THE QUALITY OF EXTERNAL AUDITOR REPORTS ACCORDING TO ISA 700 AND THE IMPACT OF AUDIT COMMITTEE CHARACTERISTICS IN LIGHT OF DIGITAL TECHNOLOGIES: AN APPLIED STUDY ON LISTED IRAQI BANKS
Keywords:
Audit committee, ISA 700, audit report quality, financial transparency, corporate governance, Iraqi banks, agency theory, emerging marketsAbstract
This study aims to examine the effect of audit committee (AC) attributes on improving the quality of the audit report in the Iraqi listed banks during the timeframe (2008-2024). The study is based on agency theory and resource dependence theory and has five dimensions of governance: AC independence, financial expertise, meeting frequency, risk management committee presence and advanced digital technology adoption. A novel composite ISA 700 audit report quality index is developed through three dimensions related to the International Standard on Auditing 700 (Revised): audit opinion type (40%), reporting timeliness (30%), and report content quality (30%) to offer a theoretically grounded measurement instrument that is applicable to emerging markets where traditional audit quality proxies lack. The empirical analysis uses an unbalanced panel of 135 observations of bank-year data for 20 Iraqi banks and 17 years, and is estimated using Random Effects GLS standard errors with cluster-robust standard errors. Results show that AC independence (β = 0.105, p < 0.001), financial expertise (β = 0.110, p < 0.001), and meeting frequency (β = 0.031, p < 0.001) are each positive and significant predictors of audit report quality, alongside Big4 auditor affiliation (β = 0.111, p < 0.001). These factors account for 48.3% of the variation within banks. There is no evidence of institutional void dynamics, as risk committee presence and digital technology adoption does not achieve statistical significance, which means that it is merely symbolic, and not substantive, additions to formal governance mechanisms. The supplementary component-level analysis shows that while the quality of the report content is mainly driven by AC characteristics, the reporting timeliness is only affected by the Big4 affiliation, thus demonstrating that internal and external governance is complementary, and not substitutive. The study provides a replicable ISA 700 quality index, extends agency theory predictions to an institutional void context, and brings a more fine-grained approach to understanding the production of audit quality through different channels of effects of internal governance and external governance.
References
M. C. Jensen and W. H. Meckling, "Theory of the firm: Managerial behavior, agency costs and ownership structure," J. Financial Econ., vol. 3, no. 4, pp. 305–360, 1976, doi: 10.1016/0304-405X(76)90026-X.
M. S. Beasley, J. V. Carcello, D. R. Hermanson, and T. L. Neal, "The audit committee oversight process," Contemp. Account. Res., vol. 26, no. 1, pp. 65–122, 2009, doi: 10.1506/car.26.1.3.
A. Klein, "Audit committee, board of director characteristics, and earnings management," J. Account. Econ., vol. 33, no. 3, pp. 375–400, 2002, doi: 10.1016/S0165-4101(02)00059-9.
F. D. DeZoort and S. E. Salterio, "The effects of corporate governance experience and financial-reporting and audit knowledge on audit committee members' judgments," Audit.: J. Pract. Theory, vol. 20, no. 2, pp. 31–47, 2001, doi: 10.2308/aud.2001.20.2.31.
E. F. Fama and M. C. Jensen, "Separation of ownership and control," J. Law Econ., vol. 26, no. 2, pp. 301–325, 1983, doi: 10.1086/467037.
O. Al-Shaer, M. Salama, and S. Toms, "Audit committees and financial reporting quality," J. Appl. Account. Res., vol. 18, no. 1, pp. 2–21, 2017, doi: 10.1108/JAAR-10-2014-0114.
H. A. Aldamen, K. Duncan, S. Kelly, R. McNamara, and S. Nagel, "Audit committee characteristics and firm performance during the global financial crisis," Account. Finance, vol. 52, no. 4, pp. 971–1000, 2012, doi: 10.1111/j.1467-629X.2011.00447.x.
S. Claessens and B. I. Yurtoglu, "Corporate governance in emerging markets: A survey," Emerg. Mark. Rev., vol. 15, pp. 1–33, 2013, doi: 10.1016/j.ememar.2012.03.002.
R. La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, "Investor protection and corporate governance," J. Financial Econ., vol. 58, no. 1–2, pp. 3–27, 2000, doi: 10.1016/S0304-405X(00)00065-9.
C. G. Ntim, "Corporate governance, corporate health accounting and firm value: The case of South Africa," International Journal of Accounting and Information Management, vol. 24, no. 3, pp. 251–274, 2016.
Central Bank of Iraq, Annual Report on the Iraqi Banking Sector. Baghdad, Iraq, 2023.
L. E. DeAngelo, "Auditor size and audit quality," J. Account. Econ., vol. 3, no. 3, pp. 183–199, 1981, doi: 10.1016/0165-4101(81)90002-1.
W. R. Knechel and J. L. Salterio, Auditing: Assurance and Risk, 4th ed. New York, NY, USA: Routledge, 2016.
International Auditing and Assurance Standards Board (IAASB), International Standard on Auditing (ISA) 700 (Revised): Forming an Opinion and Reporting on Financial Statements. New York, NY, USA: International Federation of Accountants (IFAC), 2015.
