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.