Audit and Assurance Report: Financial Analysis of Hewlett-Packard

This report provides a detailed analysis of audit and assurance services, emphasizing their importance in maintaining corporate transparency and ensuring a true and fair view of financial positions. It explores the impact of substandard audit reports on stakeholders and the crucial role of auditor independence. The report examines the Enron scandal, highlighting the failures of Arthur Andersen and the lessons learned regarding auditor independence, the need for auditor rotation, and the ethical responsibilities of auditors. It delves into the effects of misstated financial statements on stakeholders such as owners, creditors, government, and management, and discusses the concepts of independence and whistleblowing in the context of ethical auditing practices. The report underscores the importance of auditors avoiding conflicts of interest, reporting fraud, and adhering to consistent accounting policies to maintain audit quality and public trust.

Audit and Assurance
Audit and Assurance
[DATE]
Hewlett-Packard
[Company address]

EXECUTIVE SUMMARY
With the changes in economic condition, ramified corporate growth, each and every
organization needs to implement the audit and assurance services to strengthen the corporate
transparency and true and fair view of assets and liabilities. Every key person that is
interested in any organisation’s information gets it through the help of the annual report.
However, to set a trust on the truthfulness, an external body named as auditor provides an
unbiased opinion on those annual reports. The way any substandard audit report affects the
key stakeholders of any entity are also mentioned. Several risks to the wealth and security of
the key stakeholders are probed when the audit is not done at par. The report under study is
based on the research of the Enron scandal and has set out the lessons that the auditors whole
over the world could learn. The main learning stood to be the need of any auditor firm to be
independent from its client. Further, the report digs out the requirements of regular rotation of
the auditor firms to make the quality of audit turn supreme.

Table of Contents
EXECUTIVE SUMMARY...................................................................................................................1
INTRODUCTION.................................................................................................................................3
Answer to question no-1........................................................................................................................3
Answer to question no-2........................................................................................................................4
Answer to question no-3........................................................................................................................5
Answer to question no-4........................................................................................................................7
Conclusion.............................................................................................................................................9
REFERENCES....................................................................................................................................10

INTRODUCTION
The key people who are highly interested in the performance of any publically listed
company are altogether termed under the umbrella concept of key stakeholders. As the
identity of an organisation is different from the board, there is a difficulty faced by these key
stakeholders in relying the performance and position presented through the organisation’s
financial books. To ensure that whatever the books of accounts of any entity reflect is true
and fulfil the utmost requirements of fairness, there is a need of an unbiased and headstrong
professional. Here, the name of Auditor pops in the picture. The act of whistleblowing has
been stated as ethical if the same done in interest of the public. Not only could the employees
of any organisation, but the auditors also act as whistle-blowers. Moreover, the warning that
SEC’s chairman Greg Medcraft had given to all the audit firms have also been analysed. The
same has brought the different things that the auditors need to ensure to prevent the warning
from shaping real news. The current report is based upon the idea of the consequences that
may hit an organisation if the auditor isn’t diligent in his work and performs the audit
function in a sub-standardised manner. The concepts of the auditor’s independence and
whistleblowing are also thrown a light upon. Later in the report the scenario that happened at
the time of Enron’s scandal is discussed. The main focus for the discussion had been to
highlight the things that auditor can grab to improve future performance. The term Audit
quality is also made a point of thought while making the analysis of warning statement
forwarded by Greg Medcraft on auditor’s function and Enron’s failure.
Answer to question no-1.
As already discussed in the introduction section, the key stakeholders rely upon the
financial statements only because a headstrong professional, namely the auditor has reviewed
them. There is a tied expectation to the function. It is expected that the auditor has performed
audit completely in a manner that has identified all the misstatements material to every
stakeholder. And any misstatements if identified have been completely resolved. But at times
the audit performs audit ignorantly. This affects all the stakeholders including the auditor
(Brasel, Doxey, Grenier, & Reffett, 2016). There are several stakeholders of the company
who directly and indirectly get affected and affects the business organization of company.
The affects and risk that are attached to the key stakeholders are listed below and described in
effective manner.

