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Social and Economic Consequences of Audit Failure

Auditing Assignment Example

Examine the social and economic consequences of such audit failures and discuss potential factors that compromise audit quality of the above company and identify the practical difficulties faced by the audit team in obtaining sufficient audit evidence to support going concern status of the company.

Introduction:

Auditing is a very important and common task which performs for the benefit of shareholders and investors of any company. A proper audit term is prepared who analyze all the financial statements and facts and figures related to company and verify the fairness and truth of company’s transactions and dealings. A complete process has to be followed during auditing of the company and all required information and documents are given to audit team that check each and every transaction and at the end in their report explain all the norms and values of company and give confirmation that company is doing well or not according to investing point of view.

Consequences of Audit Failure:

The procedure of auditing is going to change with the passage of time and these changes also affect legislators in the measurement of benefit and cost of regulation. Legislator verifies the efficiency of product and system through audit system and additional regulations apply to all financial crises which occur in the industry. Market also punishes the auditor if they didn’t present the true picture of company. Some companies change their auditors and some didn’t want to take non audit services from that audit firm. Some investors want to control the shareholder’s meeting issue by external auditors. Many companies enhance their internal control and less required external auditing of the company. Audit firms give more attention to find the better way for searching and selecting reasonable solution in upcoming new environment.  Different problems give more practice to all participants to find out what solution in what problem. Markets are working to free basis and there is no chance to keep any fraud or error in the market but before find out the auditor’s error, we have to measure all the causes and consequences related to the problem. If government gives more attention in the markets to improve their performance then they measure all the crises and set proper punishment, adopt new policies which better deal with costs and benefits, also focus on quality safeguard and adoption of new strategies.

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In 2004, European commission issue a proposed directive related to auditors, that how member give instruction to auditors and give them permission to investigate their business. This directive also assists audit firms to follow authorities where they placed and prepare procedure to mention all the required information in front of different members. Auditors are not allowed to take part in the decision of management. All companies have to perform independent audit for the satisfaction and approval of shareholders. It also allows them to change the auditors at every year to get pure and unbiased results.

All audit regulations include some characteristics of auditing like specific nature of audit quality, effectiveness and existence of private quality assurance techniques and professional judgment. Nature of quality of audit means that clients are not affected when its internal auditing give not true picture then external audit firms audit that firm and show poor results. Clients have to monitor, investigate and evaluate it firm’s audit quality. Proper regulations help in look after all process which is used in information providing.

Audit firm have to apply different mechanism for the quality safeguard. These mechanisms used in different situations and used different implementation costs. Regulation give focus on how these mechanisms used in getting better solutions.

Professional judgment tells about the auditors that it should focus all those information which are costly or unverifiable when they go through the report of auditor. Verification capabilities show that which regulator approach should be used. So proper selection of information according to demand of external parties and also for the requirement of regulation is very important for all auditors. (Arruñada, Published in European Business Organization Law Review,2004)

Many different causes of failures also present in different companies. Audit failure happen when a serious problem in financial matters are not reflected by auditor’s report and auditor make serious mistake in this regard. Unqualified audit or wrong audit report may damage the image of company and news spread in all market that specific company has misstated statements. Auditors do some blunders by applying wrong GAAP or GAAS due to human error. Auditors not present the issue or fraud knowingly with the consent of audit client.  If auditor has direct or indirect interest financial interest in the client then he will never present the true picture of company. People may think that it’s the duty of auditor to detect all frauds and give report on all that frauds without any personal interest. Audit failure also happen when auditor not follow basic procedure according to international standard of auditing. (.ftms.edu.my)

Factors That Affect Audit Quality:

