Question

From business accounting audit class:
One way of getting accounting expertise onto audit committees is to recruit ex-audit firm partners and/or employees onto the board of directors. However, appointing former audit firm partners to boards and audit committees raises independence concerns, and Canada Business Corporations Act States that a retired partner must not take on a senior role at an audit client’s firm for one year after retiring.

An article by V. Nalker and D.S. Sharma provides evidence that financial statements are of higher quality when former audit partner are on the audit committee and raise doubts about the benefits of a rule limiting their recruitment.

Briefly explain how these accounting experts could help or hinder the audit process and thereby have an impact on the quality of a company’s internal controls and financial statements.
Your answers should include both positive and negative aspects.

Answer 1

Briefly explain how these accounting experts could help or hinder the audit process and thereby have an impact on the quality of a company’s internal controls and financial statements.

Answer:-

Former audit partners might be recruited by the client in order to help the audit process by:

improving their systems and financial statements based on the ex-auditors intimate knowledge of good control systems and financial reporting.

However, they could also be recruited and hinder the audit process by:

encourage the audit firm to be soft on their friends,

use the expertise of the former auditors to get around the system, that is, they know what the auditors will be looking for in terms of red flags and thus better able to hide the problems,

Share their knowledge of audit sampling methods could be used to hide errors in items that are not likely to be sampled.