 Owners: These owners are the shareholders of the entity. These are the persons who invest
their capital and holds the share capital based on the invested capital. These persons are
entitled to take imperative decision by participating in the general meeting and passing
resolutions. Any misstatement in the audited financial statements can affect them largely. All
the investments that the shareholders make are based upon the audited statements. Any wrong
opinion about the financial statements could lead to the shareholders taking a wring decision
and would diminish their capital worth. Risk is that any misstatement that could have affected
their decision is latent to them. If the same was known they could have taken another
decision (Molehabangwe, 2016).
 Creditors: Any misstated financial statements pose a huge risk of non-recovery for the
creditors. The entity may not be able to pay their debts, but the financials could show that the
entity is. This way, the creditors are in a risk of lending even more to the organisation
(Manita, & Elommal, 2015). However, creditors are the person to whom company needs to
pay capital due to the credit purchase.
 Government: government authority’s treasury is sure to get affected if the financial
statements are materially misstated and are not identified or not disclosed. There is a risk that
the taxable income of organisation is understated and hence tax payment is less than required
(Gustavson, 2015).
 Management: the management is responsible for preparing the financial statements. These
financial statements must comply with all the requirements of the accounting perspective.
The return that management gets is also based upon the performance of entity. Any
misstatement affects the potential of the management function as well as risks down the
management into legal troubles. Further, any understatement of the earnings can result in
lowering the returns that management is otherwise entitled to get (Koch, & Salterio, 2015).
Answer to question no-2.
Independence: independence in relation to auditor refers to the requirement from the
auditor side to be free from any pressure that may hamper his opinion on the financial
statements. It is expected out of the auditor that he shall not lay himself in a position which
hampers his objective thinking and leads to compromising integrity in his professional work.
No external influence should be prominent in the opinion of fairness framed for the financial
statements (Tepalagul, & Lin, 2015).

Whistleblowing: whistleblowing refers to the act in which a person who acts as the
whistle-blower discloses any kind of information which comes to his or her knowledge and is
completely considered wrong as per ethics or law. At times the auditor himself acts as a
whistle-blower in the entity for which he has been appointed as the professional auditor
(Latan, Ringle, & Jabbour, 2018). Ideally, Whistleblowing is promoted in organization to
strengthen the business process and mitigating the wrongdoing and malfunctioning in the
process.
The main objective of appointing any auditor is to prevent the public interest. The APES 110
Code of Ethics for Professional Accountants lays compulsorily that the auditor has to
maintain independence both in terms of his appearance to any third person and as well in his
own work. By being independent, the auditor shall frame his opinion completely upon his
audit procedures and observations. This is when the public shall be highly benefited because
everything mentioned in the auditor’s report shall be true and not biased (Mintz, 2016).
Further the concept of whistleblowing is considered ethical when the same is done in
the interest of public. The auditor works deep in the financials of an organisation and is in a
position to completely observe any flaw that is present. The flaw could be related to such a
matter which if known to the governmental authorities could count a big trouble to the
organisation (Vandekerckhove, 2016). For whistleblowing any fraud, that must be
considerably material however. And at times, the auditors are also eligible to obtain rewards
upon the disclosures that they have made, if the same has helped the government authorities
(DeZoort, & Taylor, 2015).
Answer to question no-3.
Enron Scandal has been a failure of a big corporate house and had also badly
devastated the economy then. The scandal had brought the black side of the big and leading
corporate in the frame. All the unethical practices shattered the confidence which the
shareholders have placed upon the entity and its management. Above all the party which is
mainly at fault had been the auditors, Arthur Andersen. The renowned auditor has been
auditing the company since the day it commenced operation. The shareholders had a blind
faith on the reports issued. But the scandal came as an unknown disaster. Not only the
corporation has gone into shame, but the audit firm is also put at sham. The scandal could
have prevented only if the audit firm was not biased and was neutral. The lack of

