The Audit Risk Assessment and Potential Areas of Improvement
The Audit Risks Assessment Model and Potential Areas of Improvement
By:
Patrick S. Fields
Fraud and the Creation of Sarbanes-Oxley
Following the multitude of fraud scandals in the early 2000’s, such as Enron and WorldCom, many accounting firms found themselves as part of a thorough investigation to determine what exactly caused the sudden outburst of accounting fraud. As investors and creditors pursued their lost money from the these business failures, accounting firms began to garner attention for not fulfilling their due process during the audit to detect the fraud before it grew to the extent in which it did. In the case of the Enron scandal, it ultimately turned into the indictment and conviction of Arthur Anderson, one of the Big Five auditing firms at the time. These scandals reignited a debate over the GAAP based rules at the time and led to the establishment of the Sarbanes-Oxley Act in 2002. The act provided a much stricter set of guidelines for auditing standards, increased corporate responsibilities, and created the PCAOB to overlook specific processes and procedures for compliance to these standards.
The fraud scandals leading to Sarbanes Oxley changed the accounting world and in particular, auditing. While there were definite deficiencies in the auditing practices at the time, such as the independence issues, the argument can be made that even while following precise auditing standards, an accounting firm cannot escape the possibility of litigation if a client’s business happens to fail. The connection between an auditor and a client’s financial statements will always be there and thus there is an inherit audit risk that will never be eliminated. There is always the chance of issuing a wrong opinion, even if the auditor follows all possible procedures and fulfills his professional due process; all auditors can do is limit this risk as much as possible. This is largely due to the auditor’s use of sampling procedures and the fact they do
By:
Patrick S. Fields
Fraud and the Creation of Sarbanes-Oxley
Following the multitude of fraud scandals in the early 2000’s, such as Enron and WorldCom, many accounting firms found themselves as part of a thorough investigation to determine what exactly caused the sudden outburst of accounting fraud. As investors and creditors pursued their lost money from the these business failures, accounting firms began to garner attention for not fulfilling their due process during the audit to detect the fraud before it grew to the extent in which it did. In the case of the Enron scandal, it ultimately turned into the indictment and conviction of Arthur Anderson, one of the Big Five auditing firms at the time. These scandals reignited a debate over the GAAP based rules at the time and led to the establishment of the Sarbanes-Oxley Act in 2002. The act provided a much stricter set of guidelines for auditing standards, increased corporate responsibilities, and created the PCAOB to overlook specific processes and procedures for compliance to these standards.
The fraud scandals leading to Sarbanes Oxley changed the accounting world and in particular, auditing. While there were definite deficiencies in the auditing practices at the time, such as the independence issues, the argument can be made that even while following precise auditing standards, an accounting firm cannot escape the possibility of litigation if a client’s business happens to fail. The connection between an auditor and a client’s financial statements will always be there and thus there is an inherit audit risk that will never be eliminated. There is always the chance of issuing a wrong opinion, even if the auditor follows all possible procedures and fulfills his professional due process; all auditors can do is limit this risk as much as possible. This is largely due to the auditor’s use of sampling procedures and the fact they do
Cited: Chang, She I. "The Development of Audit Detection Risk Assessment Model: Using the Fuzzy Theory and Audit Risk Model." Expert Systems with Applications 35.3 (2008): 1053-067. Academic Search Premier. Web. 26 Mar. 2012. Clark, Ronald L. "Understanding the Changes in Risk Assessment Standards." The CPA Journal 79.7 (2009): 48. Academic OneFile. Web. 1 Apr. 2012. Krishnan, Jagan. "Litigation Risks and Auditor Resignations." The Accounting Review 72.4 (1997): 539-42. Academic OneFile. Web. 26 Mar. 2012. Pelletier, Jim. "Adding Risk Back into the Audit Process: Risk Assessment Results Can Help Focus Internal Audit Efforts on the Areas That Need Them Most." Internal Auidtor 65.4 (2008): 73. Academic OneFile. Web. 5 Apr. 2012. Rotaru, Horatiu. "Audit Risk Model Based on Sampling Recommended by the Minimal Audit Standards." Annals of DAAAM & Proceedings (2009): 941-42. Academic OneFile. Web. 3 Apr. 2012.