The Audit Contract Design

Enron one of the world first 500 strong company, was bankrupted in 2001. Along with Enron Corporation, Arthur Andersen who was responsible for Enron Corporation's financial report auditing was disbanded.Then thanks to a series of audit failures and corporate fraud cases, people raised questions about the current audit contract, and deeply disappointed by the integrity of auditors and the quality of audit services.In this paper through the studying of the problem of our audit contract and their reasons,we expect to be able to find an effective way to improve the audit contract. We proposed a new idea of designing the audit contract under the financial statements insurance,and then we design some special problem and implementing mechanism for the contract. The existing audit contract is based on the accountability of owners and managers.The accountability contains audit clients, auditors and the audited persons who are interdependent and mutually constraining with each other. The relationship between the audit client and the audited is the based relationship of the audited contract, called "Basic contract", the relationship between the audit client and the auditor is the main body of the audit contract, called "main contract",and the one between the auditors and the audited is referred to as"ancillary contract".The "Basic contract" is the basis for the other two contracts, and the "Main contract" can decide "ancillary contract." In our country due to the "Basic Contract" variation, the people who require the company's true financial reports were excluded from the ranks of the audit client, cased the absence of the audit client. The vacancy caused the "Main Contract" changed. In this case,the audited has control over the auditor, hold the right to hire auditors and price audit services.And so,it will form a special economic relation between the auditors and the audited which will be placed auditors under the audited manipulation,so that to guarantee the independence of auditors become difficult.In addition. Under the existing audit contract, there are.still many problems in China's audit market,for example, audit supervision disorder,Audit service quality is difficult to judge and so on. For the above problems and their reasons,we introduce the financial statements insurance of Professor Joshua Ronen to seek an effective improvement of the audit contract.The financial statements insurance transfers the right of consigning auditors to the insurance company, which will insulate the auditors and the audited people and improve the "Basic contract" variation.As the insurance company has a huge liability for investors, so,in hiring the auditor,will choose the auditor who can supply high quality services.The financial statements insurance is able to contribute to the healthy competition. In this paper, we proved that the financial statements insurance is a medicine to solution the nature deficiencies of the audit contract.In the perspective of financial statement insurance,because the insurance company, the original tripartite audit party now become four, the original tripartite audit party now become four, Audit contract are all different in content and implementing mechanism.In the financial statements,Audit client in existing audit contract will be changed, also,there exist the period matching problem between the insurance and audit content. In addition, the thesis design the performance of financial statements insurance mechanism, we think that financial statement insurance is more suitable when use the public bidding system USES. Through this way,the certified public accountants can be screened.Two aspects should be mainly concern in the performance of audit contract mechanism, one is credit mechanism of certified public accountants,the other is the breach of legal responsibility,It is considered in this thesis that fault presumption of responsibility should be more suitable for financial statements insurance.This paper is made of five parts, the following is the Introduction of each parts:PartⅠ:Introduction, This part introduces the research background of this article, and cases of audit failures home and abroad that raises the independence of the audit contract and audit concerns, which led to the view of financial statements insurance.And overviews the documents of existing audit contract and financial statements insurance as well.And advance the ideas and research purposes of this study.PartⅡ:Introduction of China's existing audit contract problems--difficulty in guaranteeing the independence of the audit,Missing of principal part of Audit commission audit market supervision and confusion,difficulty in judging the quality of audit-service,and so on.To analyze the problem of the audit, we can see that the main reason is the variations of audit of our contractual relationship of "ground-breaking contract."---audited person is a de facto audit client who pay auditor commissioned auditors to audit their own which form a paradox.The variation of "Ground-breaking contract" leads to the variations of "subjectivity contract" and "ancillary contract". In this study, the author account that the view of Professor Ron in financial statements insurance can be a fundamental solution to the current issue of the audit contract.PartⅢ:Analyzing the improvement of financial statements insurance to the audit.In the institution of financial statements insurance, insurance company were introduced to replace the audited person as the audit client, which·Split the interests between auditors and audit of association, to maintain the independence of auditor. Furthermore the author use the institutional economics property rights theory to analyze the external effects of Audit Contract under the financial statements insurance, as well as the improvement of financial statements insurance to the audit.PartⅣ:The Design of the audit contract under the institution of financial statements insurance. The main contains in this part is a brief analysis and design to the specific problems in audit contract under the institution of financial statements insurance,including the question of compensation insurance and the arrangements of audit duration.PartⅤ:The Design of the performance of the audit mechanism under the institution of financial statements insurance,including the design of Contracting Mechanism, Compliance mechanisms and Control mechanism. In the contracting mechanism, the major concern is the bidding system.And in the compliance mechanism, the major concern is the introduction of the credibility of the audit mechanism and the design of legal mechanisms. Part VI:Summary and inspiration.The paper mainly includes the following innovative points:First,quoted the point of audit relationship to explain the defect of the existing audit contract.Second, in seeking to improve the audit contract,this article introduces the idea of financial statements insurance. And described the improvement of the existing audit contract under the financial statements insurance combined with audit contract relationshipThird, to design the special problem and implementation mechanism of the audit contract which under the financial statements insurance.In the design we consulted institutional economics,contract economics,and the related laws to define the property right problem of audit contract, propose bidding system in the process of contracting, the audit fault presumption responsibility in the process of default and proposed prestige mechanism in the process of implementing.