ACCT300: Satyam Computer Audit Report and Ethical Evaluation

This report analyzes the auditing practices and ethical responsibilities of both the management and auditors in the context of the Satyam Computer scandal. It examines the reasons behind G. Medcraft's concerns regarding auditor trustworthiness and evaluates the purpose and effectiveness of the audit report issued for Satyam Computer. The report also assesses the roles of the company's management and auditors in fostering ethical behavior, stewardship, and upholding the common good, highlighting the ethical lapses and failures that contributed to the company's downfall. The analysis points out the non-compliance with auditing standards and principles, leading to a failure in conveying the true financial health of the company, and the involvement of both management and auditors in manipulating financial information.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

1AUDITING
Table of Contents
Introduction........................................................................................................................2
Question 1..........................................................................................................................2
Reason behind the Statement of G. Medcraft...............................................................2
Purpose and Audit Report of Satyam Computer...........................................................4
Extent of satisfying the Audit Purposes.........................................................................4
Question 2..........................................................................................................................5
Management’s Role.......................................................................................................5
Auditors’ Role.................................................................................................................7
Conclusion.........................................................................................................................9
References.......................................................................................................................10

2AUDITING
Introduction
There are different factors contributes to the overall success of the business
organizations and Auditing is considered as one of them. The correct conduct of audit
operations helps in conveying the actual financial position of the business entities to
their major stakeholders (William Jr, Glover and Prawitt 2016). Thus, the process of
auditing involves in the inspection of the financial statements of the business entities in
order to make sure that they are free from material missstements. Stakeholders like
investors, creditors and others make investment related decisions by putting trust on the
financial information of the companies based on the auditor report. Hence, it is the
utmost priority to the auditors to conduct the audit operations by complying with all the
required auditing and ethical standards (Leung et al. 2014). This report takes an honest
attempt to analyse and value the roles and responsibilities of the auditors by referring
the case of Satyam Computer. The collapse of one of the major companies in India,
Satyam Computer, is famous for the misconducts of the auditors and the management.
The aim of the first question of this report is to analyse the purpose of audit report. The
aim of the second part of the report is to analyse the role of both the auditor and the
management of the companies in the process of auditing.
Question 1
Reason behind the Statement of G. Medcraft
From the provided article, it can be seen that G. Medcraft has some major
concerns about the auditor’s roles and responsibilities at the time of the audit operations

3AUDITING
(abc.net.au 2018). Mr. G. Medcraft is the former chainman of Australian Securities and
Exchange Commission (ASIC). The statement of G. Medcraft sounded like a warning
for the Australian accounting authorities related to the misconduct in the roles and
responsibilities of the auditors (abc.net.au 2018). According to him, the users of
financial information are facing difficulties in putting trust on the financial statements of
the business entities (abc.net.au 2018). In this context, it needs to be mentioned that
the auditors are needed to perform certain roles and responsibilities while conducting
the audit operations. The auditors are majorly responsible to plan and perform the audit
operations for the business entities so that they can obtain enough audit evidence in
order to make sure that there is not any material missstements in the financial
statements (Sanderson 2013). If the auditors encounter any material missstements,
then they are responsible for obtaining evidence to know whether fraud or error is
responsible for this or not (Knechel and Salterio 2016).
As a part of the responsibility, the auditors must follow the standards of
Accounting Professional & Ethical Standards Board, APES 110 as it provides all
the ethical standards and principles for the smooth conduct of the audit operations
(apesb.org.au 2018). According to G. Medcraft, the auditors are majorly lacking
professionalism and professional scepticism while performing the roles and
responsibilities. Moreover, G. Medcraft put emphasis on the fact that there is a need for
improving the auditing standards from the side of the big four audit companies in
Australia. He added that the present situation could lead to another Enron kind of
scandal in Australia (abc.net.au 2018). Thus, as per the above discussion, in order to
gain trust on the financial information from the users, the auditors are required to

