Impact of the Principle or Rule Based Financial Regulations on the External Auditing Process of the Financial Institutions’ Reports

Audit plans which will be implemented during the external auditing of the entities’ financial reports are determined according to the level of audit risk by the external auditors. Audit risk is assessed taking into consideration the structural conditions and efficiency of the internal control and accounting systems of the entities which will be audited and also, the risk that the auditor’s substantive procedures do not detect a misstatement that could be material. The purpose of this study is to evaluate the impact of the principle or rule based financial regulations on the external audit process of the financial institutions assuming that they do not include only financial reporting audits but also suitability audits in terms of the financial regulations. It has been shown that principle based regulations would increase detection risk as rule based regulations would increase control risk by using the negative relationship between the control and detection risk.