There is very informative knowledge about audit quality and its related measurements. Audit quality consider as agency relationship which establish when the group of owners appoint another person to work as an agent who perform different services on their behalf. The result of this performance is some decision making rights to the agent. This transfer of responsibility helps to support productive economy and its efficiency. Audit quality is important for company so the selection of auditor’s firm is also very important decision for the company. Now we are going to discuss some factors which consider in checking the quality of auditing: internal control; internal control is the process which prepares to give proper assurance regarding the objectives and affect the board of directors, other personals and managements. The internal control and audit quality weakness is the main point which has to be considered audit committee monitor the quality of financial reporting and accountability of corporation, also help as governance mechanism different litigation risks and reputation impairment face by committee regarding their responsibilities. So high quality audit committee is required by every company to get high quality results. Firm size; size of firm also considerable for the quality of audit. Large scale audit firms have strong tests related to performance. Audit firm size and audit quality is related with each other positively.  Large audit firms show high quality results which also attract different large scale companies. People consider that large audit firms use high level techniques and procedures which give more accurate results related to financial condition of companies. Large audit firms has high reputed internationally. They have performed all difficult measurements which show the quality of audit and other accounting services. Audit fee; this include all those charges which a company has to pay audit firm against their services include report making, consultant and management advisory. Audit fee include benefits of office, wages, field personnel, travelling costs and all remaining costs which are utilize in auditing and supportive activities. Fees have staff time estimated costs, actual costs of travelling plus profit margin. Large audit fee make strong the auditor’s independence. Managers and entrepreneurs are happily pay high fees for auditing to get the high quality of audit of their company. Auditor’s independence; audit committee give more focus on independence of external auditor so they are free from the influence and disturbance of management. Audit committee provides transparency regarding all material issues. The independence of auditor effect the quality of audit in such a way that when they easy access to all required material and data and all related information that they can provide high quality audit report to their clients and present true and fair picture of company. Auditor’s reputation; the reputation of auditor is related to actual and perceived level of quality of the auditor’s report. If the quality of auditor is in bad condition, the report also provide low level of assurance related to financial statements that its financial statement reflect all earning and book values more than its actual without verification of auditors. High quality job enhance the chance of audit results that they need more recommended improvements and serious implementation. High quality work related to organization reputation that decision makers are accept with assurity all related findings and recommendations which are going to be implemented. Reputation is develop after some time through making consistent and work of high quality. Industry specialization; the link between auditor’s expertise and audit quality is also consider. Many types of errors and methods of errors are directly belong to industries, so auditor has to be industry expert to identify and figure out all related problems and issues which directly link with industry and financial statements of company. (Husam Al-Khaddash, September 2013)

Geographic dispersion; quality control policies become more difficult if auditor select from some different area. Open communication is required in this matter. But in checking work some problem always occur as when quality control personnel want to check the work auditor not present at that time. Transparency; auditor must be transparent related to all policies and procedures of quality control. Transparency requires follow up on its policies and help in comparison of two different audit firms. (Johnston, © Copyright 2018 Hearst Newspapers, LLC)

Going Concern Belongs to Audit Evidence:

Going concern basis of any business explain that company is viewed as continuing business in the future. This is an important assumption when financial statements are going to prepared  which show that company don’t want to liquidate stop the materiality scale related to its operations. If not required, financial statement prepare on break up basis. This the responsibility of management to whether prepare all its financial statements according to going concern or not, but not the responsibility of auditor. Auditor responsibility includes all sufficient audit evidence collected regarding the usage of management of ongoing concern in the making of financial statements. And the opinion of auditor in this type of circumstances auditor’s opinion may be disturb if they not focus on management assessment. (accaglobal., 1 Feb 2018)

In every auditing, auditors may have to face such issues where they have to modify the opinion in the auditor’s report. These are, auditor cannot get all sufficient audit evidence related to appropriate going concern basis,  auditor not agree with the financial statement information related to going concern issue due to incorrect or insufficient, auditors not satisfied with the basis of financial statements because sometimes management use going concern where as liquidation basis must be suitable according to condition of business. So due to going concern basis, the modification in he opinion of auditor is very rare. According to audit evidence, a material uncertainty come in the auditor’s judgment belong to all events or conditions that show some doubt about the going concern of business. Auditor give attention on adequacy of disclosure related to financial statements and auditor’s report can be modifying by adding an extra paragraph related to this issue. Management considers all the disclosures which are appropriate in the financial statements and reassure the users of financial statements about the financial position of entity.

Material uncertainty occur when the length of related  impact as appear in auditor’s judgment ,clearly explain the nature and implication of uncertainty is required for the making of financial statement which may not give wrong direction. According ISA570, auditor’s report must contain a paragraph related to all material uncertainty of the going concern basis of business. Auditor’s report have to explain all the condition and situation to all external parties which are interested in its investment policies so they are very much concern about the basis of financial statement and all basic requirements which may affect their investment in positive or negative way . (ifac.org, JANUARY 2009)

Conclusion & Recommendation:

At the end, we conclude that there are several reasons behind the failure of audit; sometime responsible is company because it not provides all detail information and related materials and disclosures which are important in making audit report and some time auditor may not perform its duty with honesty or due to any other reasons. High quality audit is demand of every client and quality is affected by different factors so all precautionary measurements have to be adopted to maintain the quality of audit.

References:
  • ftms.edu.my. (n.d.). AUDIT FAILURES.
  • accaglobal. (1 Feb 2018). GOING CONCERN.
  • Arruñada, B. (Published in European Business Organization Law Review,2004). Audit Failure and the Crisis of Auditing .
  • Husam Al-Khaddash, R. A. (September 2013). Factors affecting the quality of Auditing: The Case of Jordanian Commercial Banks.
  • ifac.org. (JANUARY 2009). AUDIT Considerations in Respect of Going Concern.
  • Johnston, K. (© Copyright 2018 Hearst Newspapers, LLC). Factors Influencing Quality Control in Audit Firms.

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