What is Audit Failure?

An 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. This can be a major problem when there are material misstatements in the client’s financial statements. This can result in financial statement users making incorrect decisions based on those statements.

Causes of Audit Failures

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.

Independence Issues

A particularly concerning cause of audit failures arises when the auditor is not independent of the client. When this happens, the auditor’s objectivity may be impaired. For example, an auditor has a spouse working in the client’s accounting department, or has directly invested in the client, or sits on its board of directors. All of these situations would trigger clear independence concerns.

Lack of Understanding of the Industry

When an auditor does not have a fundamental understanding of how a client operates, then it is impossible to conduct an audit on those processes that are unique to the industry. For example, someone auditing the books of a casino must have a firm understanding of its cash handling practices; if not, it is impossible to render an opinion on the processes and controls of the casino.