Factors affecting the audit quality of banks performed by the state audit

imes by the SAV in 2015, 2016, 2017 and 2018. Quantitative method: The thesis analyzes quantitatively based on secondary data collected through the questionnaires and SPSS 26.0 software to see the relationship of 12 factors to audit quality. Thereby, pointing out which factor is the most important, which factor is less important in improving the quality of auditing financial statements of SAV. Specific quantitative methods include: Cronbach's Alpha reliability test method, Exploratory Factor Analysis (EFA), CFA (Confirmator factor analysis), linear regression method (Regression Model). In addition to the qualitative and quantitative methods as described above, the research also uses other methods such as comparison method, synthesis method, description method, ... 1.7. Structure of the thesis The structure of the thesis includes 5 chapters as follows: Chapter 1: Introduction Chapter 2: Literature review on factors affecting the quality of financial statements audit performed by State Audit Chapter 3: Research Methodology Chapter 4: Research results on factors affecting the quality of auditing of banks' financial statements performed by State Audit Chapter 5: Solutions and recommendations to improve the quality of financial statements audit performed by State Audit 5 CHAPTER 2: LITERATURE REVIEW ON FACTORS AFFECTING THE QUALITY OF FINANCIAL STATEMENTS AUDIT PERFORMED BY STATE AUDIT 2.1. Literature review on financial statements audit and the quality of financial statements audit 2.1.1. Concept of audit and financial statements audit - Audit is the process by which competent and independent experts collect and evaluate evidence of an entity's information for the purpose of confirming and reporting this information in comparison with the established standards. - Auditing of financial statements or financial statements audits of the State Audit is the process by which the state auditors give an opinion on the truthfulness and reasonableness of the financial statements of the audited entity. 2.1.2. Concept of the quality of financial statements audit A good quality audit can be understood when the entire audit process is performed in accordance with audit standards, ensuring the highest possibility that the auditor can detect and report the material misstatement of the audited financial statements, and the results of the audit satisfy the best use of the results by the parties. 2.1.3 Some of the views assessing audit quality - The point of view of DeAngelo (1981) - FRC Audit Quality framework (2008) - The points of view of Francis (2011), Knechel et al (2013) - IAASB Audit Quality Framework (2013) 2.2. Literature review on financial statements audit and the quality of financial statements audit of State Audit 2.2.1. Definition, objectives and audit process of financial statements audit of the State Audit 2.2.1.1 Definition of financial statements audit of the State Audit There are very few documents that define State Audit's financial statements auditing activities. In the State Audit Standards System issued by the State Audit under Decision No. 02/2016 / QD- KTNN, the concept of financial statements audit is not introduced. However, it classified audit into 3 main categories. In which, the audit of financial statements or the financial audit of the State Auditor is the 6 state auditor giving an opinion on the truthfulness and reasonableness of the material financial statements of audited unit. 2.2.1.2 Objectives of financial statements audit of the State Audit - Obtain reasonable assurance that, in all material respects whether the financial statements and the financial information are still materially misstated due to fraud or error, are the financial statements prepare and present in accordance with applicable financial reporting frameworks; - Prepare an audit report and publish the results of the audit in accordance with audit findings. 2.2.1.3 Audit process and method for financial statements audit performed by State Audit According to Decision No. 08/2016 / QD- KTNN, the audit process consists of 4 steps: Auditing preparation; Conduct audits; Making and submitting audit reports; and Monitoring, examining the implementation of audit conclusions and recommendations. 