Auditing and Assurance: Evaluating New Standards and the Collapse of Lehman Brothers

This report evaluates the new auditing standards and the collapse of Lehman Brothers, highlighting the importance of auditing and transparency in financial reporting. It discusses the audit issues that may have led to the collapse, the connection between ASA 701 and Lehman Brothers, and key audit matters in the mining industry. Recommendations for improving accounting and auditing techniques are also provided.

Auditing and assurance

Executive summary
The following report creates a proper evaluation of the new auditing standards that be used by
the organization and also the situations that have led to the collapse of Lehman Brothers Limited.
By creating a clear analysis over the fall of the organization, all the factors will be exposed to the
public which will be beneficial for them to understand the importance of auditing and the details
that should be made transparent to the public. The report will suggest the auditing standards that
should be used when an organization for conducting proper business. It was found that the
auditing standards used by the organization were not effective in nature because of which the
financial position was doomed. This ignorance of auditing standard made the financial problems
of the company to increase and hence eventually it resulted in the collapse of the organization.
Auditing standard ASA 701 communicates the key audit matters that are to be insured by the
auditor in its report so that the actual financial position can be determined with the help of the
financial statements.
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Contents
Introduction.................................................................................................................................................3
Audit issues that may have let the organization collapse of Lehman..........................................................3
ASA 701 and Lehman brothers....................................................................................................................3
KAM in Mining industry...............................................................................................................................5
 BHP Billiton..........................................................................................................................................5
 Fortes cue metal group........................................................................................................................6
 Hawk stone mining..............................................................................................................................7
 CSR Limited..........................................................................................................................................8
Recommendation........................................................................................................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Introduction
It has been clearly stated in the Australian securities and investments commission act of 2001
that the organizations are needed to present various kind of financial statements like income
statement, balance sheet, statement of changes in equity and cash flow statement for recognition
of its total worth (Cappelleto, 2010). Hence, the financial reports of the organization should
make proper disclosures in the notes to accounts that a true and fair view can be generated by the
users of the financial statements. The organization should also try to be all its liabilities and
applications on time so that the director’s declaration is complying with all the rules and
regulations (Christensen, 2011). All the statement can be used by the shareholders or other
stakeholders of the organization for making reliable decisions on the basis of the report that is
been provided by the auditor. While making an evaluation of the financial accounts of the
organization, there are various risks that need to be asserted in order to remove their presence
from the statement of the company.
Audit issues that may have let the organization collapse of Lehman
The audit process that was carried out by the investment form was very weak and effective in
nature because of which the organization may have faced this collapse. One of the most
important purposes of auditing is to conduct a clear analysis of all the financial statements of the
organization so as to predict the foreseeable future and the financial position of the company
(Ruhne & Schmidt, 2108). The predicted values and outcomes can be used to ensure that the
investment decisions that are being taken by the organization are effective in nature (Christensen,
J., Kent, P., Routledge & Steewart, 2015). These decisions will also let the organization ensure
that the project that is being carried out by it will be beneficial for the company in the future.
Therefore, it can be stated that all these points were not being properly assessed by the auditors
while conducting the audit process on Lehman Brothers limited which may further result in the
organization to face potential collapse which was not addressed or detected in advance.
ASA 701 and Lehman brothers
The ASA 701 and the collapse of Lehman Brothers Limited are having a very strong connection.
The collapse of this organization resulted in a financial crisis that was observed by the nation
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because of which the application of ASA 701 communicating key audit matters was mandated in
the independent auditor's report. The new auditing standard will help the auditor to determine the
issues that were not observed by the accountants of the organization (Cohen & Simnett, 2014).
