The document provides an overview of research findings on the function of auditing. It summarizes that auditing is chosen by companies for several reasons, including its information, agency, insurance, organizational control, confirmation, and risk management roles. Auditing is often regulated due to public interest models wherein it benefits the national economy, and public choice models wherein regulators act in self-interest. There are still unresolved issues requiring future research regarding audit quality, delivery, and regulation.

1. The Routledge Companion to Auditing
#1 Introduction: The function of auditing
David Hay, W. Robert Knechel and Marleen Willekens
@ac_zorori
2017/3/22 1

2. (本の)目次
1 Introduction: The function of auditing
David Hay, W. Robert Knechel and Marleen Willekens
PART I The social environment of auditing
2 The auditing profession Roger Meuwissen
3 Globalization of auditing Elizabeth Carson
4 The market for audit services Dan A. Simunic
5 The audit expectation gap: A persistent but changing phenomenon Brenda Porter
6 Research on litigation against auditors Dain Donelson, Kathryn Kadous and
John McInnis
7 Non-audit services and auditor independence Divesh S. Sharma
8 Auditor tenure and rotation Clive Lennox
9 Fraud and auditors’ responsibility Tina D. Carpenter and Ashley A. Austin
10 Earnings management and auditing Steven F. Cahan
11 Audit quality W. Robert Knechel and Lori B. Shefchik
12 Audits of private companies John Christian Langli and Tobias Svanström
2017/3/22 2

3. (本の)目次
PART II The impact of regulation of auditing
13 Not just a standard story: The rise of international standards on auditing
Christopher Humphrey, Anne Loft and Anna Samsonova-Taddei
14 Oversight and inspection of auditing Mona Offermanns and Ann Vanstraelen
PART III Research on the process of auditing
15 Auditor industry specialization Debra Jeter
16 Judgment and decision making Ken Trotman
17 Analytical procedures Stephen Kwaku Asare and Justin Leiby
18 Internal audit Urton Anderson and Margaret Christ
19 Audit approaches and business risk auditing Emer Curtis and Stuart Turley
20 The external auditor and the audit committee Jean Bédard and
Tiphaine Compernolle
21 Auditing ethics Michael K. Shaub and Robert L. Braun
22 Estimating audit fees and production models Henri Akono and Mike Stein
2017/3/22 3

4. (本の)目次
PART IV Issues concerned with audit reporting
23 Audit reports Paul Coram
24 Going concern Marshall Geiger
25 Reporting on internal control Jean C. Bedard and Lynford Graham
PART V Alternative auditing services
26 Assurance of environmental, social and sustainability information
Roger Simnett
27 Continuous auditing D. Kip Holderness Jr
PART VI Conclusion
28 The future of auditing research David Hay, W. Robert Knechel and
Marleen Willekens
2017/3/22 4

5. (今日の)Outline
• Overview of the topic and its importance
• Summary of current state of research findings
Explanations for companies to choose auditing
Explanations for the regulation of auditing
• Historical development
• Unresolved issues requiring future research
• Conclusion
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 5

6. Overview of the topic and its importance
• Auditing has economic benefits, some of which are not
always immediately obvious, for both individual companies
and the national (or global) economy as a whole.
• It helps in understanding auditing to be aware of those benefits
and the explanations for its existence.
• Auditing is an assurance service which improves the quality
of information or its context.
• This(audit firm has examined evidence and convinced
management) allows financial statement users to better rely
on the information because it has been vetted by an auditor
whose conclusions are stated in the audit report.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 6

7. Complexity of auditing
• Shareholders and other stakeholders in a company are not able to find
out whether assertions made by the directors are also reliable(Assertions
are made through the financial statements). The audit report provides
assurance that what management says is reliable.
• It is complex because of (1) the number of people involved and (2) the
ambiguity of financial information.
• (3) there is a well-known expectation gap, whereby many users have a
different idea of what the auditor can do compared to what the auditor
intends.
• (4) the amounts involved may be very large, and (5) the underlying financial
and accounting issues can be very complex.
• (6) auditing is usually controlled by regulation and professional
standards.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 7

8. Summary of current state of research findings
Explanations for companies to choose auditing
• Auditing can be seen as having (1) an information role; (2) an
agency role; (3) an insurance role; (4) an organizational
control role; (5) a confirmation role; and a (6) risk
management role.
• The reasons why auditing is often compulsory are also
important in understanding the function of auditing.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 8

9. The information (or signalling) explanation
• Auditing can be a way both to improve information, and to show that
it is better.
• One way of overcoming this information asymmetry is for them to
engage an auditor to provide assurance about their statements.
• Appointing an auditor is then a signal to investors that they can
place more credibility on the company’s financial statements.
• Where auditing is compulsory, then managers can provide a signal
of higher quality by appointing an auditor of higher quality.
• This can be a means of signalling insiders’ knowledge of superior
performance and reduced measurement error (Wallace, 1987).
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 9

10. The agency (or monitoring) explanation
• Shareholders are aware that managers may act in their own
interest, and could report misleading information as a result.
• If so, the shareholders might discount the information they
receive, and pay a lower price for shares than the financial
fundamentals would justify if the financial reports could be trusted.
• Where auditing is compulsory, they can reduce agency costs by
providing auditing of more than the minimum standard required.
• In 1994, a senior partner in the US firm of KPMG wrote that
‘auditing adds tremendous value’ (Elliott, 1994). Elliott estimates
that audits reduce the cost of capital by 1 per cent to 3 per cent.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 10

