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Based on the above scenarios critically examine the social and economic consequences of such audit failures and discuss potential factors that compromise audit quality of the above company and identify the practical difficulties faced by the audit team in obtaining sufficient audit evidence to support going concern status of the company.  

Factors influencing Audit Quality

The report has been prepared on Carillion Plc. The company has faced some auditing issues in 2014-2016. The company had to face various issues due to investment into numerous risky contracts and the projects. The company has been warned in 2017 for some issues regarding the profits and financial circumstances. These warnings were just the initial stage of difficult pitch on which the company had to go through.  The report takes the concern of audit quality of the company, potential factors of the company due to which audit quality has been comprised, social and economical consequences of the company and the accounting indicators and concepts of the company.

Carillion plc is a multinational company which has been established in England to manage and construct facilities and services. Headquarter of the company is in Wolverhampton.  The annual report of the company briefs about the 900 million pounds pension amount and a pension deficit of 600 million pounds. Internal parties of the company were supposed to analyze and evaluate the scam of the company but no internal stakeholder of the company was aware about the scandal (Reuters, 2018). However, the external parties of the company i.e. investors, creditors and the government were also not in a possession of evaluating the financial performance of the company as the annual report of the company has been comprised in such a way that no stakeholder could analyze the issue.

In order for the financial statements to be used as an appropriate means of economic decision-making, there must be assurance that the financial statements contain the correct data and not misleading in decision making. It would make the annual report and financial statement of the company more reliable. 

According to the The guardian (2018) there are various factors which have impacted on the audit quality of the company. Some of them has been discussed and evaluated here which explains that how the audit quality of the company has been comprised. Intimidation during audit is high. This is because in cases of fraud and incompetence, audit process and quality will unearth this. Potential factors that will influence the audit quality include the time given to conduct an all inclusive audit report, resources and personnel to conduct a quality audit. Threat may be witnessed by the auditors upon comprehensive Intimidation threat:

Firstly, it is required for an auditor to have a good knowledge of the business and its activities. Lack of knowledge about the business makes it tough for the auditor to evaluate all the relevant factors thoroughly. In case of Carillion plc, auditor had not focused on the type of business and the activities and due to which the main parts have been skipped from his side (Financial reporting analysis, 2018). The time factors would also be managed by the auditors as they have to accomplish the auditing process in a lesser time and thus they should manage the factors in a proper way.

Social and Economic Consequences and Impact on Audit Quality

For a company like Carillion, a multi-national that is involved in construction and facility management, time required to audit its books of finance should play a comprehensive role. Time is a major role during auditing, it should be important to note that time should be adequate enough to produce the right results in the auditing process. Inadequate planning in audit process should be good enough to ensure that the auditing process goes in the right manner (The telegraph, 2018). Gathering of audit evidence should take place in sufficient plan in order to provide quality audit.

The auditor's report is crucial in an audit because it could inform about what the auditor is doing and the conclusions obtained. The auditor has a responsibility to assess whether there is any doubt about the company's ability to maintain its viability over a period of time and to prove the reasonableness of the financial statements presented by the client. Therefore, in the audited financial statements, the auditor must express an opinion on the fairness of the financial statements audited (Hall, 2002). In case of Carillion plc, auditor had not focused on the financial statements of the company properly and due to it, the auditor’s opinion is not fair.   


The auditors face various practical issues while auditing the financial reports and annual report of an organization. The control risk and the inherent risk are also required to evaluate and manage by the auditor. An auditor is required to focus on technology, planning, time, staff competence, relevant documents, proves of financial transactions etc so that a better auditing report could be prepared (Eliot, 2016). A better auditing report makes it easier for the stakeholders to make a conclusion about the company. In case of Carillion plc, auditor had not focused on the various factors of the business and it had lead to the scam in the company.

Auditors are also required to manage and make the necessary amendments in the financial reports of an organization according to the accounting regulations and the accounting standards. Direction and supervision is important as it is part of a quality audit and audit process. The auditors should be enough experience and have enough knowledge about the supervision and auditing process so that the better auditing reports could be prepared (Kapferer, 2012).

The routine procedure should also be followed by an auditor to manage the process of auditing and evaluate the financial process of the company at a better way. In case of Carillion, it has been found that if the auditors were completed their job with proper timing and process than the financial statement of the company could be audited properly and the scam would not taken place. In performing the audit duties and concerning on the audit quality of a company, it has been found that the auditors are required to evaluate all the related factors so that there is no option for any kind of scam in a business.

Recommendations

In performing him duties of auditing, an auditor is not only required to be expertise in the audit process but auditor should also be independent while the process so that he could work without any pressure and threat. Independent auditors are always better than the dependent auditor.  

There are various social and economical consequences which also impacts on the audit quality and leads to the failure. Various social and economical consequences such as loss of employment, loss of public services, level of regulations, earnings losses, people lives, lack of independence, auditors in competencies, general public, GAP auditors, GAAP issues etc impacts on the audit quality of an organization and due to these factors, it becomes tough for an auditor to present a fair auditor’s report.

In case of Carillion plc, it has also been evaluated that the auditors were affected by the social and economical factors as well. These have lead to the audit of the company o failure.  It is an issue that the stakeholders in any business take the process and the factors very casually. Incompetence on the side of the auditor could lead to economic losses for a company as fraud which could not be detected. Once fraud is not detected, it is assumed that a company has healthy financial position but the position of the company’s position would come to be unearthed later (Gray, Manson and Crawford, 2015). It would lose its economic stability as shares will stumble and many would sell their stock. The social consequence of a company due to loss of an auditor is loss of reputation and good name that lead to economic losses. 


