Audit Failure: Why it happens and how to prevent it

Audit failure is when an auditor issues an incorrect opinion on a company's financial statements following their audit. It means they have indicated that the financial statements of a company have presented within all the correct financial reporting frameworks when they actually have not.

What are the consequences of audit failure?

Whether it is a statutory audit or voluntary, if an audit fails, the results can be harmful to both the company and the auditor. There are lots of possible consequences, including the following:

• Financial losses: Incorrect financial statements can influence poor decisions by the directors of the business. This could be bad investments or borrowing.
• Reputational damage: The company being audited may be perceived as unreliable or untrustworthy, while the auditor may be seen as incompetent or negligent.
• Regulatory scrutiny: Regulators investigating the audit in its aftermath might take further action against the organisation and/or the auditor.

To avoid this, companies should team up with auditors who work to an exceptional standard of quality and professionalism, while adhering to the correct procedures and best practices.

Why might an audit fail?

Here are some reasons why an audit might fall down or result in an incorrect opinion.

• Material misstatements: The financial statements contain material misstatements or errors that the auditors fail to detect and report on. This is a serious issue because they may impact or influence important financial decisions. 
• Inadequate testing: Audits involve testing, and if inadequate testing takes place, it can cause the audit to fail. Possible reasons for inadequate testing include insufficient access to information, insufficient time or resources to conduct the audit properly, or a lack of expertise in a particular area that is important to the audit.
• Lack of independence: Auditors must maintain their independence and impartiality when performing the audit. If there is any conflict of interest, such as if the auditor has a personal or financial stake in the client or their company, it can lead to the failure of the audit.
• Scope limitations: There may be circumstances beyond the control of the auditors that prevent them from obtaining sufficient evidence to support their opinion, such as access to essential information.
• Inaccurate stocktaking: If stocktaking is inaccurate, this can leaf to misstated financial statements, as well as pointing to internal control issues. These issues can lead to an adverse audit opinion.

An audit failure does not necessarily mean that the financial statements were materially misstated. It also does not mean that fraud or other deliberate wrongdoing has taken place.

What it means is that the auditors weren't able to gather enough evidence to support their opinion.

How can you prevent audit failure?

The auditor must be well-equipped and knowledgeable enough to overcome any audit challenges while maintaining the highest standards of ethics and integrity throughout the audit process.

• The auditor should have a deep understanding of the company's operations and regulatory obligations
• It is essential that the auditor has sufficient time to conduct a thorough review of all the relevant documents and data.
• Auditors need to ensure that they are equipped technologically to properly evaluate the organisation's controls and risks.
• Auditors must be well-trained in fraud detection.
• An auditor should always maintain professional scepticism to rigorously challenge assumptions and evaluate evidence objectively.

It isn't just about the auditor, however. The company being audited should always ensure they are keeping and maintaining accurate and transparent financial records. They have a responsibility for ensuring that their financial reporting is compliant with relevant accounting standards and regulations before the audit process begins.

The Shorts Audit Promise

An audit from Shorts is one that both organisations and their main stakeholders can trust and depend upon.

As an independent chartered accountancy firm, our reputation has been nurtured over decades, and our overall focus on quality, accuracy and ethics, is why we’re so well-trusted throughout the regional business community.

The Shorts Audit Promise means delivering our work to the highest standards and always giving the numbers a rigorous challenge, based on the audit risks we’ve agreed with our clients before commencing the work.

The Shorts Audit Promise is built around seven key principles, which summarise how we believe an audit should be and, indeed, how every one of our audit engagements is managed. We encourage you to read more about it.

• Learn more: The Shorts Audit Promise