Mrs

In current economic environment, business risks result from intensified market competition may force the

dishonest management of the entity to commit financial fraud. Such risks may arise from: (1) Industry

developments and consequent potential business risks that entity does not have the personnel and expertise to deal

with the changes in the industry; (2) New products and services, and consequent potential business risks that there

is increased product liability; (3) Expansion of the business, and consequent potential business risks that the

demand has not been accurately estimated; (4) Current and prospective financing requirements, and consequent

potential business risks on loss of financing due to the entity's inability to meet requirements, etc.

Moreover, poor corporate governance provides management opportunities to override controls and commit

fraudulent financial report. Although China has experienced a process of corporate reforms for more than 10 years,

but the external and internal mechanism of corporate governance is still far from efficient, thus a phenomenon

exists, namely, "strong management and weak supervision". Therefore, in order to manipulate the profit and

mislead financial statements users' judgment about the entity's performance or profitability, fraud may involve

sophisticated and carefully organized schemes designed to conceal it.Audit failure occurs when there is a serious distortion of the financial statements that is not reflected in the

audit report, and the auditor has made a serious error in the conduct of the audit (Arens, 2002). Audit failure does

not occur if the auditor has followed Generally Accepted Auditing Standards, regardless of the fairness and

accuracy of the financial statements. A properly done audit does not guarantee that serious distortions of the

financial statements have not occurred. However, a properly done audit does make serious distortions unlikely.

Thus, audit failure cannot occur unless there is serious auditor error or misjudgment.

The nature of this auditor error has four systematic causes. First, the auditor can blunder by misapplying or

misinterpreting GAAS. Such a blunder is unintentional and could be caused by fatigue or human error. Second,

the auditor can commit fraud by knowingly issuing a more favorable audit report than is warranted. This may

occur when the auditor accepts a bribe or bows to client pressure or threats. Third, the auditor can be unduly

influenced by having a direct or indirect financial interest in the client. Fourth, the auditor can be unduly

influenced because of having some personal relationship with the client beyond what is expected in a normal audit

between independent parties.

3. The countermeasures of audit failure

It is urgent to take measures to cope with the severe situation of audit failures. Some are suggested as

follows.

3.1 Maintain independence

The value of auditing depends heavily on the public's perception of the independence of auditors. It is not

surprising