Key Audit Matters and Auditing Issues: A Case Study on Lehman Brothers and ASA 701

AUDIT & ASSURANCE

ASA 701 - KAM
Executive summary
The paper strives to provide a strong study on the Key audit matters and auditing issues that
led to the downfall of Lehman Brothers. The following report sheds light on the major
reasons that attributed to the untimely demise of Lehman Brothers as well as the new auditing
standard ASA 701 that makes it mandatory for the auditors to make adequate disclosures of
KAMs in their audit reports. The report will also further discuss the conventional auditing
standards and what paved ways to the new auditing standard ASA 701. The mining industry
will be studied in the light of ASA 701 and will be done though the selection of eight
different companies listed on the ASX so as to get the overall structure of the industry.
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ASA 701 - KAM
Contents
Introduction............................................................................................................... 3
Audit failure in the case of Lehman Brothers......................................................................3
Communication of Key Audit matter – ASA 701.................................................................4
 Mining industry Analysis through analysis of different companies.....................................5
 BHP Billiton........................................................................................................ 6
 Hawkstone mining................................................................................................ 6
 Metals Bank Limited............................................................................................. 6
 CSR Limited....................................................................................................... 7
 Fortescue metal group............................................................................................ 7
 Evolution mining.................................................................................................. 8
 CSR Limited....................................................................................................... 8
 Alumina Limited.................................................................................................. 8
Industry.................................................................................................................... 9
Conclusion.............................................................................................................. 10
References.............................................................................................................. 11
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ASA 701 - KAM
Introduction
Lehman Brothers Limited was one of the leading banks in the US and therefore, the
disintegration of the same shook the entire nation. The company collapsed in the year 2008
after it became insolvent. The disintegration of the company was highly due to the negligence
of the management and auditors towards the assessment of underlying risks and providing
disclosures on KAMs in the audit reports. The failure of Lehman Brothers was also on
account of the auditing issues. The auditing practices in the company were inappropriate.
Auditing is performed so as to assess the accuracy of books, statutory records, accounts,
vouchers and other documents maintained by an organization. Auditing helps an organization
encountering and getting rid of errors or frauds underlying in its documents.
Audit failure in the case of Lehman Brothers
An investor is more pleased with an organization that shows a sign of profound audit work.
Auditing also forecasts the financial performance of an organization for the upcoming years
which is very useful information for such investors who are willing to invest in a company’s
equity. However, the audit conducted in the aforesaid company seems weak and ineffective
as its auditors did not forecast the financial future of the same. The company suffered huge
losses from making huge investments in the housing industry. The management of the
company without any evaluation and research invested a huge sum of money in the housing
industry and for this very purpose, a heavier amount was also borrowed. The housing
industry collapsed in no time and therefore, the company suffered from severe losses. Such
vital information was not provided by the auditors in their audit reports which misguided the
investors to a huge extent.
The leverage ratio of the company was 31:1 in the year 2007 which was way higher than US
standards. This means that the company was into heavy borrowings while its revenues
remained almost the same. The auditors did not project this information in their audit reports
even after being aware of the criticality of the same. The company went for Repurchase 105
and 108 transactions (Viney, 2010). This means that the organization opted for over-
collateralization of 5% and 8%. The company opted for Repo 105 and 108 transactions so as
to conceal its high leverage. These transactions boomed the company’s balance sheet by $ 50
million. The auditors of the company neither alert the management of the consequences of
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