Auditing Report: Conflict of Interest, Auditing Standards and Fraud

This report delves into the critical aspects of auditing, focusing on the conflict of interest faced by directors and the specific auditing standards applicable to public companies. It begins by explaining the purpose and nature of reporting conflicts of interest, emphasizing directors' responsibilities in protecting company interests. The report then explores various auditing standards, particularly ASA 240 (regarding fraud), ASA 501 (inventory), and ASA 502 (litigation and claims), detailing their significance in ensuring accurate financial reporting. Furthermore, the report examines the Xerox accounting scandal, analyzing how the company manipulated financial results and the role of the auditing firm, KPMG, in failing to identify the fraud. It highlights the consequences of this negligence and the auditor's breach of professional duty, referencing specific auditing standards that were not complied with, such as ASA 240, 265, 320, and 450, and discusses the impact on investors. The report concludes by emphasizing the importance of auditors gathering sufficient evidence and reporting financial misstatements to regulatory authorities.

AUDITING

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
A) Explanation on conflict of interest of Directors.....................................................................1
B ) Auditing standards specifically applicable to public company..............................................1
QUESTION 2...................................................................................................................................2
A) Specify....................................................................................................................................2
B) Auditor guilty of fraud............................................................................................................3
REFERENCES................................................................................................................................4

QUESTION 1
A) Explanation on conflict of interest of Directors
I) Purpose behind reporting of conflict of interest by directors
Conflict of interest are to be reported by the directors of ITC to the company in board
meeting and general meetings. Company comprises of several interest groups that can create
various dimensions in conflict of interests.
Reporting of conflict of interest is mandatory under the provisions of laws. Sec 191 of
Corporations Act 2001 requires directors of company to report to board of directors material
personal interest in any contract related to affairs of company (Conflict of Interest. 2019).
Directors have the responsibility of protecting interest of company complying the principle of
good faith. Directors having personal interest have restrictions like prohibition from participating
in meeting in which contract related to personal interest will be discussed. Entering company
into contract for their personal benefit or of their relatives.
Director as per the legislative regulation will have to face penal provisions on failure of
reporting personal interest to the directors in board meeting. Reporting of personal interest is
essential so that company is in knowledge of the contract and can ensure that director is not
influencing the decision for the personal interest.
II) Nature of conflict of interest
Conflict of interest refers to situation where professional judgement related to primary
interest of company tends or appear of having unduly influenced because of secondary interest of
directors. Common conflict of interests that arises in company are
Improper conduct & activities – Directors are not required to engage in activities or conduct that
are inconsistent with interest of company or disrupts the affairs of company.
Compensation from other sources – Directors are not supposed to accept compensation from any
other source for services performed for company other than company.
Gifts – Gifts of any kind that may influence the decision of directors against the interest of
company are not to be accepted by them.
B ) Auditing standards specifically applicable to public company.
I) Purpose of auditing standards
ASA 240- Responsibility of Auditor relating to fraud in an audit of Financial report. The
standard guide auditor about reporting of fraud identified during conducting audit procedures.
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Company may be overstating it profits or financial statement by raising the fictitious sales bill or
valuing the closing value at more than its actual value so that the profit of company can be raised
(ASA 240. 2019).
ASA 501 – Specific consideration for Inventory. Standard ensures that auditor has obtained
sufficient audit evidence for condition and existence of inventory. Auditor should physically
verify the inventory so that inventory material for financial reporting is included in statements.
ASA 502 – Specific consideration for Litigation and claims. Auditor of the company should
gather evidence regarding each litigation or claim concerning company which can affect the
affairs of company. Material liabilities are reported by company in financial statements.
II) Nature of the auditing standards
ASA 240 – Fraud relates to misstatements of financial statement by company. Fraud or error in
any transaction is identified upon the intention behind the event. The misappropriation in
financial statement is matter of concern by auditor. As financial statement influence the decision
of investors.
ASA 501 – It is concerned with whether the inventory reported by company is in existence and
saleable condition. Management's instruction regarding compliance with reporting methods are
being followed or not are to be identified by auditor. Inventory valuation methods , under or over
valuation of inventory is identified by auditor under this standard.
ASA 502 – Auditor should obtain sufficient evidence regarding the litigations or claims related
to company so that any litigation that can affect the company position is not left by auditor. All
the material litigation and claim that are important for investors are reported by company.
QUESTION 2
A) Specify
I) Xerox accounting scandal related to falsifying financial results. (Securities & Exchange
Commission vs Xerox Corporation)
In case of Xerox in year 2000 it was identified that there was difference of 3 billion between
operating results in actual and profit reported to shareholders. KPMG auditing the accounts of
company from last 30 years failed to identify the difference (S.E.C. Vs Xerox Corporation.
2002).
II) Facts of the case
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 Xerox was accused by SEC for misleading and betraying investors through various
accounting tricks for manipulating earnings and enriching top executives.
 Xerox introduces accountinf scheme project mozart that was a creative brilliance for
hiding the revenues.
 KPMG failed to catch the overstated profits of $1.5 billion. Also it failed to report the
case to SEC.
 Revenue recognition principle was violated by accounting department by using
techniques like cookie jar.
 It circumvented reporting standards through recording future events earlier, thereby
inflating income of company.
 Investors relied on the information and invested on company and therefore company
avoided compliance with governance regulation with SEC (Xerox Financial Fraud Case.
2016).
 Manipulation led the stock prices high due to overstated profits which ultimately fell
down.
 Financial position of company was shown much higher where in actual it was making
losses.
 This manipulation led the company to pay fine of more than $ 10 million
B) Auditor guilty of fraud
In the case of KPMG was auditing the company from 30 years. The negligence of auditor
to spot the difference in overstated revenues is breach of his professional duty. In the present
case auditor is guilty because of his negligence to report fraud. Auditor is required to report the
neglect or breach in compliance with accounting requirements to the regulatory authorities and in
his audit reports. Auditor has not complied with ASA 240, 265,320, 450. KPMG also breached
its responsibility of reporting the overstated profits to SEC. This led to various investors to rely
on the financial statements of company. Auditors have neglected the code of conduct regarding
reporting of financial misstatements of company. The negligence of auditors made the investors
to suffer losses. Auditor is responsible for gathering sufficient audit evidence regarding every
event or matters of material concern.
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REFERENCES
Books and Journals
Groomer, S. M. and Murthy, U. S., 2018. Continuous auditing of database applications: An
embedded audit module approach. In Continuous Auditing: Theory and Application (pp. 105-
124). Emerald Publishing Limited.
Adler, P. and et.al., 2018. Auditing black-box models for indirect influence. Knowledge and
Information Systems. 54(1). pp.95-122.
Online
ASA 240. 2019. [Online]. Available through :
<https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2015.pdf>.
Conflict of Interest. 2019. [Online]. Available through : <https://legalvision.com.au/when-
should-a-director-disclose-conflicts-of-interest/>.
S.E.C. Vs Xerox Corporation. 2002. [Online]. Available through :
<https://www.sec.gov/litigation/complaints/complr17465.htm>.
Xerox Financial Fraud Case. 2016. [Online]. Available through :
<https://www.bartleby.com/essay/Xerox-Financial-Fraud-Case-Analysis-P3CHVB43TJ>.
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