4AUDITING
comply with the auditing standards and principles. These are all the reasons for the
statement of G. Medcraft.
Purpose and Audit Report of Satyam Computer
The presence of some major reasons can be seen behind the preparation of the
audit opinion and these reasons are applicable for Satyam Computer. Through the audit
report, the auditors provide their written opinion about the financial situation of the
business entities and thus, it needs to be prepared as per the required format. The main
motive behind the issue of audit opinion for Satyam Computer was to inform the
auditors with the view about the financial position of the company (Christensen, Glover
and Wood 2013). The major users of the financial information of Satyam Computer
were creditors, lenders, banks, investors and others and the main reason for acquiring
financial information was to get assistance in the decision-making process. The issued
audit report of Satyam Computer by Price Waterhouse Cooper (PwC) has no mention
about any material misstatements in the financial statements. It was also mentioned that
there was not any fraud or error in the financial statements of Satyam Computer. As per
the audit report, all the required accounting standards and principles were followed
while developing the financial statements of the company (Chambers and Odar 2015).
Moreover, the auditors complied with the required auditing standards and principles for
the audit operations of Satyam Computer.
Extent of satisfying the Audit Purposes
There was major difference between the audit opinion and the actual finical
position of Satyam Computer. There was the involvement of the management of
Satyam Computer with the auditors in the process of manipulating the financial

5AUDITING
accounts. After proving this fact, the audit firm, PwC, had to pay $6 million as fine due to
the verdict of United States Securities and Exchange Commission. Moreover, the
auditors of PwC did not comply with the required auditing standards and principles and
thus, PwC received a ban on their audit operations from Securities and Exchange Board
of India (SEBI). In the presence of the non-compliance with the auditing standards and
principles, the auditors overlooked the presence of fraud and errors in the accounting
operations of Satyam Computer that contributed to the development of major material
missstements (Griffiths 2016). Due to this, the provided audit report of PwC on Satyam
Computer majorly failed in conveying true financial health or the correct financial
position. This particular aspect had major negative effects on the decision-making
process of the users of financial information. In this process, the involvement of the
management of Satyam Computer can be seen as they directed the auditor to make
manipulation in their financial statements. Hence, from the above discussion, one fact is
clear that the audit report of Satyam Computer provided by PwC failed in satisfying the
desired purpose (Shah and Nair 2013).
Question 2
Management’s Role
The managements of the business entities have to perform certain roles and
responsibility in order to assist the auditors and in other business operations. The
management of Satyam Computer was required to prepare and present financial
statements by complying with the required standards and principles (Reding et al.
2013). After that, they had to convey their opinion on various financial aspects. Apart

6AUDITING
from these, it was also required from the management of Satyam Computer to establish
effective internal control for the reduction in the possibility of occurring fraud and errors
in the accounting process. However, in most of the areas, the management of Satyam
Computer failed to fulfil their roles and responsibilities for achieving their personal
agenda as their involvement was there with different kinds of illegal activities. They are
as follows:
The motto of the founder of Satyam Computer, B. Ramalinga Raju, lied in
earning huge amount of money with the help of different illegal activities. Some of these
activities are tax fraud, preparation of false accounting books and many others. Thus, it
is clear that there was lack of ethical corporate culture within the organization. There
were many instances where the company was found involved in different unethical
activities like corruption, bribery and others.
The Crime Investigation Department (CID) of the State Police and Central
agencies found the evidence about the involvement of the management of Satyam
Computer in the process of insider trading of their company shares so that they can
purchase more lands. The company did insider trading with the fake name of 330
companies and 30 individuals.
There were many non-existed financial items in the financial statements of
Satyam Computer. For example, as on 7 September 2007, the balance sheet of the
company showed Rs. 376 crores of accrues interest that did not have an existence.
Moreover, there were other instances of accounts falsification like the manipulation in
current accounts (Pitt 2014).

7AUDITING
The owner of Satyam Computer selected their known person as the chairman of
the company for the accomplishment of their personal interest. Due to this fact, the
chairman of Satyam Computer overlooked the strategic misconduct due to the presence
of personal relationship with the owner (Lad and Dahl 2014).
The board of directors of Satyam Computer largely lacked professionalism and
objectivity. For this reason, they failed in leading Satyam Computer to success by
solving the major issues in the company. Thus, on the overall basis, it can be observed
that the management of Satyam Computer had major ethical issues.
Auditors’ Role
It needs to be mentioned that the auditors are majorly responsible for the
inspection of the financial accounts of the business entities in order to make sure that
they are free from material misstatements. For this purpose, the auditors must collect
enough audit evidences in order to make sure that there is not any fraud to error in the
financial statements. At the same time, the auditors must follow the standards and
principles of audit ethics (Kuenkaikaew and Vasarhelyi 2013).
However, it needs to be mentioned that the auditors of Satyam Computer were
illegally involved with the management of Satyam Computer in the manipulation of
financial information. It is the obligation on the auditors to provide the unbiased audit
report by stating the correct financial position of the business entities to the users.
However, the auditors of PwC did remain silent and did not inform the shareholders and
other users of financial information about the information provided by the whistleblower
before the collapse (Kuenkaikaew and Vasarhelyi 2013). This partaker decision of the

