Audit, Assurance and Compliance

This article discusses the responsibilities of auditors and provides recommendations for effective auditing practices. It also highlights the root causes of audit failures.

Running head: AUDIT, ASSURANCE AND COMPLIANCE
Audit, Assurance and Compliance
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Recommendations and root causes:
The responsibility of an auditor is to conduct an audit in a manner suitable to verify the
financial statements of an organization in a neutral manner to provide an independent opinion on
these statements. In the famous judgment in Kingston Cotton Mill Company, Justice Lindley
said that the auditors are only watchdog and not blood hounds. However, they must keep their
eyes open to the possibility of fraud and carry out all necessary substantive and analytic
procedures to ensure that the financial statements are free of any material errors. In case any
material errors exist within the financial statements the auditor must state the same along with
their impact on the financial performance and position of the company as disclosed in the
financial statements of the company. The financial statements should not be materially misstated.
Thus, auditors are mainly responsible to conduct an independent and thorough verification of
financial statements of an organization, Sampo Japan Insurance Inc. in this case to express an
independent opinion on the financial statements (Thomas and Purcell, 2018).
In this case the fact that Deloitte has failed to discharge its duties as the Auditor of the Japanese
Insurance company was quite clear from the above discussion. However, the huge loss suffered
by the Japanese company amounted to $3.5 billion is not only due to the inability of the auditor
to discharge its duties properly. Consequently, the penalty imposed on the audit firm to paid
compensation to the Japanese company also was significantly less at mere 7.14% of the expected
compensation by the company. The failure on the part of Deloitte was more than clear from the
facts of the case however, the management of the company also failed to take necessary steps to
ensure the company does not end up losing significant amount of fund due to the improper and
inaccurate reporting. The actions of Deloitte and Touch in fact end up abetting and aggregating
to failure of disclose the financial performance and position of the company in the financial

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statements. Considering the importance of auditing in today’s competitive business world the
following recommendations are made to the auditors to discharge their responsibilities
effectively (Thomas and Purcell, 2018).
Audit program: Firstly, the auditor should have an effective audit program in place. In this case
Deloitte must have had an effective audit program in place before proceeding to conduct the
audit of the Japanese company (Shamin, 2016).
Understanding organization and its environment: The auditor needs to understand the entity and
its environment such as the nature of business operations carried out by the entity and its
environment. This will help the auditor to prepare an effective audit program to conduct the
audit.
Professional competence: Professional competence is the key to an effective audit. The auditor
must have necessary qualifications and competence to conduct audit of financial statements. The
audit team must have people with appropriate qualifications required to conduct an audit.
Substantive and analytical procedures: All necessary substantive and analytical procedures shall
be carried out by the auditor to find out whether there is any material error that exists in the
financial statements of the company.
Auditors should not be negligent: Often auditors have found to be negligent in their behaviours.
In fact most of the cases against the auditors are only on the issue of negligence. The auditors
should not be negligent and shall carry out all necessary procedures to ensure required evidence
are collected on the basis of which the auditor can assess the true and fair nature of the financial
statements (Holm, Langsted and Seehausen, 2011).
Root causes:

3AUDIT, ASSURANCE AND COMPLIANCE
The root causes for the failure on the part of Deloitte to conduct an effective audit of Sampo
Japanese Insurance Inc. are outlined below.
I. Lack of planning and program to conduct the audit.
II. Lack of understanding of the company and its operations.
III. Negligence on the part of the auditors.
IV. Substantive and analytical procedures used were ineffective.
V. Lack of communication between the audit team members.
VI. Lack of knowledge and skills among the team members of the audit committee.
VII. Lack of evidence collected to ascertain the true and fair representation of financial
performance and position of the company in its financial statements.

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References;
Holm, C., Langsted, L. and Seehausen, J. (2011). Establishing Proactive Auditor Responsibilities
in Relation to Fraud: The Role of the Courts and Professional Bodies in Denmark. International
Journal of Auditing, 16(1), pp.79-97.
Shamin, D. (2016). Audit of the risk management system in order to increase its
effectiveness. Effective crisis management, 4(6), pp.76-81.
Thomas, K. and Purcell, A. (2018). Local Government Audit Committees: A Behaviour
Framework for Effective Audit Committee Performance. Australian Accounting Review, 2(3),
pp.12-39.
Van Linden, C. and Hardies, K. (2018). Entrance requirements to the audit profession within the
EU and audit quality. International Journal of Auditing, 22(3), pp.360-373.