The Audit Risks Assessment Model and Potential Areas of Improvement
By:
Patrick S. Fields
Fraud and the Creation of Sarbanes-Oxley
Following the multitude of fraud scandals in the early 2000’s, such as Enron and WorldCom, many accounting firms found themselves as part of a thorough investigation to determine what exactly caused the sudden outburst of accounting fraud. As investors and creditors pursued their lost money from the these business failures, accounting firms began to garner attention for not fulfilling their due process during the audit to detect the fraud before it grew to the extent in which it did. In the case of the Enron scandal, it ultimately turned into the indictment and conviction of Arthur Anderson, one of
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Current economic conditions and other internal factors may raise the inherent risks for a particular account. Some transactions that are routine, noncomplex, and systematically processed may have lower inherent risks, while other routine transactions, such as cash transactions, are more susceptible to fraud and, therefore, have greater inherent risk (Clark 2009). Detection risk is the risk that substantive procedures may be ineffective in detecting errors. As your risk of material misstatement increases, an auditor must prepare an audit plan with more effective substantive procedure. By multiplying these risks together you arrive at the audit risk; defined by SAS 107, "Audit Risk and Materiality in Conducting an Audit," as the positive opinion of an auditor of financial statements that are materially misstated and unknowingly failed to be appropriately modified. As stated earlier, audit risks can never be fully eliminated. Normally, the formula is used to solve for detection risk after establishing an acceptable audit risk (usually 5-10%) based on factors surrounding the company, industry, and background of the client. The determination of detection risks ultimately plays a major role in planning the audit and establishing a materiality threshold. The audit opinion is directly influenced by the amount and type of audit evidence
It is the susceptibility of an account balance or a class of transactions to a material misstatement, assuming that there were no internal controls. The inherent risk at Telstra is that there may be certain types of misstatements that may not be identified during the course of audit. The inherent risk associated with the audit of Telstra is ascertained based on the nature of the business. Telstra Corporation Limited have these kinds of risks:- inventory valuation risk, intangible assets valuation risk, foreign currency risk, interest rate risk, tax risk, amendment risk and compliance risk. All the above stated risks pose potential material misstatements on the financial statements and thus need to be addressed (Telstra
Arthur Andersen (AA) contributed to the Enron disaster when it has failed to the management by failing to have Enron establish and enforce its own internal control. There has been flaws to AA‘s internal control. There has been assumption that AA partners were too motivated by revenue recognition thus, overlooking several criteria when providing their services to Enron. Additionally, AA also recognised the retention of audit clients as vital and a loss of any clients would be disadvantaged to an auditor’s career. In AA internal control, the person who is able to make most of the decisions is the person who is most concerned about the revenue or losses of the client’s company.
The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.
Ann Inc. has a seven member Board that serves the interest of Ann Inc. and its investors. Four of the seven members of the Board of Directors would be considered to be Independent Members by the SEC rules. Five of the presiding members are listed:
Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,
1) Profitability: The bank that issued Overlook Video’s (OVS) loan to fund their expansion is now concerned about the company’s profitability. This may mean that OVS is in danger of breaching any loan covenants that exist and may have trouble obtaining future financing. This may motivate OVS to window dress their financial statements to enhance performance.
This is the first stage in assessing the risk of material misstatements, where the auditor considers the risk of material misstatement before consideration of any internal controls. This is done at the financial statement level by considering such things as the nature of the business, the industry, and any previous experience with the client.
bebe target is a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance (bebe, 2010).
The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.
On June 15, 2002, Arthur Andersen was convicted of obstruction of justice for getting rid of the documents related to Enron’s accounting audit which resulted in the its scandal. The impact of the scandal combined with the criminal findings ultimately destroyed the Arthur Andersen LLP.
On June 15, 2002, Arthur Andersen was convicted of obstruction of justice for shredding documents related to Enron’s audit which resulted in the Enron scandal. The impact of the scandal combined with the findings of criminal complicity ultimately destroyed the Arthur Andersen LLP. The company was accused of destroying thousands of Enron documents that included not only physical documents, but also computer files and Email files. By giving it the role of consultant along with their original role as external auditors, Enron made Arthur Andersen LLP a key player in Enron auditing.
Arthur Andersen and Enron scandal might be the most recognized but not the only one, history have seen many similar accounting failures such as at Satyam Computer Services and Lehman Brothers.
Arthur Andersen charged the client a huge sum on fee, 52 million dollars for the audit and the non-audit services provided to the client. Initial allegations focused on the role of the auditors, AA was one of the big five accounting firms in the united states at that time and served Enron for nearly 16 years. The courts documents stated that Enron and Arthur Anderson allegedly categorized hundreds of millions of dollars as increase in the shareholders equity, and hence misrepresented the true credibility of Enron financial statements. Arthur Anderson gig not follow the GAAP principles, and later on was also accused of destroying the records that was not on the physical but computer files and emails. Being proven guilty of after a 6 weeks trail, Arthur Andersen surrendered its accountancy license and were fine 500,000
Enron and Arthur Anderson were both giants in their own industry. Enron, a Texas based company in the energy trading business, was expanding rapidly in both domestic and global markets. Arthur Anderson, LLC. (Anderson), based out of Chicago, was well established as one of the big five accounting firms. But the means by which they achieved this status became questionable and eventually contributed to their demise. Enron used what if often referred to as “creative” accounting methods, this resulted in them posting record breaking earnings. Anderson, who earned substantial audit and consultation fees from Enron, failed to comply with the auditing standards required in their line of work. Investigations and reports have resulted in finger
For these reasons, corporate financial accounts do not provide accurate or sufficient information to corporate managers, investors, or regulators. This leads us to recommend that the SEC allow each stock exchange to set the accounting standards for all firms listed on that exchange and to promote the development of industry-specific non-financial accounts to complement the financial accounts (After Enron 53). The most important lesson of the Enron collapse is that every link in the audit chain including: the audit committee and the board, the independent public auditor, the bankers and lawyers that aided and abetted the misrepresentation of Enron’s financial condition, the credit-rating agencies, and the Securities and Exchange Commission failed to deter, detect, and correct the conditions that led to that collapse. Although not a part of the formal audit chain, most of the market specialists in Enron stock and the business press were also late in recognizing Enron’s financial weakness (Corporate Aftershocks 12).