LSBM101 Auditing Assignment Level 4

Introduction

Auditing is the process of examination of an organisation's financial statements, records and books in order to demonstrate if they are accurate in accordance with any applicable rules (involving accepted accounting standards), regulations and laws (William, Glover and Prawitt, 2016). The main purpose of statutory auditing of books and accounts is to deliver an independent opinion to the shareholders on the trust and fairness of the complete financial statements whether they have been formulated in accordance with the companies act and reports by exception to the shareholders and other major requirements of company law. Present report is based on analysis of statements which is provided Mr. Medcraft, retired chairman of ASIC. Further, analysis of Satyam (India) company case is also accomplished to provide understanding about the purpose and audit reports issued for organisation. At last, roles of company's management and auditors in fostering ethical behaviour, stewardship and common good are also discussed by analysing the case of Satyam.

Main Body

Why do think Mr. Medcraft made the above statement? Discuss.

Auditors play a critical role in ensuring that the Australian investors will be confident and informed by organisation when making their financial investment decisions. Moreover, high quality of audit supports the quality of financial statements and enable investors to rely upon the independent assessment of financial reports (Hayes, Wallage and Gortemaker, 2014). From several years, there are various deviations have found in that Auditors reports related to some organisations. Some auditors have assured the misleading financial statements and accounts of organisations. Huge Window dressing was found in company's financial statements and auditors have provided their assurance for their financial benefits.

In the above statement, Mr, Medcraft has provided their concern about assignment help the level of trust that shareholders can have in financial statements that are meant to be assured by auditors. They have point out the risk which community from unethical behaviour of auditors by taking example of ENRON case. Statement was made to provide information to government about the threat that Australia could face due to misleading financial statements provided by organisation and assured by auditors. They need to provide an understanding that the poor auditing of corporate accounts will lead to financial crisis in the future for country.

Purpose and the audit reports issued for Satyam and extent to which audit report served the purpose it purports

The Auditor's report is considered as a disclaimer which is issued by either internal or an independent external auditors as an assurance service to enable the users to make investment on the basis of audit reports. It is considered as an essential tool which is used to report the financial information to users, particularly in business. According to Simunic, Ye and Zhang, (2017), the auditors reports are the basis for investors to make appropriate investment decisions and earn high return on investments. The purpose behind development of audit reports is to identify whether the financial statements of organisation are prepared in all material respect or in accordance with the requirements of applicable financial reporting framework as well as laws and regulations.

They are also developed for the purpose of accomplishment of accounting practices that include management's judgement and decisions. While making reports, auditors are responsible to ensure the adequacy of financial disclosures and also identify discrepancies in financial statements. According to Gaynor and et.al., (2015), main purpose of audit report is to determine whether the company's accounts are adequately described the applicable financial reporting framework. Conclusion are made on the financial statements by expressing an Audit opinion. These reports are mainly required by law if the organisation is publicly traded within an industry required by the Securities and Exchange Commission.

In this context, there are various types of audit reports was issued for the Satyam India by Auditors such as unqualified, qualified, adverse and disclaimer of opinion. Moreover, unqualified opinion is also considered as a clean opinion or report which is issued by either internal or external auditors to determine that whether each of the financial records provided by business is free of any misrepresentations or not (Doxey and et.al., 2017). It also points out that organisation has maintained its financial records in accordance with the standards.

Qualified report is provided in the situations when the organisation's financial records have not properly maintained in accordance with laws but no misrepresentations are identified. Moreover, the writing of this qualified opinion is as similar to that of an unqualified opinion. Further, adverse opinion is analysed as the worst type of financial reports which can be issued to a business. It reflects that financial record of firm is not in accordance with the standards. In addition to this, statements or records provided by company are grossly misrepresented. In this type of case, auditor needs to assure company to correct its financial statements and have it re audited because lenders, shareholders and business partners will not accept it.

In some situations, when the auditor is unable to accomplish an accurate audit report is known as disclaimer of opinion. This will also occur for various reasons such as absence of appropriate financial records. In this case, auditors are responsible to issue a disclaimer opinion, stating that an opinion of organisation's financial status could be determined. In case of Satyam (India), it is analysed that company has provided misleading financial statement in which high profitability was shown by organisation to attract the investors (AICPA, 2017). While having information about this, auditors have provided them assurance of unqualified opinion which stated that company records are maintained in accordance with GAAP accounting principles. There is no misrepresentation in the financial statements with an aim of getting financial benefits. Shareholders have made their investments at high prices and after that, company was suddenly liquidated. Major losses were caused to the community only because of the wrongful assurance which was provided by auditors to Satyam.

In this case, it was the responsibility of Auditors to identify the window dressing made by Satyam in their financial records and provide them an adverse opinion to change the financial statements. Adverse opinion was useful to prevent the users for making investment decision in organisation. Moreover, in determining the nature and extent to which the Audit report served the purpose it purports for Satyam (India), there is requirement some important Evidence such as risk, requires more judgement and critical analysis of Evidence. It is all about corporate governance and fraudulent auditing practices allegedly in connivance with the auditors and chartered accountants (Glover, Taylor and Wu, 2016). The Company misrepresented its accounts both in to its board, stock exchanges, regulators, investors and all other stakeholders. In present case, Audit report has not served its purpose because risk associated with conducting Audit or risk of material, Significant deficiency or important findings was mentioned properly mentioned by Auditors. Assurance was provided on the basis financial benefits which organisation has provided to its international and external four Audit organisation such as Deloitte, KPMG, PWC and Ernst.

