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BUACC3741 – Auditing Assignment

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According to Sikka et al., (2009, pp.139) “In capitalist societies, all economic surpluses need to be accounted, allocated and distributed to the absent capitalists”. The traditional auditing process has been to verify all items on the profit and loss and the balance sheet, all of which are outcomes resulting from past transaction under the historical cost model.Several layers of complexity have been added to auditing large financial institutions and companies. New technologies, new financial instruments (derivatives, credit default swaps.), a more integrated global economy have b...

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According to Sikka et al., (2009, pp.139) “In capitalist societies, all economic surpluses need to be accounted, allocated and distributed to the absent capitalists”. The traditional auditing process has been to verify all items on the profit and loss and the balance sheet, all of which are outcomes resulting from past transaction under the historical cost model.Several layers of complexity have been added to auditing large financial institutions and companies. New technologies, new financial instruments (derivatives, credit default swaps.), a more integrated global economy have been putting strains on the auditing profession. Banks, hedge funds and insurance companies have been key actors in the financialization of the economy (Bank of England, 2008).An article by Reuters, (2008) quoted in Sikka (2009) observed that accounting has become a new exercise in creative fiction, with the result that banks are carrying a lot of “sludge” assets clogging up the balance sheet”. Auditing procedures involve a consideration of the entity’s ability to continue in operational existence for the current, and possible future circumstances of the business and the environment in which its operates. Required:-(1) Review at least two company collapses e.g. Lehman Bros., Worldcom., Xerox, Enron with a view to understanding how the companies were given unqualified audit reports, and within a short time were in financial crisis and ultimately ending in collapse. (2) Review any guidance and regulations on auditing complex financial instruments in Australia and Internationally. (3) The knowledge base of auditors has traditionally utilized methods of valuing tangible things which could be counted and measured. This paradigm is being eclipsed by complex financial transactions. Given the conventional auditing technologies, should consideration be given to alternative forms of accounting, disclosures and accountabilities.

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1. Business is characterized by many features which includes its volatility to circumstances. It has external and internal environment which can affect its operations and existence significantly and as a result business has to be very versatile, flexible and financially strong to cope up with all circumstances to thrive in the market. In the capitalist society business has authority to decide entry and exit points and creative destruction is not an uncommon topic in the industry. Sometimes it is the management which fails to control the operations or sometimes the business itself fails to compete in the market competitions. Such is the case of Lehman Bros. and Enron Corp. One of the biggest collapse stories of companies in the United States include Lehman Bros. which prevailed due to bankruptcy. Immediately after the collapse in September, 2008 many untold reason got unfolded and a different outlook of the company came forward to the people. It was evident that many disclosures were not made in the financial statements and the company tried to conceal many facts and transactions which could have changed many financial decisions of the stake holders. By the severity of concealment and misrepresentation it can be said that the top level management was definitely involved in the process either by doing so or by supervising these. Also, there are loop-holes in many accounting standards and techniques which the company used in their favour and misrepresented the financial information. The users of financial statements were miss-guided by those false reports. The accountant and auditor were also negligent in proper disclosure of financial statements, many notes to accountants were not given and no clarification about transactions were there (Inman, 2010). Earnest & Young was accused of fraud and concealing the facts about the condition of the company. The financial statements were prepared in such a manner that they did not show tru and fair view of the company’s financial statement. There were high debt loans taken by the company and the company had advanced mortgage loans to households and these loans were high risk loans. The inferior quality loan with such high rates were advanced at risk having adverse chances of non-payments. The company soon faced crisis and tremendous pressure from stakeholders to better the position of the company. A report of Anton R. Valukas presented and revealed that numerous accounting manipulation was there in the financial statements of the company (McCool, 2010). Balance Sheet window dressing was done and the company was able to reduce the credit risk it actually had by removing fifty billion dollars commitment from its balance sheet. This is huge. There were many unfolded reasons behind which actually contributed to the ultimate downfall of the company and as a result it collapsed.

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