A Case Study On Audit Failure By Da Hua Certified Public Accountants

With the continuous development of China's capital market,investors pay more attention to the quality of accounting information,the demand for certified public accountant audit is increasing,accounting firms start to bear increasing amount of responsibilities.However,in recent years,the financial fraud of listed companies has been emerging,and audit failure cases have occurred frequently.This not only affects the credibility of accounting firms,but also disrupts the normal economical order,and brings a number of negative effects on the healthy development of China's securities market.In this context,how to improve the quality of audit and reduce the occurrence of audit failure has become an urgent problem to be solved by the audit industry.As an established local accounting firm,Da Hua has been ranked among the best in the industry.However,in recent years,Da Hua certified public accountants and its branches across the country have been exposed to a variety of negative news,including the influential Zhang Zi island incident,and the Xin Da Di IPO audit failure that was fined by the China Securities Regulatory Commission.The author chose the case of the audit of Jia Dian Holdings by Da Hua certified public accountants.Da Hua certified public accountants provided audit services for Jia Dian Holdings from 2013 to 2015,but failed to find the falseness in the financial report.Thus,it was severely punished by the China Securities Regulatory Commission in July 2018.This paper is relying on the principal-agent theory and the modern risk-oriented approach,and using the method of combining the literature analysis method with the case study approach to examine the case.First of all,through the analysis of issues Da Hua certified public accountants experienced in this audit failure,the predominant issue was failed to find the abnormal fluctuations in the sales costs of Jia Dian's shares,and failed to detect the falsification of business costs and sales costs in its financial statements.Therefore,focusing on these problems,the root cause of this audit failure is analyzed from three aspects.The first is that auditors fail to gain insight into the units under review during the risk assessment phase,to perform effective audit procedures during the risk response phase,and to the failure of their professional competence.Second,from Da Hua certified public accountants' perspective,its business quality control review procedures are ineffective,lack of independence,and quality control on the branch's activities by the head office is inadequate which accelerated the failure of this audit.In addition,the current situation of industry supervision also has a certain impact on the failure of the audit,including imperfect regulatory system,low non-compliance costs and adverse market environment.Finally,according to the reasons for the above listed audit failure,a detailed proposal is put forward to prevent audit failure.Auditors should strengthen their understanding of the units under review,strictly implement audit procedures and improve their professional quality.Da Hua certified public accountants needs to pay attention to the quality control of audit business,maintain the independence of audit,its head office should strengthen the quality management of the branch.Relevant regulatory authorities should strengthen the supervision and oversight model,raise the cost of non-compliance by CPAs and accounting firms,and improve the current market environment.It is hoped that the research of this paper can provide some reference to how to prevent future occurrences of similar audit failure of Da Hua certified public accountants,and play a role in improving the audit quality of the securities market and perfecting the audit practice environment.