2.2 The definition and the criteria for evaluating the quality of financial statements audit of the State Audit The quality of of financial statements audit from State Audit persepective is defined as the level of satisfaction of the requirements of the subjects using audit results in terms of the truthfulness, objectivity and reliability; satisfying the requirements of objectivity, timeliness and feasibility for the recommendations made by the State Audit Office; ensuring reasonable costs of resources used in audit activities of the State Audit. The criteria for evaluating the quality of financial statements audit of the State Audit includes: - Audit reports meet related subjects' requirements to use information about the audited entities. - Audit results and conclusions of the State Audit must ensure truthfulness, objectivity and reliability. - Audit proposals of the State Audit must be objective, right subject and feasible. - Resources are used reasonably and effectively to perform audit. 2.2.3. Some experiences in quality assurance of state audit under the Asian organizations of Supreme Audit Institutions (ASOSAI) - The case of the State Audit in Philippine - The case of the State Audit in Turkey - The case of the State Audit in China 7 - Lessons learned for the State Audit of Vietnam Firstly, it is necessary to establish a clear function of audit quality assurance in the SAV and clarify the relative independence of the technical quality assurance system. Second, the division in charge of Audit quality assurance must be structured in a high-level position to fully support the SAV leaders and have full authority to perform their functions and duties. Thirdly, the audit quality must be fully implemented at both levels: audit level and the entire level of the SAV. Fourth, it is necessary to have appropriate strategies and policies for the promotion and development of technical quality assurance activities, including raising awareness for the contingent of cadres, civil servants, and state auditors on technical quality assurance. Fifth, need to aim to check the audit quality in the form of external inspection by an outside agency or organization that is qualified to assess the quality of the SAV or of the supreme audit agencies. 2.3. Factors affecting the quality of financial statements audit performed by State Audit 2.3.1. Factors belong to the State Auditors (a) Technical Competence According to Bui Thi Thuy (2014), the professional capacity of auditors shows the qualifications of auditors, mainly through the qualifications, practicing certificates that auditors achieve, as well as training courses in which the auditor is involved, required by regulation or voluntarily. According to Richard (2006), practicing certificates illustrate the auditors' personal knowledge, thereby showing that the auditor has the knowledge and experience to perform auditing activities effectively. (b) Industry Expertise Industry expertise demonstrates an entity's deep understanding of the specialized field. Auditors with enough experience in the industry of the audited entity will have the capacity to identify risks, opportunities as well as the financial situation. SAV and professional organizations do not train these knowledge, but it is accumulated by each auditor through active learning, observation and practical experience in auditing firms operating in each field of business (Craswell et al., 1995; Slomon et al., 1999). (c) Working Experience 8 This factor refers to the audit experience of the audited entity in the past of the auditor / audit team. If the auditor has participated in previous audits with the entity, they will have more experience in effective audit planning and smoothing of the audit process (Carcello et al. associates, 1992; Aldhizer et al., 1995; Behn et al., 1997). (d) Auditing Standards compliance Research by Treadway (1987) has concluded that if the auditor does not comply with or miss the audit procedures, it will reduce the quality of the audit. According to research by Wooten (2003), auditors who are always inquisitive tend to detect more errors. (e) Due care and information security Auditor's cautious attitude is considered as an important factor affecting audit quality. In principle, audits should be performed with extreme caution to comply with audit standards, thereby ensuring audit quality and making audit opinions become more reliable (Carcello et al, 1992; Boon et al., 2008) (f) Integrity, independence and objectivity Independence in practice refers to the auditor's need to give an objective and impartial opinion (Richard, 2006). This means that auditors are able to maintain the impartiality in judgments and resist pressure from stakeholders before making audit conclusions. DeAngelo (1981) and other studies also suggest that, if the auditor's independence is reduced, the ability to detect material mistakes in the financial statements will decrease. 