Recent cases of bank failures have called into question the professional competence and integrity of external auditors. Some have explained that an auditor might be misled about the existence of account balances that do not exist. Companies being audited might have furnished the auditor with a document confirming the account’s existence and balance as at the reporting date.
Unfortunately, according to allegations, such balances turn out to be either an overstatement or an understatement and the auditor failed to detect a material overstatement of both assets and revenues. Such cases undermine the credibility of auditors and external audit generally in the eyes of users of audited financial statements.
Required:
Explain whether you believe it is possible for such events as the one described above to completely undermine the credibility of external audit. Your explanation should consider the responses that the accountancy profession can put in place in response to such criticisms. (10 marks)
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- There have been several major audit scandals in the past. The fact that audit continues and, indeed, flourishes in the light of these suggests that society has not lost confidence in audit and that it will not do so in the future.
- The major audit scandals appear to be regarded as abnormal occurrences that do not reflect on the work underpinning the vast majority of audits. The cases that have occurred in the past few years represent only a tiny minority of the audits that have been undertaken.
- Each has attracted a great deal of publicity, even notoriety, but there has been nothing to suggest that there is a systematic failure across all audits. Indeed, the publicity generated by each case indicates that these are not routine events.
- Shareholders and other stakeholders almost certainly need the reassurance provided by audit. In the absence of audit they would have little or nothing to support the credibility of the financial statements and this would undermine confidence in investment.
- It would appear that audits are desirable even if they do not offer a guarantee of detecting every single material irregularity in the financial statements. The accountancy profession has done a great deal to enhance the credibility of audit.
- Considerable amounts of time, money and resources have been invested in standard setting, monitoring and regulation of auditors. Major audit scandals are investigated as a matter of routine and any recommendations for the future regulation of audits and auditors are usually implemented as a matter of course.