (Links to an external site.)

. Vilakshan: The XIMB Journal of Management, 13(1), 61-80.

After reading the article above, and address the following:

1. Provide a brief summary of the research performed in this article.
2. Explain the conclusions and recommendations of the authors.
3. What elements of virtue ethics, deontology, and/or consequentialism do you see in this article? Are there any principles from these theories that could benefit audit competence? How?
4. Explain how this article impact your work as an accounting professional.

Requirements:

• Your written paper should be 4-5 pages in length not counting the title and reference pages, which you must include.
• Use terms, evidence, and concepts from class readings.
• You need to cite at least 5 sources for this assignment, outside of the textbook. The CSU-Global Library (Links to an external site.) is a great place to find resources.

Relationship of Statutory Auditors’ Competence and Independence
with Audit Quality

Abstract
Quality of Statutory audit depends on competence and independence of the statutory

auditors. The absence of competence and independence of statutory auditors leads to corporate
distress. Literature shows that competence and independence of the auditors in turn depend on
‘adequate quality control procedures for statutory audit of financial statements’. And this depends
on 14 independent variables such as auditor’s inability to check regulation compliance,
management’s influence in auditor’s appointment, selection by independent regulatory authority,
whistle blower’s protection policy, effectiveness of continuous learning process and its evaluation,
failure to detect accounting frauds, unethical consulting services by auditors, impropriety of
transactions, effectiveness of peer review of audit work, cut-throat competition and reward
system for quality audit. This study is an attempt to investigate into the relationship of auditors’
competence and independence with audit quality. The empirical research was carried out with
responses from 227 Chartered Accountants (CAs) and 132 students pursuing the CA vocations.
Chi-square test, Mann-Whitney test, and correlation coefficients test were used to analyse and
interpret the data. The significant findings are that (i) the relationship between auditors’
competence and independence of statutory auditors were not homogeneous because CAs have
more professional experience than the students; and (ii) the auditors were unable to comply
with all the regulatory formalities as observed by the CAs and students. These factors, in the
opinion of respondents impaired the quality of audit. The competence and independence of
audit quality can be improved by a continuous learning process, periodic check up of propriety
transactions, audit inspection by a peer review Board and monitoring appointment of statutory
auditors.

Keywords: Statutory Audit; Quality Audit; Chartered Accountants; Chi-Square Test; Mann-Whitney
Test; Correlation Coefficient;

Mitrendu Narayan Roy
Research Scholar

Department of Commerce
University of Calcutta, Kolkata

mitrenduroy@gmail.com

Introduction

An audit is regarded as a quality audit if the auditor is able to identify any doubtful
financial reporting practices and breach of applicable accounting laws in the financial
statements. Corporate enterprise will lose its status if misreporting on the part of the
management is identified and disclosed (Deis and Giroux, 1992). Every corporate enterprise
tries to uphold and increase their existing stakeholder base in this present age of absolute
competition in the financial market. This could perhaps lead them to pump up their financial

Siddhartha Sankar Saha
Associate Professor

Department of Commerce
University of Calcutta, Kolkata

drsiddharthasxc@gmail.com

62 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

presentation and financial position using inconsistencies in accounting framework.
Stakeholders who take their financial judgment based on the financial statements are
sternly impacted due to such information irregularity. An unexpected termination of the
corporate enterprise due to such fake financial representation cost them their invested
money and confidence in country’s regulatory system. In such situation, statutory auditor
protects stakeholders’ interest by reducing this information asymmetry (Becker, et.al.,
1998). Statutory audit is the examination of financial statements of the corporate enterprise
by an expert and autonomous authority. Statutory auditors form their impartial view about
the financial statements based on sufficient and appropriate audit evidences and report
the same keeping in mind the quality control policies of the governing accounting firm. In
Indian regulatory environment, quality control policies and procedures are implemented
by accounting firms based on Standard on Quality Control (SQC)-1 issued by the Institute
of Chartered Accountants of India (ICAI) (ICAI, SQC-1, 2009). Every audit engagement
team implement the policies and procedures of their governing firm in line with Standard
on Auditing (SA)-220 issued by the ICAI (ICAI, SA-220, 2009a). The purpose of both
these regulation is to ensure observance with regulatory pronouncements and issuance of
suitable report which is appropriate in circumstances. However, with a view to
comprehending the legal dictums and applying them in actual audit engagements, statutory
auditors have to be competent as well independent in their audit engagement. However,
statutory audit failure in recent cases of corporate demises (e.g. Enron, WorldCom, Satyam,
etc.), (Francis, 2004) led to public anxiety about deteriorating audit quality in accounting
profession. Regulatory interventions in the aftermath of those scandals always pointed
towards competence and independence of statutory auditors as one of the major reasons.
Truly speaking, lack of competence and independence of statutory auditors may have
impaired the overall quality control framework that led the frauds happen without any
hindrances. In this backdrop, the study explores 15 select issues or variables. Out of
these 15 variables, there is one Dependent Variable titled, ‘Satisfactory Quality Control
Procedure for Statutory Audit of Financial Statements’ which depends upon other 14
Independent Variables relating to competence and independence of auditors. All the
variables are selected based on conceptual ideas developed from books, research papers
and court judgements in legal case decisions.

