Skip to main content

Free market and unaudited financial statement (BAFI) under low audit fee model

 1. Financial Reporting aims to solve Information asymmetry through quite extensive disclosure about financial information. BAFIs are listed companies. They are required to disclose financial information publicly. 

2. BAFIs pool majority of finance from general public and invest them. Contribution of shareholders in financing is not majority and they are in control of all the funds. They have a great incentive to mislead other shareholders and economy as they are not the major contributors but benefit from all the fund of general public.

3. Due to greater incentive of BoD of BAFIs to create information asymmetry, auditors should not only focus on management override of control as required by ISA 240 "THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS" but also focus on BoD and its incentives to override control system and financial information disclosed. One may argue that BoD is not involved in day to day operation of BAFIs, it will be same as saying Prime Minister does not run Ministries. BoD as TCWG is quite untouched by auditing standards. Or positively we may say it is impossible to audit if BoD itself is involved in malpractice. But reality does not run as we wish, because some model say it is required to be so. 

4. Given low Average price of auditing service (external audit) of BAFIs will not be that much encouraging to use greater capital (eg. CAAT) nor to use CAs leading to use of lower time period of trainees to audit huge volume of BAFIs transactions, especially interest income and interest expense and off balance sheet items. 

5. Mathematically it will be impossible to give reasonable assurance on lower audit fee. Sampling increases the audit risk, lack of systematized internal control system already place high control risk, and interest income is included by ISA as high risk (also must be considered for fraud risk), and as discussed above BoD as TCWG is quite free from ISA and has greater incentive for information asymmetry, all leads to requirement of specialized work force and use of capital (eg. CAAT) to audit BAFIs.

6. Given the lower audit fee and impossibility to give a reasonable assurance on FS, FS will be as good as unaudited and unaudited FS is of no use in Free market. 

7. Hence, Audit Fee model of BAFIs with  lower average audit fee will not yield any good to the free market economy. Economy may not be comfortable with collapse of any of BAFIs, and unaudited country, society and corporation as show in the book The Reckoning by Jacob Soll is sure to fall and fail. 

Comments

Post a Comment

Popular posts from this blog

Averaging practice in stock market and Liquidity problem in Banking

Investors in equity market (secondary) are quite familiar with averaging practice of prices. When a stock of higher cost was already purchased but the prices drop down, then purchasing stocks at lower prices (must be probable to gain some increment in those latest prices) will average the per unit cost and given increment in latest prices but lower than previous prices till make loss over previously purchased stock lesser loss making. Now, thinking the institutional capacity of banks and financial institutions and production and distribution capacity of national economy, given flood of remittance, there must be a lag in mobilization of funds through banks. Thereby keeping interest rate at lower side till national economy's capacity to produce and distribute gets increased. However, let's imagine a scenario where funds are ever demanded and loans are distributed at higher cost. Deposit rates are increased in the name of liquidity problem or liquidity premium is so high that retu...
Post a Comment
Read more

Hindu Jurisprudence- Smriti And some property law

I just don’t have the energy to write against the popular teaching (perhaps I have read the wrong books) that Hindu jurisprudence is contained within the Smriti, mainly the Manusmriti, and the property systems of the two schools — Mitakshara and Dayabhaga (I forget which region each school belongs to). But these are laws, not jurisprudence. I admit I do not know the subject of jurisprudence deeply — such a tragedy — but it seems to me these were laws made for the time and place according to the wisdom of the sages of that era. The Smriti writers themselves clearly said that the source of their understanding is the Veda. So, anyone who wants to understand exactly what truth Hindus hold must study the Vedas. Those who cannot may go through the Upanishads (major texts distilled by sages to teach the essence of the Jñāna part of the Veda). Those who still find that difficult may turn to the Mahabharata (which is in itself a “great battle” to understand), or they may study Mīmāṁsā, Nyāya-śā...
Post a Comment
Read more

Usha

I bow down to mother Vindhyabasini/Brindabasini/Bindubasini whose grace and affection alone uplift unbearable pain of this life/ignorance. Nobody but Guru Gorakhnath is my Guru but am not that fortunate to get knowledge from himself. Neither read anything written by him.  During the discussion with few wise men it suddenly occurred or reiterate the already obtained knowledge of unreal nature of thoughts. However, this just helped to connect Usha with Savitur and once again ignite enthusiasm to write meaning of Gayatri Mantra. First line is dedicated to three kind of Jagat or realities excluding Om (which is not a wise thing to do but Om itself contains 3 Jagat and one last supreme reality so it is waste to discuss other line after explaining Om). First one is almost 16 hours a day i.e. waking state where we gather all information and act upon them. Second is dream state which is in its concrete form is 8 hours a day, unknown processing of information gathered during waking state. 3...
Post a Comment
Read more