BUACC5935 Auditing and Assurance Services Report: Financial Analysis

This report provides an in-depth analysis of auditing and assurance services, emphasizing the critical role of auditor independence and the various threats that can compromise it. It explores the impact of incentives, both direct and indirect, on auditor objectivity and the potential for data manipulation. The report discusses several threats including familiarity, self-review, advocacy, self-interest, and intimidation threats, and their implications on audit quality. Furthermore, it highlights the significance of auditing and accounting in maintaining financial integrity, drawing lessons from major corporate failures like Lehman Bros., Enron, and WorldCom. The report underscores the need for ethical practices, regulatory oversight, and the implementation of standards like ASA 707 to prevent future financial scandals. It also emphasizes the importance of internal and external audits in ensuring accurate financial reporting and safeguarding against unethical behavior. The report concludes by stressing the importance of learning from past failures and implementing measures to protect companies from future disintegration.

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AUDITING AND ASSURANCE
SERVICES

Auditing
An auditor is required to be extremely professional in performing his duties and remain
unaffected by external influences that impact his audit work. The audit reports prepared by an
auditor should highlight the financial performance of the company and represent an accurate
and fair view of its state of affairs which will further assist the users in arriving at appropriate
decisions. An auditor should be dignified and disciplined enough in performing his duties.
Any external factors must not influence him (Sharp, 2006). He must not be impacted by
threats or external factors that account for shortcomings in his audit work.
Prolonged dues of salary, biasness, investments in the business, threatened litigations,
acceptance of gifts in the form of goods and services, etc. are some examples of external
factors or threats that can come in the way of an auditor while he is performing his duties. For
an auditor to diligently delegate his responsibilities, it is required for him to remain free from
influences that come in his way of showing his duties. This will allow the auditor to perform
his functions in a dignified manner and prepare an audit report to provide an accurate and fair
view of the company’s financial performance and its state of affairs and maintain
transparency in the same.
Incentives provided to an auditor are either direct incentive or indirect incentive. In the case
of direct incentive, the interests of an auditor combine with that of the management in a way
that makes way for intentional data fabrication and management. Direct incentives are actual
or potential incentives that result in data manipulation with an ultimate intention of
misleading the users about the company’s state of affairs and its financial performance
(Manoharan, 2011). The incentives offered to the auditor are to manipulate the financial
statements of the company to conceal any performance related, or such significant
information of the company that is known by the users can disallow them from making
investments in the company. Few financial dependence strategies are merged with different
incentive schemes to eliminate such influence on the auditors that come in the way of their
performing duties and maintain their dignity (Sikka, 2009)
The auditors can also be offered indirect incentives to impact the fairness of the audit report.
This occurs when the auditor and the client share interpersonal relationship amongst them
like being family members. An auditor should make sure that he doesn’t allow such
relationships to come in his way of duties (Elder et. al, 2010). Moreover, an auditor should
restrain himself from developing such relationships with the client that hampers his
professionalism. The objectivity of the audit report is hugely impacted when such
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Auditing
relationships exist or are established between the auditor and his client. The audit report is
most likely to be authentic in the case of the absence of any such interpersonal relationships
between the auditor and his client.
There are several other factors which affect the performance of the auditors. Out of which
incentive is one of the most critical deriving elements. The opinions and advice of an auditor
mostly depend on incentives and motivation. Incentives and motivation define the views and
decisions of an auditor to a considerable extent (Goergen, 2012). The management of an
organisation is required to assess the verdict of an auditor to check its appropriateness and
effectiveness. The requirement of later judgment comes in the way when the audio quality is
minimal due to the absence of judgment order. Apart from incentives, there are some other
threats like familiarity threats, self-review threats, advocacy, self-interest threats and
intimidation threats that may hamper the objectivity of an auditor.
Familiarity threat is one where the audit work is devoid of scepticism. The auditor when fails
to or stands incapable of applying doubt in his work, familiarity threat arises. It happens
when an auditor is unsure of his verdicts and because of which he depends entirely on the
client’s opinion which impacts his own belief in such a way that he fails to apply scepticism
in his work (Wiggins et. al, 2014). Familiarity threat arises when the auditor develops a
cordial or interpersonal bond with the client or the company’s management in a way that
disallows or restricts him from carrying out his research work and applying his logic on the
behaviour of transactions.
When the auditor goes through his work the chances of self-review threats arise. This is
mainly because of biasness. When the examination of the work in the organisation is done by
the person who initiated the same action, there are chances for self-review threats to take
place (Anthony et. al, 2003). The auditor might become biased while reviewing his work but
might behave judgmental when the same work is considered, examined and cross-checked by
the management of the company.
When the promoters of the company are appointed as the auditor of the same company,
advocacy threat arises. It is a threat that is most likely to take place when the auditors of the
company are also the promoters of the same company. This is because the auditor of the
company will most likely be advocating the company rather than providing the accurate and
fair view of the company’s state of affairs. He might promote the company based on personal
biasness ignoring facts.
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Auditing
Threats that are due to finances, emotions and such other risks make way for self-interest
threats. When an auditor intentionally or unintentionally upholds his interest in a way that
shows his disinterest in providing quality services chances of self-review threats are most
likely to take place (Wright & Charles, 2012). The auditor is required to be professional
