A Business Failure

A business failure happens when a business is unable to repay its lenders or meet the expectations of its shareholders due to economic or business conditions, for example a recession, poor decision making, or unexpected competition or surprising rivalry in the industry. It is the risk that a business will fail financially and then will be unable to pay its financial obligations. On the other side, audit risk means the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, actually, they are materially misstated. As auditors are only have the ability to accumulate evidence on a test basis, and detecting well-concealed frauds can be a great level challenging, there is usually some risk that the auditor will not uncover a material misstatement due to fraud, even though auditing standards complied by the auditors.

When there is business failure, but no audit failure, statement users including business company staff and shareholders tend to claim that there was an audit failure. Worse happen if the statement determined as misstated, although auditing done in accordance with standards. Users expect to have audit failure, while auditor expect auditing done in accordance with standards. Thus, expectation gap occur in this situation. In can be said that, Business failure has its own audit risk, as it can increased because there is gap in expectation among them. Some of the risk is unwarranted lawsuits. Many auditors evaluate the potential for business failure in an obligation in determining the relevant audit risk.