2.3.2. Factors belong to the State Audit (a) Working conditions of State Auditors Bui Thi Thuy (2014) said that the more favorable the working conditions, the more assured and improved the audit quality. This is an important factor that will affect the quality of audit reports. (b) Audit Approach Auditing methodology refers to the audit processes, procedures, and techniques designed by the auditor in order to obtain evidence of the appropriateness or effectiveness of the entities being audited. (c) The Quality Control System Cushing (1989) argues that material misstatements in financial statements can be more easily detected for auditing firms with good internal quality control policies and procedures. 2.3.3. External factors 9 (a) Factors belong to the audited entity The capacity, qualifications and perception of business management are factors that are believed to have an impact on the audit quality. The size and characteristics of the business firms also indirectly affect the quality of the audit. (b) Factors that are part of the regulatory environment for the audit activity Factors belonging to the legal environment for auditing activities include the system of accounting standards and regimes, auditing and related legal documents.They create the basis and guidance for the auditing activities. (c) Other external factors The macroeconomic environment such as economic growth, inflation and interest rates are important factors that directly affect businesses in general and units audited by the SAV in particular. 10 CHAPTER 3: RESEARCH METHODOLOGY 3.1. Research process The thesis is implemented through 5 steps as follows: (1) Building theoretical framework, (2) Building research model and method, (3) Assessing the current situation, (4) Analyzing research results, and (5) Solutions and recommendations. 3.2. Research model and hypotheses 3.2.1. Research model 12 factors (divided into 3 groups A, B, C) with 55 influencing criteria is built to determine the factors that affect the quality of auditing of banks' financial statements performed by the SAV. In addition, based on the Vietnam Auditing Standard (2016), the four criteria to measure the audit quality of the SAV's financial statements are as follows: Table 3.2. The measurement criteria for the dependent variable – The quality of financial statements audit The dependent variable Acronym The quality of financial statements audit performed by State Audit CLKT 1. Audit reports meet related subjects' requirements to use information about the audited entities. CLKT1 2. Audit results and conclusions of the State Audit must ensure truthfulness, objectivity and reliability. CLKT2 3. Audit proposals of the State Audit must be objective, right subject and feasible. CLKT3 4. Resources are used reasonably and effectively to perform audit. CLKT4 Source: Audit quality control fostering document, 2015 Thus, the research model of factors affecting the quality of financial statements audit of banks performed by the SAV is built as follows: 11 3.2.2. Research hypotheses Hypothesis 1 (H1): Technical Competence (Nangluc) has a positive impact on the quality of auditing financial statements of banks performed by the SAV. Hypothesis 2 (H2): Industry Expertise (Chuyenmon) have a positive relationship with the quality of auditing financial statements of banks performed by the SAV. Hypothesis 3 (H3): Working Experience (Kinhnghiem) have a positive relationship with audit quality of auditing financial statements of banks performed by the SAV. Hypothesis 4 (H4): Auditing Standards compliance (Tuanthu) has a positive relationship with audit quality of financial statements of banks performed by the SAV. Hypothesis 5 (H5): Due care and information security (Thantrong) is an important factor that positively affects the audit quality of the financial statements of banks performed by the SAV. Hypothesis 6 (H6): Integrity, independence and objectivity (Doclap) is proportional to the audit quality of the financial statements of banks performed by the SAV. Hypothesis 7 (H7): The more favorable working conditions of the SAV (DKLV), the better quality of auditing financial statements of banks performed by the SAV. Hypothesis 8 (H8): An effective audit process has a positive impact on audit quality when Audit Approach (Phuongphap) applied in the audit process are well organized. Hypothesis 9 (H9): The better SAV quality control system (KSCL), the better quality of auditing financial statements of banks performed by the SAV. Hypothesis 10 (H10): Factors belong to the audited banks (Nganhang) will positively affect the audit quality of the SAV. 12 Hypothesis 11 (H11): The legal environment for auditing activities (Phaply) of the SAV is fully built, the higher the quality of the audit of financial statements is improved. Hypothesis 12 (H12): Macroeconomic environment (Ngoaikhac) positively affects quality of auditing financial statements of SAV. 3.3. Research methodology - Qualitative method: The qualitative method is used through 2 types of questionnaires, including (i) a questionnaire for the auditor / audit team to investigate the factors affecting the audit