Audit tenure can be one of the external factors that can affect the quality of the audit. Because, proximity auditor. with clients, will affect the independence of auditors. Meanwhile, good and quality financial statements are born from a free and impartial assessment.
Therefore, it is important for the company to determine the duration of the cooperation between the public accounting firm (KAP) and the client. That way, the company's reports can be prepared with good quality and the relationship between the auditor and the client remains within professional limits.
What Is Audit Tenure?
General definition of Audit Tenure
In general, the audit tenure is a period of time set by the company and the KAP to hire the audit services of an auditor from a particular KAP. This period of cooperation is commonly referred to as the period of engagement which is measured on an annual basis.
Determination of the timing of this alliance becomes one of the dilemmas often experienced by enterprises. Whether to keep using the same hood service after a certain period of time or replace with a new hood service.
This dilemma can occur, since the period of attachment of the company and the auditor can create a depth of emotional connection between the two, thus affecting independence, fees, among others.
Audit Tenure According To Experts
Menurut Sattar Mansi, Profesor Keuangan Wells Fargo di Sekolah Bisnis Pamplin, Virginia Tech dalam artikelnya yang berjudul Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market, says that the audit tenure is the term of the relationship of the client and the auditor.
Furthermore, according to Dwi Martani, a lecturer at the Faculty of Economics and Business, University of Indonesia (FEB UI), audit tenure is not just a term that refers to a period of time, but more specifically, the number of years an auditor audits a company.
Purpose and importance of Audit Tenure
In any cooperation between the company and external parties, the time frame is one of the things that must be made clear to determine the beginning and end of the cooperation. That way, healthy professional relationships are maintained.
Why is Audit Tenure necessary in the Audit process?
So, why does the audit process by an auditor of a particular KAP require a period of time? Each report produced by an auditor, is expected to reflect the reality of the company, quality, and trustworthy.
The intensity of cooperation by auditors and clients, more or less will cause closeness that can affect independence. In fact, an auditor is expected to be able to give an assessment freely and impartially. That way, the quality of the assessment can be trusted.
In addition, setting a time frame also allows an auditor to understand a company more closely professionally. By hiring auditors from certain KAP for a long time, auditors can gain institutional knowledge of the company being handled, so that the audit process is faster and more efficient.
Impact of Audit Tenure on Auditor independence
Auditor independence is the independence, honesty, freedom, and impartiality of an auditor in assessing the company. This aspect is an important key for an auditor to maintain his credibility. But unfortunately, the auditor's independence is often disturbed by too long a period of cooperation, so that the auditor and client relationship is too familiar.
The existence of closeness between the two parties, can cause closeness, reduce audit quality, and independence. For example, auditors find it difficult to assess freely and objectively, which can lead to bias and conflicts of interest.
Advantages and disadvantages of long-term audits
In the field accounting and auditing, many years of cooperation of auditors with clients give rise to varied pros and cons. Here are a number of advantages and disadvantages when auditors work with certain companies for a long time.
Advantages:
- The Auditor gets a deep understanding of the condition of the company
- Auditors get the economic benefits of long-term relationships, such as income, bonuses, performance incentives
Disadvantages:
- Create an emotional connection between the auditor and the client
- Affect the objectivity and professionalism of auditors
- Decrease auditor independence
- Preclude stricter audit procedures
- Triggers manipulation and cheating
Audit Tenure formula and how to calculate it
To determine the audit tenure or period of use of auditor services from the same KAP, there are several formulas that can be used. That way, the company can count the number of years of auditors.
Commonly used Audit Tenure formula
One of the easiest and commonly used ways to calculate the number of auditor years is to calculate the number of years of engagement, where auditors from the same KAP conduct an audit engagement of a particular company.
This can be done by giving a value of 1 in the first year the engagement begins. Likewise, in subsequent years, if the company still uses the same auditor, then in that year it is given a value of 1. However, if in a certain year the company switches to using a new auditor, it is given a value of 0.
Examples of cases of calculation of Audit Tenure in financial statements
To calculate the audit tenure in a particular company, the counter must have access to the company's financial statements. The financial statements, can be a useful medium to find out who the company's auditors.