J. Pfeffer and G. R. Salancik, the External Control of Organizations: A Resource Dependence Perspective. New York, NY, USA: Harper & Row, 1978.
B. H. Baltagi, Econometric Analysis of Panel Data, 6th ed. Cham, Switzerland: Springer, 2021.
D. S. Dhaliwal, V. Naiker, and F. Navissi, "The association between accruals quality and the characteristics of accounting experts and mix of expertise on audit committees," Contemp. Account. Res., vol. 27, no. 3, pp. 787–827, 2010, doi: 10.1111/j.1911-3846.2010.01027.x.
C. Lennox and B. Schauer, "Consequences of expanded audit reports: Evidence from the United Kingdom," Rev. Account. Stud., vol. 27, no. 2, pp. 736–771, 2022, doi: 10.1007/s11142-021-09654-0.
D. J. Teece, "Profiting from innovation in the digital economy: Enabling technologies, standards, and licensing models in the wireless world," Res. Policy, vol. 47, no. 8, pp. 1367–1387, 2018, doi: 10.1016/j.respol.2017.01.015.
N. Sultana, "Audit committee characteristics and accounting conservatism," Int. J. Audit., vol. 19, no. 2, pp. 88–102, 2015.
D. V. Vafeas, "Audit committees, boards, and the quality of reported earnings," Contemporary Accounting Research, vol. 22, no. 4, pp. 1093–1122, 2005, doi: 10.1506/C7P7-M313-RU4M-6RUT.
M. Al-Haddad, W. Alzurqan, and F. Al-Sufy, "The effect of corporate governance on the performance of Jordanian industrial companies," Int. J. Humanities Soc. Sci., vol. 1, no. 4, pp. 55–69, 2011.
G. V. Krishnan and G. Visvanathan, "Does the SOX definition of an accounting expert matter? The association between audit committee directors' accounting expertise and accounting conservatism," Contemp. Account. Res., vol. 25, no. 3, pp. 827–857, 2008, doi: 10.1506/car.25.3.7.
L. L. Lisic, T. L. Neal, I. X. Zhang, and Y. Zhang, "CEO power, equity incentives, and audit committee effectiveness in restatement firms," Contemp. Account. Res., vol. 33, no. 3, pp. 1133–1168, 2016, doi: 10.1111/1911-3846.12212.
L. J. Abbott, S. Parker, and G. F. Peters, "Audit committee characteristics and restatements," Audit.: J. Pract. Theory, vol. 23, no. 1, pp. 69–87, 2004, doi: 10.2308/aud.2004.23.1.69.
B. Xie, W. N. Davidson, and P. J. DaDalt, "Earnings management and corporate governance: The role of the board and the audit committee," J. Corp. Finance, vol. 9, no. 3, pp. 295–316, 2003, doi: 10.1016/S0929-1199(02)00006-8.
Basel Committee on Banking Supervision, Corporate Governance Principles for Banks. Basel, Switzerland: Bank for International Settlements, 2015.
V. Aebi, G. Sabato, and M. Schmid, "Risk management, corporate governance, and bank performance in the financial crisis," J. Banking Finance, vol. 36, no. 12, pp. 3213–3226, 2012, doi: 10.1016/j.jbankfin.2011.10.020.
M. Nasr and C. G. Ntim, "Corporate governance mechanisms and accounting conservatism: Evidence from Egypt," Corporate Governance: Int. J. Bus. Soc., vol. 18, no. 3, pp. 386–407, 2018.
C. Dai and M. A. Vasarhelyi, "Imagineering audit 4.0," J. Emerg. Technol. Account., vol. 13, no. 1, pp. 1–15, 2016, doi: 10.2308/jeta-10494.
P. Moll and O. Yigitbasioglu, "The role of internet-related technologies in shaping the work of accountants," Brit. Account. Rev., vol. 51, no. 6, art. 100833, 2019, doi: 10.1016/j.bar.2019.04.002.
F. A. Gul, S. Y. K. Fung, and B. Jaggi, "Earnings quality: Some evidence on the role of auditor tenure and auditors' industry expertise," J. Account. Econ., vol. 47, no. 3, pp. 265–287, 2009, doi: 10.1016/j.jacceco.2009.03.001.
A. Czerney, J. J. Schmidt, and A. M. Thompson, "Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?" Account. Rev., vol. 89, no. 6, pp. 2115–2149, 2014, doi: 10.2308/accr-50836.
Iraq Stock Exchange (ISX), "Official Website of the Iraq Stock Exchange," 2026. [Online]. Available: http://www.isx-iq.net/isxportal/portal/homePage.html [Accessed: May. 11, 2026].
J. M. Wooldridge, Econometric Analysis of Cross Section and Panel Data, 2nd ed. Cambridge, MA, USA: MIT Press, 2010.
C. Hsiao, Analysis of Panel Data, 3rd ed. Cambridge, UK: Cambridge Univ. Press, 2014.
Downloads
Published
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution 4.0 International License.
CC BY
This license enables reusers to distribute, remix, adapt, and build upon the material in any medium or format, so long as attribution is given to the creator. The license allows for commercial use. CC BY includes the following elements:
BY: credit must be given to the creator.