quality of the financial statements of banks implemented by the SAV; (ii) in-depth interview questionnaire with bank leaders to assess the quality of auditing activities of SAV's financial statements. In addition, the qualitative method in the thesis is also demonstrated through case study analysis- research on the quality of auditing financial statements of SAV at Vietnam Bank for Social Policies (VBSP). This bank was audited four times by the SAV in 2015, 2016, 2017 and 2018. - Quantitative method: The thesis analyzes quantitatively based on secondary data collected through the questionnaires and SPSS 26.0 software to see the relationship of 12 factors to audit quality of financial statements of banks performed by State Audit. 3.4. Method of collecting and processing data 3.4.1. Design questionaires The survey questionnaire is designed based on a theoretical framework such as the research of DeAngelo (1981), Francis (2011), Knechel et al (2013), và The Audit Quality Framework of FRC (2008), IAASB (2013); based on the Vietnam Audit Standard 2016; and combined with characteristics of financial statements audit of banks performed by the SAV. 3.4.2. The objects of survey The interviewees are the auditors who has participated in the audit teams or has conducted a quality review of the audits of banks in the period 2015-2019 and the General Director / Deputy General Director or Head of the internal audit department 7 banks, including: Vietnam Bank for Agriculture and Rural Development (Agribank), Vietnam Bank for Investment and Development (BIDV), Joint Stock Commercial Bank for Industry and Trade Vietnam Nаm (Vietinbank), Viet Nam Commercial Joint Stock Bank (Vietcombank), Vietnam 13 Development Bank (VDB), Vietnam Bank for Social Policies (VBSP), and Vietnam Cooperative Bank (Co-opBank). 3.4.3. Data collecting and processing method (a) Methods of data collection - Collection of primary data: Primary data through questionnaires were surveyed directly or indirectly via email / phone interview. The survey period will take place from November 2019 to March 2020. As a result, the study collected 275 responses from the State Auditors and 7 in-depth interviews of the leaders of the banks audited by the SAV. - Collection of secondary data: In addition to primary data, secondary data are also collected to assess the current stituation of auditing quality of banks' financial statements performed by the SAV, including internal documents, reports of the Department of Regime and Quality Control on auditing of banks, Vietnam Auditing Standard, documents and decisions of the State Auditor General relating to quality audit. (b) Data processing method: After being checked to ensure the suitability, data will be encoded and entered into Excel file. 14 CHAPTER 4: RESEARCH RESULTS ON FACTORS AFFECTING THE QUALITY OF AUDITING OF BANKS’ FINANCIAL STATEMENTS PERFORMED BY STATE AUDIT 4.1 Characteristics of auditing activities of banks' financial statements performed by the SAV 4.1.1. General introduction about State Audit 4.1.1.1. The process of formation and development State Audit Office of Vietnam was established in 1994. Until now, it has become increasingly powerful and effective tool of the State and National Assembly in checking and monitoring public finance and public property. 4.1.1.2. Organizational structure The organizational structure of the SAV includes 32 departments and units equivalent to the department level. 4.1.1.3. Audit Quality Control Department The Audit Quality Control Department consists of 3 functional departments: the State Budget Department, the Investment Project Department, the Enterprise Department and the Banking and Financial Institutions Department. Thus, the organizational structure with a department of Audit Quality Control for financial and banking institutions shows that the SAV pay great attention to ensuring the audit quality for financial and banking institutions. 4.1.2. Characteristics of banks' financial statements audit performed by the SAV (1) Auditing contents of a bank's financial statements must be consistent with this subject's business operations. (2) The bank's accounting system is relatively different from the account system of other types of businesses. Therefore, audit method for banks’ financial statements auditing also needs to be developed in order to access this account system. (3) The operations of the banks in the current conditions must be based on a modern information technology system. Therefore, it can be seen that information technology audit is an important audit content in the auditing of banks’financial statements. (4) The auditing risk of banks’ financial statements should be assessed based on observations and analysis of the bank's operations. 