Literature Review and

Research Gap

The review of literature on the topic of the research that has led to identifying the
research gap is explained through a tabular form as indicated below:

63

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

64 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

65

Research Gap

Wells (2011) critically reviewed some case studies on audit failure, while Jones
(2011), Thibodeau and Freier (2010), and Clickeman (2009) cited the professional
responsibilities of statutory auditors in recent corporate accounting scandals. Dastur (1998)
pointed out the regulatory inadequacies on statutory auditors’ independence. However,
Fearnley, Beattie and Brandt (2005), and DeFond and Lennox (2011) talked about the
impact of regulatory interventions on quality of the audit. Bazerman and Lowenstein
(1999) in their research paper tried to find out the reasons behind statutory auditors’ lack
of independence. Ultimately, Akpom & Dimpkah (2013), Ghosh (1999) and Lennox (2009)
empirically analysed the impact of non-audit services, audit firm size, and audit market
capitalisation on the quality of the audit.

In this backdrop, it is imperative to empirically analyse the perceptions of
respondents on the stated theme of the paper as some empirical researchers on competence
and independence of auditors are inadequate. Studies that take into consideration opinions
of both practising CAs and Students pursuing Chartered Accountancy Course have not
been made so far. A significant difference of views between CAs and Students and
impact of competence and independence of auditors on quality control procedure for the
statutory financial audit has not been searched upon in existing researchers.

Objectives

Keeping in mind the research gap, the major objectives of the study are formulated
as follows:

1. To analyse homogeneity of opinion between CAs and Students;
2. To study empirically significant difference of opinion between CAs and Students

on select issues; and
3. To identify those issues having significant association with Satisfactory Quality

Control Procedure.

Hypothesis

With a view to empirically analyse perceptions of respondents to fulfil aforesaid objectives,
the hypotheses are taken for the three objectives as follows:
Objective-1: Analysing homogeneity of opinion between CAs and Students
Hypothesis-1
Null Hypothesis (H0): Opinion of CAs and Students are homogenous.
Alternate Hypothesis (H1): Opinion of CAs and Students are not homogenous.
Objective-2: Studying empirically significant difference of opinion between CAs and
Students on select issues

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

66 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

Hypothesis-

2

H

0
: There are no significant differences of opinion between CAs and students;

H1: Significant difference of opinion exists between CAs and Students.
Objective-3: Identifying issues having significant association with Satisfactory Quality
Control Procedure
Hypothesis-3
H0: Dependent variable and select independent variables do not have any significant
association between themselves;
H1: Dependent variable and select independent variables have significant association
between themselves.

Research Methodology

In this exploratory empirical research, data has been collected at the outset from
primary as well as secondary sources. Secondary data for the study incorporates several
books, journal articles, legislations, reports and legal case decisions which have been
consulted for identifying research gap and selection of variables. Opinions of respondents
are sought on these variables through a field survey.

Sampling Design and Collection of Data from the Respondents

Primary data for the study has been collected from practising Chartered
Accountants (CAs) in Kolkata and Students pursuing Chartered Accountancy course
from the Institute of Chartered Accountants of India (Eastern Region). Respondents
for this current study have been selected based on Non-Probability Convenience
Sampling Technique (Ho, Ong & Seonsu, 1997). As population sizes of individual
respondent categories could not be determined, this sampling method is favoured. At
the beginning of the field survey for the collection of opinions of respondents, initial
respondents considered as sample size of 450 respondents comprising 250 CAs and
200 Students was selected and they were consulted. Ultimately, the complete responses
came from 373 respondents comprising 227 CAs and 146 Students considered as final
sample size through a meticulous survey conducted in the district of Kolkata during the
period of January, 2015 to June, 2015.

