Audit exemption and the voluntary audit in Maltese small companies : an evaluation

Abstract

Purpose: The statutory requirement for a full scope audit in the context of small companies is often seen as a financial burden and unnecessary 'red tape' imposed on the small company. An alternative is the introduction of an audit exemption threshold leaving the audit decision voluntary. This study aimed to establish the opportunities and threats of an audit exemption together with the identification of the main factors that affect the demand for a voluntary audit. Finally, it inspected the likely demand for the voluntary audit if an audit exemption was in place. Design: The objective of this study was achieved through a mail survey conducted with a sample of 150 small company directors and 150 audit practitioners further enhanced by 20 personal interviews. Findings: The conduct of this study revealed that in the majority of cases the audit is merely a 'rubber stamp' on the auditor's own work since it is customary that the accounts of the company are done by the auditor. In this situation, directors rarely perceive any added value from the audit. The only value envisaged by directors is as a means to obtaining finance since it is seen as a requirement by banks. This requirement has a great impact on the demand for the voluntary audit in companies necessitating external finance. Value: It is likely that the introduction of an audit exemption will not change the current situation. Thus, a different approach should be adopted in order to maximise the value for small companies. This study suggests that different alternatives to the statutory audit should be applied to different categories of companies.