Question

EXPLAIN MORE AND GIVE AN EXAMPLE OF:

1. Business Failure: occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions, such as a recession, poor management decisions, or unexpected competition in the industry.

2. Audit Failure: occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards.

3. Audit risk represents the possibility that the auditor concludes after conducting an adequate audit that the financial statements were fairly stated when, in fact, they were materially misstated.

Answer 1

Solution

1.Business Failure

If you’ve ever started a business and failed, you might feel terrible about the loss of time, effort. and money.

In fact, you may even have beaten yourself up for like lack of motivation, laziness, partnering up with the wrong people, and so on.

Reasons For Failure

1.They don’t know how to plan

Lack of planning is when you ignore the value of planning and don’t bother to learn the methodology of planning. A good plan should include both short- and long-term goals as well as a way to measure goals and results.

2.They don’t know how to provide leadership.

i)Leadership is about motivation and inspiring the troops with a bold vision.

ii)Leadership is essential; without it, it’s hard to make good decisions or take effective actions.

iii)Leadership affects every aspect of a business, from how productively employees work to how operations are organized.

3.They don’t know how to win customers over.

i)There is no point in improving lead generation if a business doesn’t know its customers well or treat them well.

ii)Winning customers over starts with understanding consumer desires and tailoring products to meet those wants and needs.

iii)Treating customers well starts by following best practices when it comes to customer service

Example of Business Failure

Compaq(1982-2002)

Compaq was one of the largest sellers of PCs in the entire world in the 1980s and 1990s. The company produced some of the first IBM PC compatible computers, being the first company to legally reverse engineer the IBM Personal Computer. Compaq ultimately struggled to keep up in the price wars against Dell and was acquired for US$25 billion by HP in 2002. The Compaq brand remained in use by HP for lower-end systems until 2013 when it was discontinued.

2.Audit Failure

Audit failure occurs when an auditor deviates from the applicable professional standards in such a way that the opinion contained in his or her audit report is false. Audit failures are frequently associated with inadequate auditor training, failure to exercise sufficient professional skepticism in evaluating management representations, not sufficiently evaluating client valuation estimates, essentially not engaging in any auditing activities at all, and/or creating inadequate audit documentation.

Examples of Audit Failure are as follows

a)The damage done to people's lives by audit failures is well documented. Audit failures played a part in a crisis for 30,000 Maxwell pensioners (House of Commons Social Security Committee, 1992). Audit failures played a part in the closure of Polly Peck and the loss of 17,227 jobs (Mitchell et al, 1991) and losses to 11,000 shareholders of Sound Diffusion Plc (Department of Trade and Industry, 1991a).

b)Auditors failed to note that frauds that led to the conviction of five officials of the Baptist Foundation of Arizona on 32 counts of fraud, racketeering and theft. 11,000 investors lost £400 million (Daily Mail, 2 April 2002).

Causes Of Audit Failure are as follows.

i)The auditors can blunder by misapplying or interpreting GAAP or GAAS; such blunders are unintentional and could be caused by human errors and fatigue.

ii.) The auditors commit fraud knowingly issue more favourable audit report than is warranted. This may occur when the auditors accept bribe or bows to client pressure or threats from the audit client.

iii). The auditor can be unduly influenced by having direct or indirect financial interest in the audit client. For example audit practice provide significant amount of non audit services to audit client and will be reluctant to questioned the audit client fearing losing the client.

3.Audit Risk

Audit risk, also known as residual risk, is the chance that financial statements will be issued with materials errors even though they have been reviewed by an auditor and approved.

Audit Risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Components of Audit Risk

i) Inherent Risk

Inherent risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of control.

Eg, Transactions involving high-value cash amount carry more inherent risk than the transaction involving high-value cheques.

ii) Control Risk

Control risk is the risk that a material misstatement would not be prevented, detected or corrected by the accounting and internal control systems.

Eg,Failure on the part of management to control and prevent transaction carried out by staff who is not authorized to carry out those transactions in the first place.

iii) Detection Risk

Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements. An auditor must apply audit procedures to detect material misstatements in the financial statements, whether due to fraud or error.

Eg,Failure by Auditors to identify the continuous misreporting of financial statements by the company.

Minimise Audit Risk

1. Having a strong Audit team that has sufficient knowledge of the business and transactions involved;
2. Sufficient time is provided to the team to analyze financials;
3. Ensuring strong engagement with the management of the client firm to understand business philosophy and practices;
4. Ensuring proper and adequate sampling techniques;