Auditing failures and quantitative measurement of materiality judgement - Essay Example

This may be resulting due to the intentional or unintentional involvement of the auditor in accepting serious misstatements from the company professionals. Large number of factors can be defined as the causes of the audit failure. However, broadly following four categories engulf almost all aspects of audit failure. First and foremost is the failure on the part of the auditor to ensure the compliance of reporting financial statement with the Generally Accepted Accounting Principles (GAAP) or standards of audit.

An evidence in the survey reported that nearly 49% of the audit failure resulted due to inability of the auditor to fully comply with the GAAP and GAAS rules. For example, Ernst & Young in USA has recent been charged to pay around USD two million for violating PCAAOB rules of auditing in the audit of its client Medicis Pharmaceutical Corporation (Public Company Accounting Oversight Board, 2012). In the referred case, E&Y remained the external auditor of the company for nearly 20 years and financial statement of 2008 is found to have clear distortion from GAAP rules.

The second reason that results in the failure of audit include the due involvement of the auditor. This results when auditor issues due report that warrants compliance of the financial statement with the set standards and principles. . d penalizes the auditor for the reason that failure ultimately results due to the lacking on the auditor’s part (Peursem, Zhou, Flood, and Buttimore, 2007). It is evident that auditors’ firms usually end up paying the penalty without agreeing or denying the charges (Peursem, Zhou, Flood, and Buttimore, 2007; United States Securities and Exchange Commission, 2013).

The third aspect of the audit failure results when an auditor intentionally or intentionally ignores the investigation requiring component of the financial statement due to having some financial interest in the organization. In almost all cases of the audit fraud, the auditors are investigated for supporting fraud in lieu of having direct and indirect financial interest in the organization or negligence. According to the Peursem, Zhou, Flood, and Buttimore, (2007) with respect to the case of Adelphia, Deloitte had a financial interest in the company as it was largest and long terms standing in the clientele list of the Pittsburgh office of Deloitte.

The case of GTGI also faced this issue when auditor relied heavily on the information provision by the management representatives. Auditor in this case ignored the need of giving exploratory assessment to the revenue and other related components of the financial statement. Finally, the most common aspect of effect is having some personal relationship with the client or entity for which the auditor is providing a service. Such relationships result in impacting the audit activity than having normal business relationship in independency.

For instance, Peursem, Zhou, Flood, and Buttimore, (2007) have reported the case of Adelphia also claimed that many partners of the audit firm had a relationship with Adelphia and the family member of the management of the