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Purpose of Auditing

Discuss about the Auditing for Australian Securities and Exchange Commission.

In the business organizations of twenty-first centuries, Auditing is considered as one of the major success factors. Auditing refers to the process of inspecting the financial statements of the companies in order to make sure that they are free from material missstements (William Jr, Glover and Prawitt 2016). The report of the auditors is a useful tool for determining the extent to which financial information of the companies convey the financial position of the companies. Based on the absurdity of the auditors, the users of financial statements put trust on the financial information published in different kinds of financial statements (Leung et al. 2014). For this reason, the auditors are required to comply with all the required ethical principles of audit standard for the smooth conduct of the audit operations. The main aim of this report is to analyse the ethical behavioural aspects of the auditors and the management. For the purpose of this report, the famous case of Satyam Computer Collapse is considered. The collapse of Satyam Computer is famous for the failure of both auditors and the management of the company. The first part of the report evaluates the purpose of auditing by relating the statement of G. Medcraft. The next art of the report evaluates the role of management and auditors in the collapse of Satyam Computer.   

Mr. G. Medcraft is the former chainman of Australian Securities and Exchange Commission (ASIC) and he is deeply concerned about the roles and responsibilities of the auditors while perming the audit operations (abc.net.au 2018). From the provide article, it can be observed that G. Medcraft is giving warning to the Australian accounting authority related to the roles and responsibilities of the auditors. In this article, he has also shown his concern related to the dependency and trust on the financial information. In this context, it is required to be mentioned that there are some specific responsibilities and roles of the auditors (abc.net.au 2018). The main responsibility of the auditors involves in the planning  and performing the audit operations in order to obtain sufficient evidence for getting assurance about the financial statements of the companies are free from material missstements (Knechel and Salterio 2016). In case of the presence of material missstements, the auditors are required to determine that whether they have been occurred from errors or fraud (Sanderson 2013). At the time of performing the audit operations, it is required for the auditors to comply with the audit ethical principles for the generation of influence free or biased free audit opinion. However, in the provided article, G. Medcraft has mentioned that there is a lack of professionalism and professional scepticism in the responsibilities of the auditors. He has also mentioned the fact that the big four audit companies of Australia are required to bring improvements in the audit standards for avoiding any Enron kind of situation in Australia (Christensen, Glover and Wood 2013). Based on the above discussion, it needs to be mentioned that in case the auditors do not perform their roles and responsibilities, the community people will not be able to put trust on the financial information of the companies (abc.net.au 2018). Thus, in the presence of all these reasons, G. Medcraft made this statement.

Failure of Audit at Satyam Computer

It needs to be mentioned that there are some major purposes of audit report in the business organizations and there is not an exception of this fact in case of Satyam Computer. In this context, it needs to be mentioned that audit report is the written opinion of the auditors related to the financial statements of the companies. For this reason, the companies are required to follow the specific form for the preparation of audit report (Robert Knechel, Vanstraelen and Zerni 2015).  In case of Satyam Computer, the main purpose of the company for the preparation of the audit report is to provides the users with the correct financial information related to the financial position of the company. Satyam Computer ha different users of the financial statements like the investors, employees, customers, lenders, creditors, banks, taxation authorities and others; and all these users use the financial information for the purpose of different kinds of decision-making process. In the issued audit report of Satyam Computer, it was observed that there was not any kind of fraud and errors in the financial statements (Lennox, Schmidt and Thompson 2017). Thus, it implies that the financial statements of Satyam Computer were free from any kind of material misstatements. Apart from this, in the audit report, the auditors of Satyam Computer, Price Waterhouse Cooper (PWC) stated that all the financial statements of Satyam Computer were developed with accordance with the required standards and regulations of financial reporting. Apart from thus, from the audit report, PWC was found to be stated that they did conduct the audit operation by complying with the required audit standards.      

In actual, the situation was totally different from what the auditors mentioned in the audit report of Satyam Computer. It was found the auditors of Satyam Computer; PWC was majorly involved with the company in the manipulation of the financial statements of the company. For this reason, the United States Securities and Exchange Commission find PWC with an amount of $6 million (Lai 2013). Apart from this, US SEC, and Securities and Exchange Board of India (SEBI) barred the audit operations of PWC by stating the fact that auditors did not comply with the standards and principles of audit profession. Thus, from the above discussion, it can be observed that the auditors of Satyam Computer did not comply with the necessary standards and principles of audit profession while conducting the audit operations. Due to this, the auditors overlooked the major financial frauds of the company in the presence of major financial influence (Gayno et al. 2016). Thus, the audited financial statements of Satyam Computer did not reflect the major material missstements. For this reason, financial statements of Satyam Computer did not reflect the true financial conduction of the company. Hence, based on the whole discussion, it can be observed that the audit report of Satyam Computer did not serve the desired purpose of audit reports.

Unethical Conduct of Satyam Computer's Management

It needs to be mentioned that the managements of the companies have some particular role to play in auditing and in other aspects of the business operations. The main responsibility of the management is the preparation of financial statements after complying with the required accounting standards and principles. They are also required to express an opinion on the financial statements. The management is largely responsible for the establishment and maintenance of effective internal control in order to reduce the possibilities of any kind of fraud activities or trading. All these aspects are also applicable for the management of Satyam Computer (Badolato, Donelson and Ege 2014).