8AUDITING
auditors contributed towards the violation of the Objectivity principle as per APES 110,
Section 120 (apesb.org.au 2018). Many people all over the world consider the role of
PwC in the collapse of Satyam Computer same as the role of Arthur Anderson in the
collapse of Enron.
While conducting the audit operations, it is needed for the auditors to develop
their own internal control testing techniques based on the demand of the situations.
However, instead of developing own internal control testing mechanism, the auditors of
PwC decided to adopt the recommended mechanism of the management of Satyam
Computer (Ojala et al. 2014). This aspect majorly compromised the professionalism of
audit. In spite of detecting major faults in the internal control of Satyam Computer, the
auditors of PwC remained silence for the fulfilment of their own interests. Thus, this
particular action of the auditors violated the principle of Professional Competence and
Due Care as per APES 110, Section 130 (apesb.org.au 2018).
Checking different financial accounts is another major role of the auditors.
However, the auditors of PwC did not take any single attempt to check the necessary
invoices of the business for their own benefits. The example of sundry debtors can be
presented as an example here as auditors did not recheck the balance of this account
(Lombardi, Bloch and Vasarhelyi 2014). Moreover, the implemented audit procedures of
PwC were ineffective as they majorly failed in checking the balance of crucial financial
items like cash book, value of fixed assets, value of liabilities and others. Instead of
doing the physical verification of inventories, the auditors relied on the provided
information of the management. With the help of this action, the auditors of PwC

9AUDITING
violated the principle of Professional Behaviour as per APES 110, Section 150
(apesb.org.au 2018).
Conclusion
Based on the whole discussion, it can be concluded that both the auditors and
the management of Satyam Computer were majorly responsible for the collapse of the
company. The management of Satyam Computer encouraged and involved in various
illegal management activities like insider trading, bribery, false accounting and others.
On the other side, the auditors of PwC were involved in the illegal activities of the
management of Satyam Computer and overlooked the presence of major material
missstements in the financial statements of the entity. For the involvement of the
auditors, the provided audit report was not able to reflect the correct financial health of
the business and did mislead the users of financial information. Thus, in the presence of
all these aspects, G. Medcraft made the statement about uplifting the auditing standards
in Australia and asked for the coordination of the big four audit firms in developing the
audit procedures.

10AUDITING
References
ABC News. (2017). Poor auditing could be 'canary in the coal mine' for financial crisis:
ASIC. [online] Available at: http://www.abc.net.au/news/2017-11-03/asic-boss-
concerned-over-poor-auditing/9114490 [Accessed 12 Apr. 2018].
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online]
Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed
12 Apr. 2018].
Chambers, A.D. and Odar, M., 2015. A new vision for internal audit. Managerial
Auditing Journal, 30(1), pp.34-55.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty
and audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Kuenkaikaew, S. and Vasarhelyi, M.A., 2013. The predictive audit framework.
Lad, P.M. and Dahl, R., 2014. Audit of the informed consent process as a part of a
clinical research quality assurance program. Science and engineering ethics, 20(2),
pp.469-479.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and
Assurance Services 6e. Wiley.

11AUDITING
Lombardi, D., Bloch, R. and Vasarhelyi, M., 2014. The future of audit. JISTEM-Journal
of Information Systems and Technology Management, 11(1), pp.21-32.
Ojala, H., Niskanen, M., Collis, J. and Pajunen, K., 2014. Audit quality and decision-
making in small companies. Managerial Auditing Journal, 29(9), pp.800-817.
Pitt, S.A., 2014. Internal audit quality: Developing a quality assurance and improvement
program. John Wiley & Sons.
Reding, K.F., Sobel, P.J., Anderson, U.L., Head, M.J., Ramamoorti, S., Salamasick, M.
and Riddle, C., 2013. Internal Auditing: Assurance & Advisory Services. Institute of
Internal Auditors, The IIA Research Foundation.
Sanderson, I., 2013. Tools for IT governance assurance: using recent updates of
ISACA's Information Systems Audit and Assurance Standards alongside COBIT 5 can
help auditors evaluate their organization's information systems governance. Internal
Auditor, 70(5), pp.51-54.
Shah, M. and Nair, C.S. eds., 2013. External Quality Audit: Has it Improved Quality
Assurance in Universities?. Elsevier.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.