Discussant's response to audit detection of financial statement errors;

              Discussant's Response to
Audit Detection of Financial Statement Errors
William F. Messier, Jr.
University of Florida
The recent competition among public accounting firms for clients has forced them to find more efficient ways to conduct audits. The methods chosen to improve efficiency, however, must be as effective as the old methods in detecting error or auditors must be willing to accept higher levels of risk on their engagements. The results reported in Hylas' paper (and which are based on the study by Hylas and Ashton1) provide many insights for practitioners and present some interesting areas of research for academicians. In particular, this study provides valuable information on how auditors can more efficiently and effectively conduct audits.
In my discussion I will first address some specific areas of the study that are particularly interesting and informative. Secondly, I would like to comment on Hylas' scenario for an effective and efficient audit.
Specific Areas of Interest
In this section I would first like to address two specific results that may have a significant impact on the way audits are presently conducted. I will folow this with a subsection which contains a number of miscellaneous comments.
Personnel Related Problems
The result that surprised me the most was that the auditors who participated in the study "attributed a great many errors to various personnel problems, including employee turnover and inexperience, time pressure, carelessness, and even incompetence." Relatedly, a large number of errors resulted from a lack of accounting knowledge by client personnel. There are some serious implications for accounting control from such findings. SAS Section 320.30-.48 outlines the basic concepts or elements of internal control. Of all the concepts listed in those standards, the most critical element to the internal control system is competent and trustworthy personnel. This results from the fact that even if all of the other concepts of internal control (e.g. segregation of duties, execution and recording of transactions, etc.) are present, incompetent personnel can destroy their effectiveness.
Does the fact that a large percentage of errors are caused by personnel problems pose difficulties for the auditor? My inclination is that it does. This is based on the belief that it is difficult for auditors to assess personnel related problems ex ante (i.e. early in the audit). Certainly, employee turnover and inexperience should be "red flags" to the auditor, but judging the competence
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