Toward a Knowledge Management Framework for Auditing Processes

Toward a Knowledge Management Framework for Auditing Processes

Loan Nguyen (Japan Advanced Institute of Science and Technology, Nomi, Japan) and Youji Kohda (Japan Advanced Institute of Science and Technology, Nomi, Japan)
Copyright: © 2017 |Pages: 23
DOI: 10.4018/IJKSS.2017070104
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We aimed at discovering how auditors working in an auditing firm managed their knowledge-related processes, and then built a theoretical model for the knowledge management of professional knowledge-intensive services like auditing. We conducted a case study in an auditing firm in Vietnam by employing a qualitative methodology in this research by using twenty in-depth interviews, observations, and documentary analysis. A literature review revealed that auditing research has been developed through various approaches ranging from experimental studies to information processing and experience-focused and knowledge-related interests. However, there has not been much empirical research that explains how knowledge is created during an auditing process. We conducted an empirical case study in this research that provided useful insights into constructing a theoretical model of knowledge management processes in auditing. Because the theoretical model consisted of three phases of collecting data, analyzing data (thereby turning them into information), and synthesizing information into knowledge, we called it the collect-analyze-synthesize (CAS) model. The model was used to visualize the auditing process as a spiral with many iterative CAS processes. Wisdom in the CAS model is defined as high levels of accumulated knowledge and the ability to exercise professional judgments attained from long-term experience. Wisdom is retained by members in an auditing firm and drives the auditing process. The significance of this study was inherent in three main areas: providing scholarly extensions of the literature by suggesting a knowledge management framework for auditing processes, helping auditors and auditing firms with their roles, and ensuring better assurance services for society.
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1. Introduction

An audit is an independent professional service that improves the quality of information for decision makers (Arens et al., 2014). An audit of financial statements is the determination of whether the financial statements of a company present a true and fair view of its state of affairs. The ultimate product of an audit is the issuance of an audit opinion, i.e., qualified or unqualified, on the financial statements of publicly listed companies.

Audit services are valued to private and public entities, the users of audited financial statements, and the financial capital market because an audit provider is independent and perceived as being free from bias when examining information. Private entities admit that auditing is an activity that reduces resource costs. Auditing is a useful tool in management to review and ensure the truthfulness and fairness of financial statements. Thus, audits serve as a monitoring device, and are part of the corporate governance mosaic (Cohen, et al., 2002). Governments have also realized efficiency improvements cannot be achieved, and problems with resource allocation cannot be solved without qualified auditing processes. Auditors help public sector organizations achieve accountability and integrity, and improve operations by providing unbiased, objective assessments of whether public resources are being managed responsibly and effectively to achieve intended results (Nieuwlands, 2006). Moreover, auditing is crucial to other users who need to rely on audited financial statements, e.g., investors, tax authorities, and financial institutions. Individuals who are responsible for making decisions look for assurance services to improve the reliability and relevance of information that is used as the basis for their decisions (Arens et al., 2014). Furthermore, auditing is a cornerstone of capital market governance that helped to cope with the global financial crisis. Auditing is crucial to the sound functioning, integrity, and efficiency of capital markets because it strengthens investor trust in the financial information issued by companies (Hill, 2015).

Auditing is classified as one of the most knowledge-intensive business services that require a high level of professional knowledge and expertise. This professional service is associated with gaining and processing data as well as providing information about the internal controls, financial systems, and financial records of a company or a business, which thereby creates knowledge in the form of audit reports. Auditing firms provide knowledge-based professional services for which the management of expertise is critical to success (Davenport, 1997).

Knowledge management (KM) is a discipline that focuses on managing the knowledge of workers. The effective management of knowledge in a knowledge economy is a key resource to attain higher competitive advantages and enhanced performance. Therefore, KM has caused many heated discussions as a new arena for theoretical development and practical applications (Ragab & Arisha, 2013). This interest is readily apparent in professional auditing firms as they increasingly look into the use of information technology to support the creation and dissemination of knowledge about their international clients between global offices (Sieber & Griese, 1998). However, there has been pressure on auditing firms to enhance their KM systems in recent amendments to regulations as well as accounting and auditing standards. For example, the International Standards on Review Engagements requires that the appropriate competence and capabilities of an audit team not only involve an understanding of professional standards and applicable legal and regulatory requirements, but also practical experience, technical expertise, knowledge of relevant industries, and the application of professional judgment (IFAC, 2014). The auditing environment, especially, has also experienced many changes after the failure of Enron Corporation in 2001, which was the largest bankruptcy in the history of the US. This scandal resulted in changes to the regulatory environment that surrounded financial reporting and aroused widespread skepticism based on the way corporations prepare their financial reports and how auditors attest to the reliability of those reports.

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