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The Effects of Longterm Auditor-Client Relationship on Audit Quality

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Submitted By CapitalPeter
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THE EFFECTS OF LONG-TERM AUDITOR - CLIENT RELATIONSHIP ON AUDIT QUALITY IN SMEs

INTRODUCTION 1.1 BACKGROUND TO THE STUDY

Small and medium-sized enterprises (SMEs) play a vital role in the economy of any country, and the impact of their growth is experienced positively across the overall economy. As stated by the European Commission report, Small and Medium-sized Entities (SMEs) represent 99% of all the entities operating in Europe, and have been important for both the social and economic developments in Europe. In Europe, micro-enterprises within the SMEs are considered to be the real giants of European economy, and are the ones with fewer than 10 employees. As per the stats of Eurostat, 67% of the privatesector jobs in Europe are created by SMEs, which represents a major share in the overall economy of a country (European Commission, 2008). Most SMEs encounter limited financial as well as non-financial resources. They depend upon the creditors like banks and other financial institutions, or private equity. In this regard, banks have become one of the major sources for SMEs

fulfilling their financial requirements. However, banks are less likely to provide loans without any reasonable assurance of creditability of the firms. Banks generally rely on the financial information of the firms. They do prefer credible audited financial statements by independent auditors as a matter of assurance. In other words, most banks view auditing as a guarantee for the quality of information disclosed in companies as well as a foundation for their credit rating process. Banks believe that the credit rating would be unsure without audit obligation (Andersson & Paulsson, 2005 as cited in Ademi & Stigborn, 2010). Quality audit is an official, step-by-step assessment and evaluation of the activities and/or decisions opted, in reference to records, to ensure their applicability to meet…...

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