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Purpose of Audit Report

Question:

Discuss about the Audit Report of Satyam Computer.

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.      

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 (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 comply with the auditing standards and principles. These are all the reasons for the statement of G. Medcraft. 

Role of Auditors and Management in Auditing Process

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.          

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 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).    

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 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:

Concerns about Auditor's Professionalism and Professional Skepticism

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).

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. 

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 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.

Preparation of Audit Opinion for Satyam Computer

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 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.

References

ABC News. (2017). Poor auditing could be 'canary in the coal mine' for financial crisis: ASIC. [online] Available at: https://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.

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.

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