Research On Audit Failure Based On Related Party Transactions

The 19 th and the 20 th National Congress of the Communist Party of China both emphasized that the economy need to achieve high-quality development,which put forward stricter requirements for the development of enterprises.Therefore,many enterprises carry out acquisition or merger activities to enlarge and seize market resources.The increasing number of related party relations makes the frequency of related party transactions increasingly higher.Due to the special relationship between related party relations,the transaction’s pricing between two or more related party enterprises is determined through self-negotiation,which is likely to be unfair.Under the pressure of shell protection or financing,some enterprises will take advantage of this feature to commit fraud in related party transactions.Because forms of related party transactions are diverse and hidden,so it increases the difficulties and risks of accounting firms in the audit of related party transactions,and the probability of audit failure.In order to continuously improve the quality of audit business and avoid the frequent occurrence of improper related party transaction events,it is necessary to deeply study the cases of related party transaction audit failure and analyze the causes of related party transaction audit failure,and then put forward the corresponding improvement suggestions.Based on the research of domestic and foreign scholars on related-party transaction and audit failure,this paper combines with the specific case of Lixin Accounting Firm in auditing related party transactions of Wuhan National Medicine,and made an in-depth analysis of the process,consequence and reason of this case.Then the paper puts forward methods to improve the audit of related party transaction and opinions to prevent the audit failure of related party transactions.Based on the study of related party transaction,related party transaction audit and audit failure at home and abroad,the paper sorts out the relevant definition of related party transaction and audit failure,as well as the characteristics,principles and objectives of related party transaction audit.Then,based on the principal-agent theory,modern risk-oriented audit theory and rational economic man theory,the paper adopts methods of literature research and case analysis to study the failure of Lixin Accounting Firm in auditing related party transactions of Wuhan National Medicine.By analyzing the problems existing in the audit process of the related-party transaction.It is concluded that there are two reasons for audit failure.Firstly,auditors used improper related party transaction audit methods,including lack of reasonable and appropriate audit plan.CPAs who over-relianced on enterprise internal control failed to find risks of internal control defects on related party transaction audit.The audit procedures of related party transactions were not strictly implemented when the revenue of the enterprise changes abnormally,and costs of the related party transaction audit were insufficient.Secondly,CPAs were lack of necessary professional ability.The specific performances were not familiar with requirements of related party standards in the audit process.They also didn’t obtain necessary audit evidence for the relationship with related parties and transactions,and maintain professional suspicion of abnormal situations,which led to the failure of audit of related party transactions.The paper takes related party transaction as the starting point to study audit failure.Firstly,it summarizes the characteristics and principles of related party transaction audit,and demonstrates the relationship between related party transaction and audit failure theoretically.Secondly,the paper studies the relationship between related party transaction and audit failure by specific cases.It is precisely because of the characteristics of related party transaction audit that audit procedures are not strictly implemented in practice and auditors’ professional quality needs to be improved,so audit failure is more likely to occur.Finally,the paper puts forward some suggestions to prevent audit failure of related party transactions from the corresponding perspective.It’s beneficial to improve audit quality for accounting firms and promote the stable development of securities market.