An Analysis Of Audit Failure Of CPA

Since the CPA industry started reconstructing in the1980s, the size and scope ofits business is expanding with each passing day. Then the establishment anddevelopment of China’s capital market provides a broad space for the industry’sfurther development. So far the CPA auditing has become one of the indispensableparts of social supervisory system in our country, playing an ever-important role in it.However, with the vigorous development in the CPA industry, the shocking qualityproblems are exposed. In recent years, the financial fraud and related auditing failurecases occurred frequently in the listed companies, which will not only bring hugelosses to investors, but also make CPA’s role as economic police questionable.Therefore, the CPA industry is now suffering an unprecedented reputation crisis. Sothis paper is aimed to analyze the cause as well as the coping strategy of audit failure.The first part of this paper includes three contents. Firstly it writhes about theresearch background and significance of this paper. Secondly it introduces theresearch methods and basic concepts as well. Thirdly it discusses the literature onaudit failure by domestic and foreign scholars. The second part summarizes the auditfailure theory, gives the definition of audit failure and analyses the relationshipbetween the audit failure and clients’ fraud, CPA’s fault, business failure as well asaudit risk. Based on the commission and agency theory and rational-economicassumption, the paper puts forward the theoretical basis of audit failure.The third partof this paper analyzes in details the reasons for audit failure.The external andobjective reason is that the demand of auditing service is insufficient in the market,and the laws is imperfect and the regulation is not enough. The internal andsubjective cause is that accounting firms and CPAs lack the awareness of audit risk,with low level of professional skills. And the internal control mechanism in auditedcompanies is imbalance. The fourth part focuses on the case study of the Green EarthBiotechnology co.,LTD to discuss about the specific circumstances of financial fraud.On this basis, this paper tries to explain the cause of audit failure from the perspectiveof CPA and the auditees’ internal controls. First of all, the listed companies havesubjective intentions that they take the fraud deliberately. Secondly, it is CPA’s lack ofcaution in business that internally cause audit failure. The last part of the paper isdesigned to put forward the corresponding policy recommendations to avoidaudit failure in terms of standardizing audit environment, bettering corporate governance, speeding up auditing firms’ reform and improving the quality of CPA.