Selection of Variables and Designing of Structured Questionnaire

The study explores a relationship between, ‘Quality Control Procedure for Statutory
Financial Audit’ (also known as Dependent Variable) and one important parameter
‘Competence and Independence of Auditors’. In the current study, the essence of the
Dependent Variable is captured with the help of ‘Satisfactory Quality Control Procedure
for Statutory Audit of Financial Statements’ (V1). On the other hand, 20 variables are
selected under, the parameter ‘Competence and Independence of Auditors’ based on
applicable legislations, legal case decisions and research based materials. A few practising
Chartered Accountants in Kolkata have been consulted as a matter of pilot survey to

67

know the validity of the variables. Ultimately, those 20 issues were reduced to 14 most
significant related issues (finally selected as independent variables) keeping in mind their
suggestion for the current study. Dependent and 14 Independent Variables (total 15
variables) of the study along with rationale behind their selection are shown in the following
table (Refer to Table 1). Based on those 15 variables, a structured questionnaire is designed
on a 5 Point Likert Scale [1: Strongly Disagree (SD); 2: Disagree (D); 3: Neutral (N); 4:
Agree (A); and 5: Strongly Agree (SA)] (Kothari, 2010) for collection of opinion of select
class of respondents comprising CAs and Students.

Table 1: Selection of Variables and Rational for Selection

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

68 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

69

Statistical Tools used for Analysis of Objectives of the Study and Interpretations
The collected data has been incorporated in the statistical package SPSS 20.0

and opinions of CAs and Students on these variables have been empirically analysed.
However, at the beginning, reliability and internal consistency of the data is tested with
the help of Chronbach’s alpha (á). If the value of ‘á’ is greater than the threshold limit
0.6. Hence, the data is reliable and internally consistent (Peterson, 1994). In the current
study, the value of ‘á’ is 0.786. Hence, the data is reliable and internally consistent. Now,
in order to empirically analyse three objectives of the study, Chi-Square test of homogeneity,
Mann-Whitney Test and Pearson’s Correlation and t test are conducted respectively.
Brief ideas about these tests are enumerated below:

Chi-Square Test of Homogeneity

Homogeneity of opinion between CAs and Students for each independent variable
is analysed using Chi-Square Test of Homogeneity. It is conducted to test Hypothesis-1
for each select variable. Test statistic is calculated as follows:

⇒ x2 = Σ [(F
O
– F

E
)2 ÷ F

E
]

Where,

FO = Observed frequency of respondents in different levels of the categorical
variable;

FE = Expected frequency of respondents in the different levels of the categorical
variable.

FE = Nr × Nc÷ T

Where,

Nr = Total number of observations from population r for a particular variable;

Nc = Total number of observations from treatment level c for a particular variable.

T = Total sample size

At (r-1) × (c-1) Degree of Freedom (DF) [Where, r = Number of populations =
2; and c = Number of treatment levels = 5] and 5% level of significance, if probability of
test statistic in Chi-Square table is less than 0.05, H

0
is not accepted and vice versa.

Mann-Whitney (M-W) Test

Significant difference of opinion between CAs and Students for each select variable
is analysed using Mann-Whitney Test. Hypothesis-2 is tested with the help of this test.
However, there are certain assumptions that must be fulfilled before conducting this test.

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

70 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

Assumptions of M-W Test

(i) The dependent variable should be measured at ordinal level

Variables selected for this current study are measured in 5 point scale. It is an
ordinal scale.

(ii) Independent variable should consist of two categorical independent groups

In this study, independent variable is the population groups. One is CAs and another
is Students. Hence, they are categorical in nature.

(iii) Observations in one group must be independent from observations from another
group

Chartered Accountants are independent in their observations from Students pursuing
Chartered Accountancy Course.

(iv) The independent groups should not be normal distributed.

Normality of a distribution can be examined with the help of following hypothesis:

H
0
: Distribution is normal

H1: Distribution is not normal

⇒ To test the above hypothesis, Kolmogorov Smirnov (K-S) Test is conducted for
each select variable across independent groups at ‘n’ (sample size of each group)
degrees of freedom and 5% level of significance.

⇒ If P-Value of statistic is less than 0.05, H0 is not accepted proving the distribution
as non-normal distribution.

It is observed that H0 is rejected for both the groups for each select variable. Hence, they
follow non-normal distribution.

Subject to fulfilment of all the assumptions, M-W Test is conducted on the current dataset.
The test statistic for the test is, smaller value of

U1 = n1n2 + [n1 (n1+1)] ÷2 – R1
Or,

U
2
= n

1
n

2
+ [n

2
(n

2
+1)] ÷2 – R

2
Where,

n1 = sample size in Group-1;

n2 = sample size of Group-2;

71

R1 = sum of ranks in Group-1;

R2 = sum of ranks in Group-2.