15 (5) The business operation of a bank affects many economic entities in society. Therefore, information on the bank's financial statements is of interest to many subjects in the economy; especially the bad debt situation, the capital adequacy of banks. Therefore, this is one of the important contents of the auditing of a bank's financial statements. 4.2. The situtation of the quality of banks' financial statements audit performed by the SAV 4.2.1. The situtation of controlling the quality of banks' financial statements audit performed by the SAV According to the annual plan of audit quality control, the Department of Audit Quality Control of the State Audit conducted the audit quality control and issued reports on audit quality. Audit quality control has always been focused by the SAV. The control groups show their roles in the stage of survey, collecting information, making audit plans, performing audits, issuing audit reports. Thereby, the control results have helped the Chief Auditor to have instructions to promptly rectify the operation and improve the quality of the audit teams. 4.2.2. The situation that State Auditors evaluate the quality of banks’ financial statements audit The SAV has detailed regulations in grading to assess the quality of audits, but the scoring still shows subjectivity because there is no external unit involved in the grading process. 4.2.3. The situation that banks evaluate the quality of financial statements audit performed by the SAV Through in-depth interviews with 7 leaders who are General Directors / Deputy General Directors or Head of the Supervisory Board of audited banks, leaders rated the audit quality as quite high (4.6 / 5 points respectively) and noted that the audit activities of the SAV have helped banks re-evaluate and adjust many of their governance activities to increase transparency and higher operational efficiency. 4.2.4. The case of Vietnam Bank for Social Policies (VPBS) In the period 2015-2019, Vietnam Bank for Social Policies (VBSP) was audited by the SAV 4 times in 2015, 2016, 2017 and 2018. Therefore, VBSP was selected for the case study. 4.3. Factors affecting the quality of banks’ financial statements audit performed by the State Audit 4.3.1. Descriptive statistics 16 Factors are evaluated on a scale of 1-5, of which 1- Very Low, 2- Low, 3- Normal, 4- High, 5- Very High. Table 4.4 shows the minimum and maximum values of each factor are 1 and 5 (except for the three factors Kinhnghiem, CLKT and Nganhang have the smallest values of 1.8, 1.25 and 1.33). In terms of average value, the independent variable CLKT has the largest average value of 4.2891. The dependent variables whose mean value is lower than the independent variable and ranked from high to low are KINHNGHIEM (3.9898), KSCL (3.9861), TUANTHU (3.9760), and CHUYENMON (3.9582), THANTRONG (3.9513), NANGLUC (3.9273), PHAPLY (3.8646), NGANHANG (3.8358) DOCLAP (3.8246), PHUONG PHAP (3.8246), DKLV ( 3.6248). The factor NGOAIKHAC has the lowest mean value of 2.6618. 4.3.2 The reliability test After evaluating by Cronbach's Alpha index, it shows that besides the factor Ngoaikhac did not meet the minimum requirement, the other 11 factors all reached the reliable value. 4.3.3. Exploratory factor analysis (EFA) All 53 observed variables met the requirements. 4.3.4. Confirmation factor analysis (CFA) CFA results show that 53 observed variables have weights greater than 0.5 (satisfying the convergence value condition), in which, CHUYENMON3 has weight less than the rest (0.79> 0.5) and is statistically significant. The P- values are equal to 0.000 then the scales in the research model reach convergent value. 4.3.5. Regression analysis results The thesis uses regression analysis model for the 11 factors identified above (excluding the variable Ngoaikhac). The adjusted R- square of 0.712 shows that the model explains 71.2% of audit quality greater than the required level of 50% and about 28.8% of the independent variable of audit quality has not been explained by the model. This can be completely explained by a number of factors outside the model and random error. The coefficient Durbin - Watson = 1.424, is in the range of 1.0 to 3.0, so there is no first order series autocorrelation. 17 Table 4.9. The results of regression analysis on factors affecting the quality of banks’ financial statements of audit performed by the SAV Adjusted R2 0,712 Durbin-Watson 1,424 Variables Unstandardized Coefficients Standardized Coefficients Sig VIF Error 0,391 0,157 0,014 KSCL 0,115 0,038 0,003 1,901 CHUYENMON 0,112 0,037 0,003 1,866 PHUONGPHAP 0,112 0,035 0,001 1,734 THANTRONG 0,100 0,031 0,001 1,490 NANGLUC 0,099 0,037 0,008 1,911 DKLV 0,098 0,035 0,005 1,807 KINHNGHIEM 0,088 0,038 0,021 1,475 PHAPLY 0,084 0,031 0,007 1,792 TUANTHU 0,072 0,033 0,033 1,747 NGANHANG 0,067 0,03