If an auditor does not offer a fair auditor’s report about the financial position of a company than these financial statements lead to the decisions of creditors, banks and other stakeholders of the company in a wrong direction. Great confidence in the auditor is often overwhelmed by scandals by auditors. The social consequences brief the audit quality of Carillion plc has been lower and it has impacted on the company as a whole (Jubb, 2008). If the auditors would have evaluated the scandal at initial stage than the loss amount could be reduced. Stakeholders of an organization would always consider the auditor's Opinion which is contained in the auditor's report to evaluate and analyze the investment position of the company.

Further, the loss of public services is always equivalent to loss of economic potential of a company. Auditing is the field that has advanced the most. It returned its leading role to the public accountant in modern organizations by freeing it from the financial and accounting classification (Biegelman and Bartow, 2012). It has impacted on the company’s auditor’s report as the auditors have not focused on the social factors of the company and which has directly lead to the auditing process of the company towards a failure.

The auditor has a responsibility to assess whether there is any doubt about the company's ability to maintain its viability over a period of time and to prove the reasonableness of the financial statements presented by the client. Therefore, in the audited financial statements, the auditor must express an opinion on the fairness of the financial statements audited (Hightower, 2009).

After the globalization, it has been important for the organizations to evaluate and analyze the new standards of accounting and follow the international accounting standards. In case of Carillion plc, it has been evaluated that the audit quality of Carillion plc has been lower and it has impacted on the company as a whole. If the auditors would have evaluated the scandal at initial stage than the loss amount could be reduced. Stakeholders of an organization would always consider the auditor's Opinion which is contained in the auditor's report to evaluate and analyze the investment position of the company.       

Going concern concept assumes that a business would run beyond the next fiscal year so that an organization could accomplish its current and future plans. It is a fundamental accounting concept which explains that every business runs with a thought that it would never be closed.  A going concern business is a business that is operating currently, making profits from its operations and is deemed to operate in the foreseeable future (Crumbley, Heitger and Smith, 2011).

An auditor’s opinion must be modified. It is necessary to node that unmodified auditor’s report is the report where the auditor’s opinion has not been modified. On the contrarily, an auditor’s report is modified because of the emphasise of the matter paragraphs then auditors paragraph will be considered as not modified (Freedman and Jaggi, 2010). Auditors may mention that the auditor’s opinion has not been modified due to inclusions of certain matters in an opinion. Thus, the auditor's report for the company is needed to increase the users' confidence in the financial statements that the financial statements are neutral, so public confidence in the financial statements will increase.

Tangible and intangible asset recognition is important for an auditor in a business as it is the main asset of the company and the most of the scandals are done on the basis of assets (tangible and intangible). The accounting policy note of the company briefs that the company has followed proper IFRS rules but the calculations and the proper disclosure has not been done by the company of financial figures and the transactions of the company (Codification of statements on auditing standards, 2010). 

References:

Biegelman, M. and Bartow, J. 2012. Executive roadmap to fraud prevention and internal control. Hoboken, N.J.: Wiley.

Codification of statements on auditing standards. 2010. New York, NY: American Institute of Certified Public Accountants.

Cosserat, G. and Rodda, N. 2012. Modern auditing. Chichester: John Wiley and Sons.

Crumbley, D., Heitger, L. and Smith, G. 2011. Forensic and investigative accounting. Chicago: CCH.

Eliot, G. 2016. The mill on the Floss. New York: Open Road Integrated Media.

Financial reporting analysis. 2018. Investigation into the audit of the financial statements of Carillion plc. (online). Available at: https://www.frc.org.uk/news/january-2018-(1)/investigation-into-the-audit-of-the-financial-stat (Accessed as on 17th April 2018).

Freedman, M. and Jaggi, B. 2010. Sustainability, environmental performance and disclosures. Bingley: Emerald.

Gray, I., Manson, S. and Crawford, L. 2015. The audit process. Andover, Hampshire, U.K.: Cengage Learning.

Hall, J. 2002. Information systems auditing and assurance. Cincinnati, Ohio: South Western College.

Hightower, R. 2009. Internal controls policies and procedures. Hoboken, NJ: Wiley.

Jubb, C. 2008. Assurance & auditing. South Melbourne: Thomson Learning..

Kapferer, J. 2012. The new strategic brand management. London: Kogan Page.

Reuters. 2018. KPMG's audits of Carillion to be investigated: UK watchdog. (online). Available at: https://www.reuters.com/article/us-carillion-collapse/kpmgs-audits-of-carillion-to-be-investigated-uk-watchdog-idUSKBN1FI0MB (Accessed as on 17th April 2018).

The guardian. 2018. KPMG to be investigated over Carillion auditing. (online). Available at: https://www.theguardian.com/business/2018/jan/29/kpmg-carillion-frc (Accessed as on 17th April 2018).

The telegraph. 2018. Carillion auditor KPMG faces scrutiny for approving books months before collapse. (online). Available at: https://www.telegraph.co.uk/business/2018/01/15/carillion-auditor-kpmg-faces-scrutiny-approving-books-months/ (Accessed as on 17th April 2018).

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