independence at part of Arthur Andersen has led to the entire situation. If the audit firm had
acted as a whistle-blower, then the authorities could catch the wrong at the correct time
(Luke, 2018). It is analysed that auditors are the person who are indulged in or responsible to
strengthen the transparency of the financial statement of company.
There is a lot which the auditors can learn from this scandal, and mainly from the wrong that
Arthur Andersen had done. These could be summed as follows:
 Arthur Andersen had a tied business interest with Enron. Apart from auditing, Andersen was
also involved in the business of consultation and accounting with the organisation. This
hampered the independence that Andersen must have exercised completely. This signifies
that, whenever the auditor has a conflict of interest that takes away his independence as
auditor, the audit turns into a sub-standard one. Hence the auditors must avoid taking up such
audit where their independence goes at stake. Even after taking up the audit, if certain
situation arises when independence can be compromised, such conflict must not be
entertained (White, 2018).
 Since the auditor Arthur Andersen was involved with Enron since its business commenced, it
was observed that Andersen had got related to the management in an informal manner. A
long tenure spent with the management led to personal dealings of Andersen with the
management. Owing to this Andersen helped the management to manipulate their earnings
and helped the management in showing the income on higher side. This helps in coming to a
conclusion that the audit firm or at least the partners of the firm who perform the
organisation’s audit must be changed after a fixed tenure (Provost, 2016).
 Being the auditors of Enron, Arthur Andresen had the responsibility to report the frauds that
were being committed inside Enron’s white and clean image. Instead of reporting the same,
Andresen even fostered them by helping Enron in getting a clean audit report. This calls the
other important learning. It is that if the auditor comes across or gets hints about any fraud
being committed in the organisation, the same should be reported by him, irrespective of any
influence or personal interest. It is the utmost responsibility of the auditor to be exercised
(Humphrey, Canning, & O'Dwyer, 2018).
 As Andresen was also providing accounting services to Enron, it had he responsibility to
prepare the balance sheet and the other related statements. Instead of preparing the books in a
fair manner, Andresen window dressed all the financial statements. The assets were

hypothetically valued, there was no consolidation of the subsidiaries, as well as all the
liabilities and debts were smartly transferred to the subsidiaries. All this came into the eyes of
the people when Enron’s bankruptcy happened. This shows that, first of all the auditors must
not get involved in providing any accounting service to the same client whom they are
servicing audit for. But however, even if they do, the same must be done in accordance with
the consistence accounting policies and without any personal interest (LaShaw, Lambert, &
Sloan, 2016).
 If the history of Enron is to be looked, it is observed that the Arthur Andresen had been
appointed as an auditor actually by the management, but it appeared that the shareholders did
so. The shareholders appoint the auditor in order to make him accountable to them and at the
same time free from any influence of management. However, in case of Enron, as the
management played a vital role in Andresen’s appointment as auditor, the decisions and
opinion of it was sure to get influenced by management’s interest. Further, personal interest
of Enron also affected their decision as a professional and hampered their objective and
sceptical working. Owing to everything that happened due to this, the big corporate was able
to play unethically with the shareholder wealth and belief. Eventually both Enron and the
Andresen suffered drastically. This makes the whole auditing community learn to stay away
from any management influence and accept audit engagement only if it is as per the set rules
of auditor appointment.
 Apart from being the external auditor for Enron, Arthur Andresen played as the internal
auditor of the same organisation and that too for years. Internal auditor has the major
responsibility of on looking the control environment as well as to check the possibility of any
fraud. Andresen was already involved in a conflict of interest as the external auditor as well
as accountant of Enron. By being the internal auditor, the benefit raised for Andresen. It went
in a position to completely manipulate the case scenario and provide best internal audit
reports, even when some of the internal audit members conflicted upon same. This leads to a
conclusion that, the same audit frim that acts as the external auditor should never be
appointed as the internal auditor. Same is for the auditing community. The auditors must not
accept internal audit engagement for the firm in which they are external auditors. This shall
prevent them from indulging in any conflict of interest (El Guindy, & Basuony, 2018).