11. The insurance (or ‘deep pockets’) explanation
• Chow et al. (1988) suggest that providers of external
financing and custodians of others’ funds may demand
audits as a way of increasing the chance of recovering
certain types of losses.
• Auditors are seen as the ‘deep pockets’ defendant and, as a
result, auditors can face costly litigation even when they
have little or no responsibility for the losses.
• This view treats the audit almost like a put option against
future bad behaviour or misleading reporting.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 11

12. The organizational control explanation
• Organizational control for the benefit of internal management
is another explanation for auditing, especially in smaller
companies that may be family-owned or have less complex
financial structures.
• In a small organization, the owner or manager controls
operations by direct supervision and personal observation.
As an organization grows larger, control becomes more
difficult. Delegation becomes necessary, and there is a risk
of moral hazard and opportunism.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 12

13. The confirmation hypothesis
• The confirmation hypothesis examined by Ball et al. (2012)
states that audited financial reporting and the disclosure
of managers’ private information are complementary.
• Ball et al. (2012) argue that committing to higher audit fees
is associated with management forecasts that are more
frequent, specific, timely, accurate and informative to
investors.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 13

14. Risk management
• It is also useful to see auditing as a critical element in an
organization’s risk management strategy.
• Other mechanisms are also used to reduce risk, such as internal
audits and processes, audit committees and independent directors.
• Knechel and Willekens (2006) show that demand for external
auditing, illustrated by audit fees, increases in situations where
there are multiple stakeholders.
• Knechel and Willekens (2006) found evidence that audit fees are
higher when a company has an audit committee, discloses a
relatively high level of financial risk management, and has a larger
proportion of independent board members. Audit fees are lower
when a company discloses a relatively high level of compliance
risk management.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 14

15. Public interest models
• To understand the function of auditing, we need to consider why in
many settings auditing is compulsory, especially for listed
companies.
• Part of the answer is that auditing is a form of public good. For
that reason, legislators impose auditing requirements for the
benefit of the community.
• A second explanation is that auditing is beneficial to a country’s
economy.
• Studies of economic development include better auditing and
accounting among measures of the investor protection environment
and have shown that they are associated with better economic
performance.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 15

16. Public choice models
• An alternative set of views about regulation consider the
incentives of those who can impose regulated auditing, either
elected representatives or bureaucrats appointed by them, or
independent standard setters.
• These explanations are more in line with public choice
economics, and take into account the self-interest of regulators.
• If an audit failure is controversial, especially if it causes harm to
voters, there will be an incentive for these powerful groups to
impose further regulation.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 16

17. Historical development (1)
• Watts and Zimmerman (1986: 312) describe how voluntary
auditing existed for 600 years in circumstances where there was
a need for stewardship, as ‘part of the efficient technology for
organising firms’.
• Auditors changed with the coming of the industrial revolution
from amateur shareholder representatives to professional firms.
• Maltby (2009) indicates how the explanation by Watts and
Zimmerman (1983) that auditing was desirable as it reduced the
risks inherent in agency relationships is also helpful in explaining
why auditors are still valued, even when auditing failures are
evident.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 17

18. Historical development (2)
• There is always some remaining risk that material
misstatements can exist in a set of financial statements that
have been examined by an auditor.
• This potential is specifically reflected in the audit risk model
that guides much of what an auditor does.
• The fact that auditors cannot reduce residual risk to zero is
partially the cause of the so-called expectations gap
between what an auditor can realistically accomplish and
what the general public expects, especially when using
hindsight after an audit failure has been revealed by
circumstances.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 18

19. Unresolved issues requiring future research (1)
• Audit failures of the twenty-first century have led some to believe
that auditing is in a state of crisis, and further radical reforms
are required.
• On the one hand, there are ample economic reasons for directors
and managers to choose auditing, because it is in their interests or
in the interests of the company.
• There is also evidence from research studies to support the
economic reasons for auditing; but the evidence is still relatively
sparse, and more research into the function of auditing will be
valuable.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 19

20. Unresolved issues requiring future research (2)
• There are at least four aspects that should be separated to
some extent in the discussion of audit regulation.
• First, there is the demand for auditing, which is well
established by literature and economic theory.
• Second, there is the issue of who should conduct audits
and under what conditions.
• Third, there is the manner in which auditing is actually
delivered.
• Finally, there is a strong concern about how to evaluate
audit quality after the audit is completed.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 20

21. Conclusion (1)
• Auditing reduces the risk of a financial report being materially
misstated.
• More detailed explanations of the value of an audit to the company
reporting are based on economic models.
• Auditing is often compulsory. There are competing explanations for
why legislators require auditing.
• Public interest models see compulsory auditing as a way to protect
the interests of those stakeholders who cannot otherwise obtain
auditing.
• Public choice models emphasize the interests of the legislators
themselves, perhaps in showing that they have taken some action
during a crisis, and to deflect blame.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 21

22. Conclusion (2)
• Many of the explanations for auditing are counter-intuitive: it
is in the manager’s interest to arrange for auditing, so that it
ceases to be necessary for it to be imposed by shareholders or
regulators.
• Regulation may be for the benefit of the economy and for
stakeholders who cannot impose their own controls on the
company.
• It may be helpful when reading the subsequent chapters of
this book to consider the function of auditing and the models
that explain the need for it and its regulation.
Overview of the topic
and its importance
Explanations for
companies to choose
auditing
Explanations for the
regulation of auditing
Historical development
Unresolved issues
requiring future
research
Conclusion
2017/3/22 22