Top 10 Audit Deficiencies

By Beasley, Mark S.; Carcello, Joseph V. et al. | Journal of Accountancy, April 2001 | Go to article overview

Top 10 Audit Deficiencies


Beasley, Mark S., Carcello, Joseph V., Hermanson, Dana R., Journal of Accountancy


EXECUTIVE SUMMARY

* CPAs CAN LEARN HOW TO BETTER DETECT financial statement fraud by understanding the mistakes others made in cases where the SEC imposed sanctions on auditors for their association with fraudulently misstated financial statements. This article focuses on 45 SEC enforcement actions against auditors in the period 1987 to 1997.

* THE MOST COMMON PROBLEM, IN 80% OF THE CASES, was the auditor's failure to gather sufficient audit evidence. Many of the cases involved inadequate evidence in areas such as asset valuation, asset ownership and management representations.

* IN ALMOST HALF OF THE ENFORCEMENT ACTIONS, the SEC alleged the auditors failed to apply GAAP pronouncements or applied them incorrectly. One way firms can deal with this problem is to expand the coverage of technical accounting topics in firm-sponsored training.

* AUDIT PROGRAM DESIGN WAS A PROBLEM CITED in 44% of the cases. Auditors failed to properly assess inherent risk and adjust the audit program accordingly. The best way for a firm to remedy such deficiencies is to promote more involvement by audit firm executives--partners and managers--in planning the engagement.

* OTHER COMMON AUDIT PROBLEMS INCLUDE FAILURE to exercise due professional care and the appropriate level of professional skepticism, overreliance on inquiry as a form of audit evidence, deficiency in confirming accounts receivable, failure to recognize related party transactions and assuming internal controls exist when they may not.

How can CPAs learn to more effectively detect financial statement fraud? One of the best ways is to "profit" from the mistakes of others. The information presented here is based on cases in which the SEC sanctioned auditors for their association with fraudulent financial statements. Enforcement actions against auditors are rare, but the consequences of individual cases can be great and the cases offer the profession an opportunity to learn and grow. While the lessons presented here will be most valuable to practitioners who perform audits, CPAs employed by client companies may also benefit from understanding the process so they can develop realistic audit expectations.

Our analysis is based on a report we completed in 2000 for the AICPA ASB titled Fraud-Related SEC Enforcement Actions Against Auditors: 1987-1997. Our research initially involved 56 cases. However, 11 of those 56 cases involved a bogus audit or auditor where either the audit never took place or a non-CPA posed as an auditor and issued a phony opinion. In the remaining 45 cases the SEC alleged deficiencies in performing one or more "attempted" audit engagements. These cases form the basis for our analysis.

All of the cases involved public companies, most of which engaged in fraudulent financial reporting (or "cooking the books"). Only a few engaged in misappropriation of assets or defalcation (stealing). While the audit deficiencies described here may help CPAs detect or prevent either type of fraud, with private companies--where stealing is the more pervasive risk--auditors face an entirely different set of considerations.

COMMON AUDIT PROBLEMS

The exhibit on page 65 highlights the top 10 audit deficiencies the SEC claimed. The most common problem--alleged in 80% of the cases--was the auditor's failure to gather sufficient evidence. In some instances, this failure was pervasive throughout the engagement; in other instances the allegations were more specific. For example, many of the cases involved inadequate evidence in the areas of

* Asset valuation. The auditor did not obtain evidence to support key assumptions.

* Asset ownership. The auditor did not obtain evidence to indicate the company owned certain assets.

* Management representations. The auditor did not corroborate management responses to inquiries.

Some cases involved the auditor's failure to examine relevant supporting documents (for example, examining a draft, instead of a final, sales contract) or failure to perform steps listed in the audit program. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Top 10 Audit Deficiencies
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.