Any kind of vulnerable data present in the accounts of the organization is needed to be addressed
because of which this new standard was recommended. If this standard would have been used by
the Lehman Brothers Limited at the time of the collapse, then they would have been able to
analyze various communicating key factors that may have led them to observe this downfall. All
the key audit matters should be clearly mentioned in the audit report so that a proper analysis of
the areas constituting of high risk can be analyzed by the organizations and the investors. The
risks that are present in the mortgage market should be communicated so that any such collapse
can be avoided. The transactions that have been made by the organization should be carefully
analyzed which will further help to analyze the leverage ratios efficiently and reduce them as key
audit matters in the audit report. The repo transactions of the organization led to the rise in the
leverage ratios because of which they were restricted from making better strategic investment
decisions (Fazal, 2013). All the areas that consisted of management and auditors judgment
should be clearly stated in the accounting estimates that are related to the organization. The
application of this new standard will be a powerful tool for the investors because it will not only
provide them with additional information but will also help the organization to protect itself from
various internal frauds (Hoffelder, 2012).
The application of this new auditing standard helped the organizations to enhance and develop
their auditing reports because of which the regulations of international auditing and assurance
standards board have been given utter importance. This standard involves new features like:
• Presenting the key audit matters in the communication reports made by the auditors.
• Allowing the auditors to make decisions in relation to the key audit matters that are to be
included in the report (Horngren, 2013).
• Determining the authenticity or need of attention for the key audit matters that needed to be
assessed by the organization. The proper judgment of risk assessment and other events are also
presented in the auditor's report (Lapsley, 2012).
• The standard helps define the way auditor describes the key audit matters.
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• Presenting all the facts and figures in their actual value.
• Presenting other necessary documents which were not made transparent to the public
(Kaplan, 2011).
The application of ASA 701 will be done in the report of the company’s financial statements
after the period 15th December 2016. The major objective of the report is to increase the
confidence of the public on the financial statements of the organization so that more investors
can be attracted towards it (Kruger, 2015). This will also help the organization to provide
investors with:
• A true and fair view of the responsibilities of the auditors.
• The proper insight will be provided in terms of the audit matters that needed to be conducted
(IFAC, 2015).
The main objective in order to present better disclosures to the public is to help them for making
better decisions while making investments. The application of this new auditing standard will be
made necessary by the international auditing standards.
KAM in Mining industry
In order to analyze the annual reports of various organizations of the same industry, the mining
industry was chosen so that all the key audit matters can be analyzed according to their financial
reports. The analysis of the financial statements of the organization has been conducted on the
basis of the statements presented for the year ending 2017.
 BHP Billiton
Some of the key audit matters for mentioned by the auditors in the audit report which would
have created a great impact on the financial position of the company
Asset valuation
A clear evaluation of the assets of the organization was being done because it constituted about
72% of the total transactions of the group. Also, various kinds of material weaknesses were
present in the processes that were being conducted by the organization because of which the
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impairment of assets was not conducted properly. Therefore, it involved a greater focus so that
such valuations are not made vulnerable. A detailed comparison and analysis process was carried
out in order to test the key controls of the valuation of assets. Further, the commodity values
were also evaluated and forecasted after analyzing the valuation of assets of the organization.
Taxation
It is very important for an organization to ascertain the tax structure that is being operated over it.
Hence, it should be considered as a key audit matter because it will affect the operations in
various ways. The estimation of the cost of tax, contingent liabilities, and expenses should be
evaluated carefully so that the auditors are being provided with true and fair values (Moroney &
Trotman, 2016) Procedures like test key controls and tax analysis should be conducted by the
companies in order to improve the operations that are being conducted by them. The auditor
should also understand the consistency of the organizations to assess the values of various
transactions that are being made by the group in the particular financial period.
 Fortes cue metal group
Revenue generated from the sales of iron ore
It was observed in the year 2017 that the organization earned total revenue of $8335 million from
the sales of iron ore. Hence, this was considered to be as a key audit matter that involved the
significant need for the focus of the accountants and auditors of the organization. Proper audit
approach was used by them in order to focus on the non-cash adjustments that were made in the
revenue structure of the organization. Measurement of the professional sales conducted by the
organization and the income accrued by it in the particular financial year was also being assessed
again. Some of the promotional pricing adjustments were found to indulge in the commodity
data because of which the repayments obtained by the confirmations from the customers of the
group were affected.
Financing of ore carriers
The Organization was observed to invest in the financial contract that will help it to achieve the
goals in the future. In this contract, the organization will receive a refund of 234 million dollars
in the material form so that it can carry out the operations smoothly. The auditors and
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accountants stated that the transactions that are needed to be checked in respect to the cost
incurred by the organization so that any kind of financial arrangement for such funds is being
made previously by the companies (Ruhnke & Schmidet, 2014).