For example, calculating the audit tenure of Pt Sekawan Media Informatika. In 2018, the company used the audit services of Sukmono Agung from Kap Maju Jaya. That year, it was rated at 1. In 2019 to 2022, it was known that the company also used Sukmono Agung audit services from KAP Maju Jaya.
Thus, the result of the value 1 in 2018-2022 is 5. That is, the audit tenure of Pt Sekawan Media Informatika with auditor Sukmono Agung from Kap Maju Jaya is 5 years.
How to view Audit Tenure in financial statements
Audit tenure in financial statements is not information that can be obtained immediately. Rather, it must be calculated in advance using the existing formula. Before doing the calculation, it is also important for the counter to know the location of the auditor's report which is usually attached to the financial statements. Here are the parts to know along with the tips.
Section of the report showing the Audit Tenure
Audit tenure can be calculated by knowing the auditor or KAP used in calculating the financial statements each year. The results of the audit by the KAP auditor, usually located in the independent auditor's report prepared after the statement of the board of directors.
In the independent auditor's report section, it can be seen that auditors and KAP handle the financial statements of a company. Meanwhile, to find out the audit tenure of a company, calculations can be made according to the existing formula.
Tips to know the Auditor and the first year of Audit
The location of the auditor in the financial statements and the first year of the audit, can be an easy starting point for calculating the audit tenure. The name of the auditor is usually attached to the report of the independent auditor in the financial statements of a company.
On the page, the top right corner that contains the name of the institution, address, email, and website is the KAP that handles auditing. While the top left corner is the affiliate hood. The name of the auditor concerned can be found from the person who signed the independent audit report document. Typically, the section is at the very bottom of the independent auditor's report.
Effect of Audit Tenure on Audit Quality
Audit tenure or the number of years an auditor audits a company, can affect the quality of the resulting audit. This influence can be both positive and negative, depending on the extent to which both parties concerned can maintain the limits of their professionalism.
If the audit tenure has a long enough period of time, the quality of the audit has the potential to have a positive effect or the quality of the audit increases. Because, auditors have enough time to understand the company. That way, the auditor can assess effectively and accurately.
However, if the audit tenure is too long, it is also not good for the company because it can reduce the quality of the audit. Some factors that can contribute to the negative influence, such as auditors and clients are too familiar, so that each other has a sense of reluctance that can affect the objectivity of the audit results.
Therefore, to minimize the negative influence, the auditor and client relationship should comply with the approved cooperation contract. If the contract is completed, the company must replace the auditor so that the resulting audit is maintained quality.
Development of Audit Tenure issues in Indonesia
In Indonesia, the issue of audit tenure reaps a number of pros and cons. From several existing studies, the researchers ' analysis shows that audit tenure can have a positive and negative effect on audit Quality.
For example, the longer audit tenure period, on the one hand, can reduce the auditor's independence, because the auditor and client relationship is getting closer. But on the other hand, a long relationship has a positive positive effect on the results of the audit, because the auditor understands the company better.
Legally, the period of audit tenure by KAP institutions in a company has been regulated in government regulation of the Republic of Indonesia number 20 of 2015 concerning the practice of Public Accountants Article 11 paragraph 1 which states that the provision of audit services on historical financial information to an institution or company by KAP is limited to a maximum of 5 consecutive years.
Closing
Audit tenure is the period of time an auditor audits the financial statements of a client or a company. In order to produce quality, objective, and trustworthy audit reports, both parties maintain the boundaries of professionalism and the company conducts auditor rotation within a certain period of time.
Audit tenure is not just a company Assessment report, but a picture of the company's reality seen from data and facts. As a practical and efficient step, companies do not need to be confused to manage all stages of the audit. Reasons, Audithink's Comprehensive Features presenting audit management services and features who can design, implement, and evaluate the audit management process effectively.
Our team is also ready to provide professional assistance in audit research, measuring the efficiency of financial statements, to internal audit consulting, do not hesitate to contacting the Audithink team.