Answer to question no-4.
Audit quality in a manner determines the level of reliance which could be placed upon
the opinion that the auditors have extended in their audit reports. As per APES 110, code of
ethics for professional accountants, the auditor’s independence while conducting the audit
sets the quality for audit. If an auditor performs the audit in accordance which the standards
of auditing and guidelines set by the auditing and assurance board, the quality is rare to get
compromised. Although auditor’s independence is the main focus while maintaining audit
quality, but there are also several other issues that the auditors need to address. The main of
these include the tax authorities as well as the security management authorities while
strengthen the audit quality check. It is not only related to ethical, but it is the supreme
responsibility of the auditor to address any fraud that he observes in the organisation. By
doing this he is termed a whistle-blower that is acting in the interest of the key stakeholders
for whose benefit he is working. This has revealed in the audit procedure and strengthen the
audit quality check while auditing the financial statement of company.
As per the speech that Greg Medcraft gave after Enron scandal, a warning is visible in the
same. The warning raised the risk of raising another Enron if the auditors do not work
professionally while providing their opinion on the financial statements. To address the
warning raised by Medcraft, the auditors need to do a few things as follows:
 The auditors must be completely sceptical while conducting audit function. Anything that
seems doubtful and signifies an anomaly, even if remote, must not be taken with ignorance.
Proper audit planning must be undertaken to find audit evidence that is appropriate and
sufficient to lower down risks of misstatements or fraud to zero (Tomasic, 2018).
 Mandatory rotation of audit firms is required to be strictly adhered. This shall prevent the
development of any personal relationship between the client and audit firm. By proper
rotation, the work of an audit firm would also come into the scrutiny of another. This shall
also help in finding out any significant mistake on part of the previous audit firm (Moosa,
2015).
 To ensure that the sub-standard audit performance is prevented, the auditor must maintain
complete independence. Their function must be to perform the audit and report opinion in
public interest and not for personal interest. Any conflicting situation that prevents them from
doing a fair audit must be avoided. Every audit step must be taken in accordance with the

standards that have been framed by the audit and assurance board (Carson, Fargher, & Zhang,
2017).
 Any kind of misstatement that the auditors notice must be disclosed, if material. The way it
gets corrected must be stated. The shareholders must be made aware of any discrepancy that
is material enough to make them bring a change in their decision (Kofman, & Payne, 2017).
 Auditors stands in the fiduciary position to the shareholders and he needs to assure whether
financial statement and details revealed in the financial statement of company is reflecting the
true and fare view of the assets. He needs to asses all the credentials to pass disclaimer and
audit report on the audited financial statements.
 Any service that is extended to the client in addition to the core audit function must be done
only if the acceptance of same does not diminish audit quality and auditor’s independence.
These services may relate to accounting, advisory, consulting, and etc. (Smith, Clarke, &
Rogers, 2017).
 The auditors must not hesitate to engage in the whistleblowing activity. If in the audit process
they come across some illegal acts done by the client or any unethical practice, they must not
hesitate to report the same to the considerate enforcement or government authority. This is
nowhere considered unprofessional from the auditor’s end to report any false or incorrect act
of the client that might disrupt or have disrupted public interest. Similarly, if the auditors
come across any whistle-blowers from within the organisation, they must not be threatened
by them, but must be promoted. If in case, auditors find any issues and discrepancies then he
needs to report the same to stakeholders or shareholders of company. They are working in the
fiduciary position towards the shareholders.
 To further ensure that the audit function is free from any low standard, the auditors who are
in the external audit team must not be allowed to be a part of the audit committee that works
inside the organisation. The internal audit team must be different from the external
professional auditors. This will prevent any of the audit teams to commit fraud on the client
for personal interest. As well this shall also prevent the client’s management from indulging
in any conflict of interest. Overall position would be resultant in a fair environment where the
chances of scandals like Enron would be less to pop.

Conclusion
After assessing all the details and cases of the corporation and audit activities, it could
be inferred that each and every company should indulged in auditing their corporate financial
statements which helps in strengthening the true and fair view of assets and liabilities of
company. However, auditors must not hesitate to engage in the whistleblowing activity if
they want anything wrong in the books of account and business process of organization. If the
auditors come across any whistle-blowers from within the organisation, they must not be
threatened by them, but must be promoted. The crux of this report is that, every auditors are
working in the fiduciary position to the shareholder and needs to assess whether company is
revealing the true and fair view of the assets and liabilities of company.

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