Carrying value of the evaluation and exploration assets
The total value of the assets recognized by the organization amounted to $813 million in the year
2017. The total recognizes value will affect the judgment of the public and also show the
exploration value of the assets will be categorized in different development departments.
Discussions were being held by the auditor in order to manage the group of the assets that were
being owned by the organization. A site visit was conducted by the organization to determine the
current status of the project that was being managed by your organization. After all the analysis,
it was found that these types of assets of the company require consistent checks in order to
determine their status.
 Hawk stone mining
In the initial stages of the company, it was observed that the natural resources exploration tasks
were carried out by it. In order to get its operations financed, the company depended on the
capital and the debt instruments. The organization required sufficient cash resources in order to
conduct all the tasks and operations that were being determined by it because of which it was
necessary for them to tackle the debts and the capital which have been accrued by them (Hawk
stone mining, 2018). The evaluation carried out by the directors was conducted in accordance
with the going concern concept so as to determine the expenditure and the cash flow requirement
of the company within the past 12 months.
Carrying value of mineral exploration and evaluation expenditure
Different type of expenses was being incurred by the organization while conducting the mineral
exploration and evaluation tasks. Sometimes, it is observed that the appropriateness of the
accounting criteria in respect to the capitalization of mineral exploration and evaluation
expenditure task may lead to a loss in the capitalized cost that is beyond the value in use. The
presence of search impairment triggers can be confirmed only after conducting a proper review
process (Hawk stone mining, 2018). Audit procedures that are defined by the organization
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should be used by every organization of the industry so that comparison of data can be made
easily. Audit procedures that are taking place in the mining industry include various analyses of
the projects and operations that are being conducted in the shape of mineral exploration and
evaluation expenditure tasks. All these operations are needed to be analyzed for the impairment
charges and other capitalization costs.
 CSR Limited
Product liability provision
A total provision of product liability amounted to 312.4 million dollars and is needed to be
assessed for various judgments. The complexity and the size of the provisions that were being
examined by the auditors were assessed independently but a need arises to get professional
advice from the external experts (CSR Limited, 2018). Various types of inquiries were made in
order to break down the liabilities of the organization and assuring the ethical nature of every
single transaction that was being conducted by the organization.
Asset valuation
The assets of the organization were recorded at very high values because of which the financial
statements of the organization were not depicting a true and fair view of the financial position of
the company. The inflation, growth rate, forecast changes, and other assumptions can also affect
the financial position of the organization (CSR Limited, 2018). This was hence observed as key
audit matters that were to be judged by the auditors for forecasting the future cash flow of assets.
Impairment tests were also to be conducted to determine the appropriateness of the models used
by the companies for the ascertainment of fair values of an asset.
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Recommendation
The poor accounting and auditing techniques that were used by the organization made the
process of communication very vulnerable in nature. The guidelines present in the ASA 701
clearly stated the importance of communication of key audit matters in the independent auditor's
report so as to manage the risks and policies. The auditors of the organization should ensure that
all the major matters are being communicated so that fair and true value of the financial
statement can be provided to the stakeholders and investors of the organization (Baldwin, 2012).
The audit process should be conducted ethically and responsibly so that constant monitoring of
values can be done by the regulatory bodies. In the financial statements of the organization,
Lehman Brothers Limited was evaluated properly then they may have been saved from
bankruptcy by taking strict measures. A proper legal framework for bailing out the organizations
from financial distress should also be made so that the company is kept free from risks.
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Conclusion
After making a clear evaluation of the Lehman Brothers Limited case it can be clearly analyzed
that poor and unethical auditing practices led to the collapse of the organization. This collapse
could have been avoided if proper key audit matters would have been mentioned in the audit
report of the organization. The application of the new auditing standard ASA 701 would have
improved the approach of the firm to make the financial statements. Further, this would have
also supported the regulatory bodies for conducting the process of supervision and monitoring
efficiently. Proper analysis should be made by the regulators so that any kind of unethical
activity can be detected in the financial institution
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References
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