As test statistic approximately follows normal distribution, the Standardised Test
Statistic (Z) is as follows:

Z = (U-mu) ÷ σu
Where, m

u
= n

1
n

2
÷2; and σ

u
= “ [n

1
n
2
(n

1
+ n

2
+ 1) ÷12]

At K-1 DF [where K = number of groups = 2] and 5% level of significance, if P-
Value is less than 0.05, H0 is not accepted and vice versa.

5.3.2 Pearson’s Correlation Coefficient and t test

Association between Dependent Variable (V1) and each Independent Variable is
measured with the help of Pearson’s Correlation Coefficient which is denoted by ‘r’.

Where,

x = Scores of each observation for V1; and

y = Scores of each observation for V
i
where i ranges from 2 to 15

Significance of ‘r’ is tested based on Hypothesis-3. Hypothesis-3 is tested with
the help of ‘t’ test. The test statistic is developed as follows:

t = r ÷ [(1-r²) × (n-2)] where n is sample size = 3

73

At ‘n-1’ DF (372) and 5% level of significance, if P-Value is less than 0.05, H0 is
not accepted and vice versa.

Results and Discussion

In this segment, a demographic profile of the respondents is presented at the
outset. This section mainly represents the research findings in addressing the research
objectives based on select empirical analysis, like Chi-Square test of Homogeneity, Mann-
Whitney Test, t test, etc.

Demographic Profile of Respondents

Demographic profile of the respondents based on their gender, age and occupation
is depicted here:

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

72 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

Table 2: Demographic Profile of Respondents

(Source: Compilation of Primary Data using SPSS 20.0)

Findings

In the current sample, 98.4% are male, though it is not intentional. As Students
form a significant portion of the final sample based, 42.6% of the total sample belongs to
the age group with age less than 30 years. Finally, in the total sample, proportion of CAs
(60.9%) is more than that of Students.

Analysing homogeneity of opinion between CAs and Students using Chi-Square
Test of Homogeneity

In an empirical research based on respondents’ perception, it is an imperative to
recognise whether the population of respondents are homogenous in their responses for
the select variables. It is tested using Chi-Square test of homogeneity.

Chi-Square Test of Homogeneity is conducted for Independent Variables and
inferences are drawn on homogeneity of responses between 2 respondent categories.
The following table depicts consistency between the opinion of CAs and Students for
select variables. In the following table, Chi-Square value (test statistic) and P-Value for
each Independent Variable are projected based on the methodology described in Section
5.3.1. Decision rule for accepting or rejecting H0 and the ultimate decision on the variables
are also projected here.

73

Table 3: Result of Chi-Square Test of Homogeneity

(Source: Compilation of Primary Data using SPSS 20.0)
Roy & Saha, Relationship of Statutory Auditors’ Competence and …
Findings

H0 is not accepted for any of the variables under the study (Table 3). Hence,
CAs and Students are not homogenous in their opinion. Professional experience gathered
by CAs make them more professionally aware about current economic environment.
However, Students with their theoretical knowledge do not get such exposure. Therefore,
for all the aforesaid issues, CAs and Students portray a heterogeneous attitude.

74 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

Studying empirically significant difference of opinion between CAs and Students
on select issue using Non-Parametric Mann-Whitney Test

Mann-Whitney Test is conducted to compare differences between two independent
groups when the dependent variable is either continuous or ordinal but not normally
distributed. If significant disparity exists between two categorical groups, it can be
concluded that the basis of such classification has a significant impact on the opinion of
the respondents. The major assumptions for performing this test are as follows:

1. The dependent variable should be measured at ordinal level;

2. Independent variable should consist of two categorical independent groups;

3. Observations in one group must be independent from observations from another
group; and

4. The distributions for the groups should not be normal distribution.

All the assumptions for conducting this test are fulfilled (Refer to Section 5.3.2).
Now, based on the methodology described under Section 5.3.2, test statistic has been
calculated for each Independent Variable and their P-Value has been generated. The
results of M-W Test have been projected for each Independent Variable (Table 4). Decision
rule for accepting or rejecting H0 based on P-Value and actual decision on them is also
shown in table-4.
Table 4: Result of Mann-Whitney Test

75

(Source: Compilation of Primary Data using SPSS 20.0)
Findings

H0 is accepted for variables like ‘Inability of the auditor to check compliance with
all regulations in financial statements’ (V

2
), ‘Effectiveness of Continuous Learning

Programmes (CLP) of ICAI’ (V7), ‘Periodical evaluation of outcome of CLP’ (V8),
‘Consideration of propriety of transaction under the purview of financial audit’(V12), and
‘Effectiveness of peer review of audit work’ (V

13
). All these issues are generic and

opinion on these issues does not require any professional experience. Hence, CAs and
Students are undistinguishable for these variables.

