Importance of Key Audit Matter in Annual Reports: Case of Lehman Brothers

AUDITING & ASSURANCE

Audit
Executive Summary
It is important for the organization to project the key audit matter in the annual report because it
is directly associated with the process of decision making. Any negligence in this regard can
make the things worse as it happened in the case of Leman Brothers. The report is primarily
based on ASA 701 that is communication of the key audit matter to the users of the report. It is
being done by referring to the case of Lehman Brothers where the absence of ASA 701 led to the
downfall. The importance of KAM is projected in this report and the selected industry is mining
where four companies are selected and discussed in the light of ASA 701.
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Audit
Contents
Introduction................................................................................................................ 3
Key Issues Related to Auditing – case of Lehman brothers........................................3
Key Audit Matters....................................................................................................... 4
ASA 701 & its relationship with the audit report.........................................................5
Mining Industry........................................................................................................... 5
CSR Limited................................................................................................................ 5
BHP Billiton................................................................................................................. 6
Fortes cue metal group.............................................................................................. 7
Rio Tinto Limited........................................................................................................ 8
Recommendation....................................................................................................... 9
Conclusion.................................................................................................................. 9
References............................................................................................................... 10
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Audit
Introduction
Lehman Brothers attained a commendable position in the investment banking in the US
operating as an international bank. Lehman Brothers were regarded as one of the most reliable
banks in the United States until September 2008. The organization faced bankruptcy towards the
end of the third quarter of the year 2008 and therefore, declared itself as bankrupt and registered
for Chapter 11 Bankruptcy. There were several reasons attributed to the disintegration of the
company. The company failed to address the material risks and the auditors too didn’t bring into
the management’s notice about the consequences arising out of non-assessment of substantial
risks. Another possible reason behind the company’s bankruptcy could be the unprofessional
attitude of the auditors of the same (Wood, 2011). The auditors concealed key audit matters in
the financials of the company instead of disclosing them in their audit reports. This represents the
need for an organization and the auditors to adhere to all the accounting standards and auditing
standards.
Key Issues Related to Auditing – case of Lehman brothers
The auditors must have assessed the requirement of Repo 105 transactions for the company as
well as its utility in the financials of the same. Even the aforesaid company failed to procure
legal opinion from the United States firm pertaining to Repo 105 transactions. This signifies the
fact that this negligence was intentional on the auditors’ part in the exchange of monetary
benefits. The independence of the auditors of Lehman Brothers can be put into question. The
auditors of Lehman Brothers were paid a whopping amount of 29.5 million dollars for
conducting audit function in the company for the year 2007. This huge amount of payment made
to the auditors reflects the fact that the same must have been provided so as to conceal the
shortcomings of the company in its financials. The auditors were negligent enough towards
assessing the Repurchase 105 transactions opted by the company (Wood, 2011). The auditors
were required to assess these transactions so as to evaluate their effect on the financial ratios of
the company.
Lehman Brothers projected its equity at $22.5 billion and assets at $90 billion in the year 2007
that is the year prior to its disintegration. This area also reflects the presence of material
misstatements. Another KAM is the fact that the auditors offered a judgment so as to treat Repo
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