However, the situation is different in case of Satyam Computer as the management of the company was noticed not fulfilling the desired roles and responsibilities. It can be observed that the management of Satyam Computer was involved in different kinds of illegal activities. They are discussed below:

Unethical Conduct: It needs to be mentioned that the management head and founder of Satyam Computer, B. Ramalinga Raju. His main aim was to earn money with the help of different illegal activities like not paying tax, false accounting books and others. There was not any positive corporate culture for the management of Satyam Computer. The management of the company was largely responsible for bribery, corruption, exchange of favour and others (Welford 2016).     

Insider Trading: From the investigation of Crime Investigation Department (CID) of the State Police and Central agencies, the management of Satyam Computer was involved in the process of insider trading of the shares of them in order to build a large land bank. The management team of Satyam Computer used the raised money to buy lands in the names of 330 companies and 30 individuals. This can be considered as a major instance of insider trading (Helmreich and Merritt 2017).

False Book and Wrong Accounting: It needs to be mentioned that the balance sheet of Satyam Computer as on 7 September 2007 shoed accrued interest amounted Rs. 376 crore that did not have any resistance in actual. Apart from this, the management of the company was also involved in the falsification of current account deposits (Welford 2016).   

Insufficient Board: It was seen that the board of directors of Satyam Computer was composed of chairman-friendly directors and they literally failed to question the strategy of the senior management. In addition, they were also very slow to act (Helmreich and Merritt 2017).

Responsibilities and Role of Auditors

Unconvinced Role of Independent Directors: There was lack of objectivity in the role of the independent directors and the board failed to improve the effectiveness of the company. Thus, based on the above discussion, it can be seen that the management of the company failed to act ethically for the overall success of the company (Helmreich and Merritt 2017).

As per the earlier discussion, the main responsibility of the auditors is to inspect the financial statements of the companies in order to be ensured that they are free from material misstatements. For this reason, they are required to obtain sufficient financial information and they must comply with the principles and standards of audit ethics (Klassen, Lisowsky and Mescall 2015).

However, different situation can be observed from the audit operations of Satyam Computer. In case of Satyam Computer, it was required for the auditors to inform the shareholders and the regulatory authority about the information supplied by the whistleblower. However, the auditors did choose to remain silent due to have financial interests in the property of Satyam Computer. It needs to be mentioned that PwC played a fraudulent role in the audit operations and the role of PwC in Satyam Computer matches the role of Arthur Anderson in the collapse of Enron (Broberg 2013). It is the responsibility of the auditors to develop their own independent testing mechanism and not to consider the reporting mechanism of the client. However, in case of Satyam Computer, it can be observed that PwC used the provided tool by Satyam Computer that lead to the compromise of auditing standards. While doing the audit operations of Satyam Computer, PwC came across that fact that there was deficiencies in the internal control process of the company that can contributed to fraud risk (Broberg 2013).

In spite f knowing all these facts, the auditors did not report this fact to the shareholders. The auditors of PwC did not take any attempt to check the invoice of the company. In addition, they did not even inspect the balance of sundry debtors. It can also be seen that the statutory audit process of Satyam Computer failed in the verification of cash and book balance, current account and fixed deposits (Jibrin, Blessing and Danjuma 2014). It is required for the auditors to conduct the physical verification of various financial assets rather than simply relying on the books prepared by the company. However, in case of Satyam Computer, it can be observed that the auditors of PwC did not do any physical verification of the assets (Broberg 2013). Thus, based on the above discussion, it can be observed that the auditors of Satyam Computer did not fulfil their roles in Satyam Computer.      

Conclusion

Conclusion

 From the above discussion, it can be observed that Mr. G. Medcraft made the provide statement due to the lack in the roles and responsibilities of the auditors. It can be seen from the discussion that the auditor of Satyam Computer, PwC did not mention the material missstements in the financial statements of Satyam Computer. However, in actual, the auditors did not show the correct financial situation of the company as there was the presence of major material missstements. In addition, it can also be seen that the management of Satyam Computer failed in their major management activities. The management of the company of Satyam Computer involved in various illegal activities like unethical conduct, insider trading, falsification in financial accounts and many others. Apart from this, it can also be seen that the auditors of Satyam Computer failed in their roles and resomnsbilty.

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 7 Apr. 2018].

Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2-3), pp.208-230.

Broberg, P., 2013. What do auditors do?. Mercury Magazine, 5, pp.102-107.

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.

Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), pp.1-22.

Helmreich, R.L. and Merritt, A.C., 2017, November. 11 Safety and error management: The role of crew resource management. In Aviation Resource Management: Proceedings of the Fourth Australian Aviation Psychology Symposium: v. 1: Proceedings of the Fourth Australian Aviation Psychology Symposium. Routledge.

Jibrin, M.S., Blessing, S.E. and Danjuma, I., 2014. The role of auditors in the recent Nigerian banking crisis. International Journal of Academic Research in Business and Social Sciences, 4(3), p.231

Klassen, K.J., Lisowsky, P. and Mescall, D., 2015. The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review, 91(1), pp.179-205.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Lai, K.W., 2013. Audit reporting of big 4 versus non-big 4 auditors: The case of ex-Andersen clients. The International Journal of Accounting, 48(4), pp.495-524.

Lennox, C.S., Schmidt, J.J. and Thompson, A., 2017. Is the expanded model of audit reporting informative to investors? Evidence from the UK.

Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance Services 6e. Wiley.

Robert Knechel, W., Vanstraelen, A. and Zerni, M., 2015. Does the identity of engagement partners matter? An analysis of audit partner reporting decisions. Contemporary Accounting Research, 32(4), pp.1443-1478.

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.

Welford, R., 2016. Corporate environmental management 1: Systems and strategies. Routledge.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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