Role of the company management and auditors fostering ethical behaviour, common good and stewardship in relation to Satyam

According to Anderson and et.al., (2017), management of every business enterprise has the responsibility to promotion ethical behaviours in organisation by analysing that there is not misrepresentation in their financial records. Auditors in the organisation is required to comply with the International Federation Of Accountants (IFAC) Code Ethical for professional Accountants such as Independence, integrity. Objectivity, Professional competence and due care, Confidentiality, professional behaviours and technical standards. Ethical behaviours in Auditing refers to providing freedom to internal auditors by organisation to point out the misrepresentation, discrepancies and incorrect information and getting independent opinion from auditors. As per the IFRS, it is essential for auditor of company to follow the accounting standards which are made by government while conducting Audit and providing their assurance. For the promotion of ethical behaviours, management needs to ensure that all the accounting standards and principles must be followed by investors (Arens, Elder and Beasley, 2014). It is also a misconception of organization that they have not provided their conception on agreement.

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Moreover, it is also important for the management to develop its financial statement without any discrepancies and analyse that they have to improve their business operations. For promotion of Ethical behaviour is important role committee is to oversight the company's financial statements reporting procedure and disclosure of its financial information to ensure that the financial statements is correct, sufficient and credible (William, Glover and Prawitt, 2016). They also need to provide them recommendation for the appointment, remuneration and terms of appointment of Auditors of the organisation. Moreover, Auditors also tends to analyse the changes in accounting policies and practices and reason for the same. Major accounting entries involving estimated which are based upon the financial statements arising out of audit findings. Common good refers to the benefits which is achieved by both stakeholders and organisation through ethical auditing of financial records.

According to Hayes, Wallage and Gortemaker, (2014), management plays an important role in fostering the common good between organisation and its stakeholders by analysing that they will provide proper amount of dividends to their shareholders and also provide actual and correct information about their profitability to their stakeholders. Through this, management will tend to raise the supports of its stakeholder in making investments in their business operations. It is also essential for organisation to get an effective analysis of financial statements which are prepared to influence stakeholder for making investment decisions. Management must not perform window dressing which implies to the action in order to improve the appearance of the organization's financial statements. In case of Satyam, Window dressing of financial statement was made by accountants of organisation on the instructions of management and employers. In their financial statements, they have showed their retained earnings as their current years profitability to increase the net profits (Kinney Jr, 2015). These major misrepresentation was wholly conducted with the consent of management, employees and owners which has resulted in major fraud that was identified by national stock exchanged when the firm was liquidated immediately.

No ethical behaviours was found in the management and Auditors who have provided them assurance of Unqualified opinion in which they have stated that financial records of organisations are correct and maintained as per standards of GAAP (Gaynor and et.al., 2015). Stewardship is the sign of good governance which is analysed as ethics that embodies the effective and responsible planning and management of company's financial resources. The concept of stewardship has also been applied to the environment of business and financial market. For promotion of ethical business operations, management of organisation plays an important by making their business operations free from any type unethical work culture and adaptation of ethical principles to carry out business operations (Doxey and et.al., 2017). Further, Auditors also plays important role in fostering stewardship as they are important parts of organisation and provide supports in increasing investment from market.

As per Simunic, Ye and Zhang, (2017), it is responsibility of Auditors to carry out an ethical analysis of company's financial statements and provide correct audit reports without implementation of any unethical practice. Implementation of ethical business practices in business will help the enterprise to regulate business operations effectively. It is also important for the management to develop its financial statement without any discrepancies and analyse that they have to improve their business operations. Auditors also tends to analyse the changes in accounting policies and practices and reason for the same.

Conclusion

In this report, it is concluded that Auditors plays an important role in fostering the ethical behaviour, common good and stewardship. Auditing is the process of examination of an organisation's financial statements, records and books in order to demonstrate if they are accurate in accordance with any applicable rules (involving accepted accounting standards), regulations and laws. Stewardship is the sign of good governance which is analysed as ethics that embodies the effective and responsible planning and management of company's financial resources. Auditors have to follow ethical principles while conducting audit of business enterprise and deliver correct report that helps the users to make accurate investment decisions.

References

  • AICPA, 2017.Statement on Auditing Standards, Number 126: The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern(No. 126). John Wiley & Sons.
  • Anderson and et.al., 2017. "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2013-009, Proposed Rule on Improving the Transparency of Audit: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor's Report of Certain Participants in the Audit: Participating Committee Members."Current Issues in Auditing8, no. 2 (2014): C1-C7.
  • Arens, A., Elder, R. and Beasley, M., 2014. Auditing and assurance services–An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of the AICPA Clarity Project, PCAOB auditing standards, the Sarbanes-Oxley Act, and Section 404 audits, 15.Aufl., Boston.
  • Doxey and et.al., 2017. "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form: Participating Committee Members."Current Issues in Auditing10, no. 1 (2015): C1-C10.
  • Gaynor and et.al., 2015. Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on IESBA Consultation Paper: Improving the Structure of the Code of Ethics for Professional Accountants: Participating Committee Members.Current Issues in Auditing,9(1), pp.C12-C17.
  • Glover, S.M., Taylor, M.H. and Wu, Y.J., 2016. Current practices and challenges in auditing fair value measurements and complex estimates: Implications for auditing standards and the academy.Auditing: A Journal of Practice & Theory,36(1), pp.63-84.
  • Hayes, R., Wallage, P. and Gortemaker, H., 2014.Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
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