But the situation is different for rest of the variables. There is significant divergence
of opinion between CAs and Students for them. Naturally, for these variables professional
experience has a significant influence.

Identifying issues having significant association with Satisfactory Quality Control
Procedure using Pearson’s Correlation Coefficient and t test

In this section, an attempt has been made to study the relationship between
‘Satisfactory Quality Control Procedure for Statutory Audit of Financial Statement (V1)’
and each and every Independent Variable with the help of Pearson Correlation Coefficient
(r). The process of calculating ‘r’ has been described in Section 5.3.3. Significance of ‘r’
is tested with the help of ‘t’ test. Detailed methodology for the test is also enumerated in
that section. Now, the value of ‘r’ between each Independent Variable and the Dependent
Variable and their corresponding P-Value is projected in the following table (Table 5).
Decision rule for accepting or rejecting H0 based on P-Value and actual decision take is
also exhibited in Table 5.

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

76 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

Table 5: Pearson’s Correlation Coefficient and Result of t test

(Source: Compilation of Primary Data using SPSS 20.0)

77

Findings

Result of t test for analysing significance of correlation between select variables
and ‘Satisfactory Quality Control Procedure for Statutory Audit of Financial Statements
(V1)’ shows that variables, like ‘Inability of the auditor to check compliance with all
regulations in financial statements’ (V2), ‘Management’s influence in appointment of
statutory auditors’ (V3), ‘Effectiveness of Continuous Learning Programmes (CLP) of
ICAI’ (V7), and ‘Failure of current auditing system to detect systematically designed
accounting frauds’ (V

9
), ‘Cut throat competition in the accounting profession’(V

14
) have

significant association with the theme of this study.

Among these variables, ‘Management’s influence in appointment of statutory
auditors’ (V3) and ‘Failure of current auditing system to detect systematically designed
accounting frauds’, ‘Cut throat competition in the accounting profession’ (V

9
) have negative

association with audit quality. From the value of ‘r’, it is observed that the other two
variables have significant positive association with it.

Conclusions and suggestions

The empirical study, based on the responses of 227 practicing CAs and 136 students,
examines the relationship between statutory Auditors’ Competence and Independence
with satisfactory quality control.

Opinions of CAs and students for selected variables governing competence and
independence of statutory auditors are not homogenous as CAs have professional
experience in these subjects that the students do not have. However, difference of opinions
between CAs and students are not significant for selected issues such as, ‘Inability of the
auditor to check compliance with all regulations in financial statements (V2)’, ‘Effectiveness
of Continuous Learning Programme (CLP) of ICAI (V7)’, ‘Periodical evaluation of
outcome of CLP (V8)’, ‘Consideration of propriety of transaction under the purview of
financial audit (V12)’, and ‘Effectiveness of peer review of audit work (V13)’. From the
findings of the research, it is observed that auditors are unable to comply with all regulatory
formalities as observed by the respondents CAs and Students. Hence, time for each audit
engagement should be increased to some extent. CLP is an effective mechanism of
restoring competence and independence. However, their effectiveness should be measured
from time to time. Propriety of transactions should also be checked by auditors as opined
by both the respondent categories. Effectiveness of Peer Review Board in audit inspection
should also be ensured.

Roy & Saha, Relationship of Statutory Auditors’ Competence and …

78 Vilakshan, XIMB Journal of Management, Vol.13 (I), March, 2016

The variables like, ‘Management’s influence in appointment of statutory auditors
(V3)’, and ‘Failure of current auditing system to detect systematically designed accounting
frauds (V9)’, and ‘Cut throat competition in the accounting profession (V14)’ have
significant influence on satisfactory quality control procedure. From the findings, it is
suggested that an independent body should monitor appointment of statutory auditors to
reduce management’s influence on appointment procedure. The Institute of Chartered
Accountants of India (ICAI) should research on devising techniques to identify
systematically designed accounting fraud. As competition in the accounting profession is
observed to be one of the reasons behind statutory auditors’ impaired independence, the
ICAI should take proper action to curb such competition in the market. A due emphasis
on these proposals is expected to improve competence and independence of statutory
auditors and implementation of a satisfactory quality control procedure.

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