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Should auditors have discovered the problems?
By Tom Crouch, CPA, CIA, CISA, and Attorney and Otis Singleton, CPA
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When accounting problems are discovered, they may be as large as an
Enron-type fiasco or they may be minor errors. People often say that the
auditors should have discovered the problems. Is such a broad assumption on
target?
A financial statement audit has stated objectives and auditors render an
opinion related to those objectives. It is highly unlikely that the audit
opinion will ever say that the auditors are providing 100% assurance. The
audit opinion generally provides a 95% statistical assurance
level that the stated objectives were met.
There is no such thing as 100% assurance regarding the accuracy of
financial figures, effectiveness of internal controls, or compliance with
laws and regulations. In order for auditors to provide 100% assurance, they
would have to review every transaction for the entity. Even if auditors
examined 100% of the supporting documentation for all transactions of an
entity,
there is a risk that the entity's records have been falsified, causing the
subject matter to be misstated. Auditors are responsible for identifying
fraud when it is material to the financial statements. Usually fraud is not
material to financial statements, and if a fraud is carried out, it is
difficult to identify,
especially if there is collusion among several employees.
The staffing levels for even 99% assurance audits might need to be more
than double the staffing levels for the 95% assurance audits normally
conducted. The audit staffing level would need to increase exponentially to
move from 99% to 100% assurance. The auditors would be moving from cost
effective
auditing to a point where the auditors' cost would be overwhelming. The law
of diminishing returns does apply to audit efforts.
Auditors cannot and do not provide 100% assurance about the financial
figures, internal control, and compliance. The entity paying for the audit
probably could not pay the audit cost for 100% assurance. In fact, it might
be nearly impossible to find any entity willing to provide the additional
funds
for 100% assurance audits.\
Even if funding were available, most auditors would wonder whether the needed audit staffing level could be achieved for such detailed audits. The turnover rate among the auditors assigned to a 100% assurance audit might skyrocket due to the repetitive nature of the very detailed work required to meet the desired assurance level.
If funding, audit staffing levels, and turnover rates could be overcome,
an
audit group would face another major problem. The detailed and
comprehensive audit work would be very time consuming and very
disruptive to the normal business operations of the audit client. The
audit client probably would exert pressure to reduce or stop the
disruptions.
Even if the 100% assurance obstacles could be overcome, the level of
cooperation by the audit client would drop. The audit group probably would
not be able to complete the assigned audit work in a timely manner. Timely
and cost effective audits provide management and investors with the
best audit value.
Should auditors have discovered the problems? "Yes," when the
problems
were material to financial statements. If the problems were not material to
the financial statements, the answer is usually "No," unless the
problems
discovered are clearly contrary to the audit opinion rendered.
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This text may be forwarded via fax or e-mail. This text may be republished
in any professional publication or web site.
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