enough utilising being self-independent in his opinions and verdict during the audit.
When the auditor is threatened with getting replaced by another auditor, he is most likely to
get biased, affected or influenced giving way for intimidation threats. The auditor might
manipulate data and such other information under the influence of danger of being replaced.
He may knowingly take a wrong decision instead of being aware of the truthfulness and
genuineness of the verdicts on the organisation financial statements (Zhang et. al, 2007).
What auditing is accounting is significantly essential. It must be noted that auditing and
accounting are both critical for an organisation. The two are dependent on one other in such a
way that in the absence of one the other is likely not to take place. In the case of lack of
accounting, auditing cannot be initiated. Both, auditing and accounting help in shaping the
economy for countless reasons. The auditors verify the accounting statements of the company
to evaluate their fairness and give an accurate and fair view of the opinions on the same.
Ever since the demise of big organisations like Lehman Bros, Enron and WorldCom the
genuineness of the accounting system is doubted, questioned and has offered lessons that are
required to be taken from these failures.
The issues that the accounting profession came across in the Lehman Bros. scenario were a
very negative one. To avoid such situation to take place in the future, the companies must
learn from the reasons accounting in the failure of Lehman Brothers which was once a huge
name and a renowned brand that now no longer exist (Wearden et. al, 2008). To eliminate
unethical practices in the company, policymakers like Securities Exchange Commission and
IFRS should be adopted which regulates effectiveness in operations and harsh methods for
the company to engage in. It was noticed that in Lehman Brothers, the use of Repo 105
transactions was hugely incorporated before the date of reporting. The company after the time
of reporting borrowed to buy back these transactions (Hoffelder, 2012). If there have been
adequate audit work done, the chances of the occurrence of such inadequate Repo 105
transactions could have been dealt with. The presence of such operations was mainly on the
part of auditing professionals who failed to highlight this area of concern and also due to the
governing bodies that were unable to trace the adoption of unethical practices within Lehman
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Auditing
Bros. For the statutory authorities to be aware of such unethical practices incorporated by a
company, it is required for the accountants to appropriately record all the transactions and
prepare the financial statements and auditors to properly evaluate the company’s financial
statements and effectively perform their audit work (Berensen et. al, 2001). It is also a lesson
for other companies to safeguard itself from disintegration and its failure. Another valuable
experience that can be taken from the collapse of Lehman is not to practice or undertake
unethical measures, and to avoid the same, there must be regular checks in the organisation.
This is because it is not just the demise of one company, but it is also the impact it puts on the
entire economy (Berensen et. al, 2001). If ASA 707 were present during the failure of
Lehman Bros, the auditors would not have been able to hide significant information and other
critical matters from the users to uplift the company’s reputation. If ASA 707 standards were
present at that time and were given due importance by the auditors of Lehman, then it shall be
easy for them to update the users of every activity of the company that needs to be known by
them.
The complexity of the American standards of accounting was highlighted with the failure of
the big name like Enron. Certain off-balance sheet items like dodges were seen to be given
due importance while not considering essential principles and guidelines. To better the
effectiveness of the standards, FASB made due attempts which were also ruined using
relentless lobbying.. The need for implementation of specific measures was also determined
that are universally accepted and acclaimed. This highlighted the need for the formulation
and application of practical and profound principles by the Securities Exchange Commission.
These principles would not focus on exaggerated described rules but instead would focus on
paying attention to single figures. The need for accountants and auditors to interrogate the
organisation regarding its activities and everything else before their work commencement
was also learnt from the disintegration of Enron. It could have happened due to the inability
of the auditors of Arthur Anderson in tracing the financial lists for a company like Enron that
was way more complicated and still carrying out their audit work (Maines & Wahen, 2006).
The offering, stocking, locking and barrelling of the obligations gathered from the private
accounting firm for accounting purpose the government, will be one significant learning of its
kind that can be taken from the disintegration of Enron. One of the most significant lessons
taken from the untimely demise of Enron could be taking away the duty of appointing and
choosing auditors from the senior management of the company. Considering the complexities
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Auditing
of the current times, it is required for corporates to take lessons from the disintegration of
Enron to safeguard themselves from failures in the future.
The failure of WorldCom taught that it is essential for the internal auditors of an organization
to extensively review the affairs of the same in case if it has been doing good in the external
space for it is most likely for such companies to get into unethical measures and take undue
advantage from its brand name and goodwill in the industry. At the same time, it is also
required for the external auditors to assess the organisation’s internal environment while
being disciplined, professional, unbiased and dignified enough during the same. WorldCom
was into an illegal activity where the transfer of all implied expenses into the capex where
practised along with the clear-cut cost practice that was done employing paying service costs
to lease the local lines. This calls for the accounting profession to understand the need for
identifying these costs and when such costs accrue to avoid such a situation in the coming
time. The need to appoint external auditors is one of the most significant lessons learnt with
the failure of WorldCom.
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Auditing
References
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Education, New Jersey: USA
Goergen , M. (2012). International Corporate Governance. Prentice Hall.
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Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The
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Zhang, Y., Zhou, J., & Zhou, N. (2007) Audit committee quality, auditor independence, and
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