A recent article in The Wall Street Journal reported a study 1 done by accounting researchers. They argued that over the last 20 years, auditors have changed their audit approaches and these changes make it less likely that auditors will discover misstatements by business executives. In the older style of auditing, the report argues, auditors looked at business transactions to determine whether they were recorded properly according to accounting rules. The new auditing methods, by contrast, focus on internal control. Relying on internal control documentation rather than reviewing transactions could catch misstatements by low-level employees, the researchers claimed, but corporate executives can circumvent internal control. This means that high-level misstatements are not easily discovered with contemporary audit procedures.
a. As you understand these audit techniques, what in each procedure could make it possible for auditors to detect misstatements that are generated by either low-level or high-level employees?
b. What aspect of the audit industry could be driving the decisions to concentrate on internal control documentation? Don't auditors want to discover misstate ments that originate among high-level employees?
c. Can you identify problems in the business environment that could contribute to misstatements? How should the auditor respond to these problems?