Audit (2nd Copy).docx

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Table of Contents EXECUTIVE SUMMARY ............................................................................................. 3 INTRODUCTION......................................................................................................... 4 REQUIREMENT# 1 ..................................................................................................... 5 REQUIREMENT # 2 .................................................................................................... 6 REQUIREMENT # 3 .................................................................................................... 8 REQUIREMENT # 4 .................................................................................................... 9 SUMMARY NOTE/CONCLUSION PARAGRAPH ........................................................ 10 BIBLOGRAPHY ......................................................................................................... 12

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Executive Summary In this in-depth analysis, report of Enron scandal, the management and auditors played a fraudulent role and misused public money for their benefits. They used main system including accounting reporting and structures to disguise the information and concealed the actual situation from stakeholders, shareholders and government until it has been collapsed. This report is a humble effort based on findings and facts uncovering mysterious events inside Enron and it’s governance issues. Introduction Top progressing company Enron have more than $100 billion revenue and one of the ten most famous company according to different magazines and statistics and one of the biggest giants in the big energy industry all over the world and known as best energy icon but bad fortune for this rising star was some corrupt auditors and other top level management who played pivotal role in failure of this company .this company has been actually got form in 1985 ,when two companies mergers were formed between intermonth and Houston natural gas. Enron specialty were electricity, communication, networks, pulp, natural gas in comparison of other us competitor companies. Enron was largest electricity supplier all over the US. Also huge structure of power plants is also present in ownership of Enron. KEY STAKEHOLDER ANALYSIS OF QANTAS AIRWAYS The ASX listed company which I selected for my assignment is Qantas Airways which is listed on stock exchange with code (ASX: QAN). Qantas Airways is the largest airline of Australia by fleet size, international flights and international destinations. It is the third oldest airline in the world. It initiated international passenger flights in May 1935. The airline is based in the Sydney its main hub at Sydney Airport. By March 2014, Qantas had a 65% share of the Australian domestic market and carried 14.9% of all passengers travelling in and out of Australia. Red kangaroo is the Qantas airways logo. Stakeholders for the Qantas Airways are people who have any kind of financial or non-financial interest in the company. The key stakeholders and the implications of materially misstated financial statements on their decisions are discussed below. Shareholders: These are the people who own Qantas Shares So; they own the proportion of the Qantas Business as they lend the company money to operate by purchasing its shares. They want the business to be profitable as they will receive return on their investment in the form of dividend payments. If the financial statements are misstated the profits shown by the company can turn into losses and the company will not pay dividends to save money for other purposes. If company for the long time will not pay dividends the shareholders will not see any logic to keep the company shares they will sell you share and will invest the amount in some other company. As misstated financials will lead to reputation losses the share price will go down based on this factor.

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Banks and Institutional Investors: As Qantas is operating in a highly capital intensive industry so it’s impossible that they avoid loans from banks and institutional investors for growth and operations. If the company will show wrong or misstated information the investors will lend the money based on it but later the company will not be able to payback their loan so the creditor ratings will come down and for the next time company will face difficulty in raising finance for operational and growth purposes. Suppliers: These are the people who supply good and services to the business for its operations .They rely on the financial statements to see that the business they are supplying is stable enough to pay them back on time. If the business will provide wrong statements the suppliers believing that the business is in good position will give the good or services to the Qantas Airways but later. If material misstatement is not properly identified, disclosed or adjustment then there is different layer of impacts on different stakeholders according to their powers and interest in financial statements of company. The different impacts are given below: 

If there is material misstatement in such a way that if they identified and adjusted then it have the tendency to change profits into losses and make report material and pervasive this will impact all stakeholder’s employee may lose their jobs like in Enron case.

Other stakeholders also lose their interest in the company (ACCA News, 2018). Question # 2 INDEPENDENCE OF AUDITORS The shareholders and other stakeholders need confidence that the financial statements they are relying upon are assessed objectively and independently so they need confidence that the auditors conduct their work without bias and personal interests and they are not influenced by the management of the company who prepared the financial statements under review. This is the concept of Auditors independence. So Auditors independence is the mind attitude to act in the best interest of the public while carrying out professional judgments (PWC, 2017). Whistleblowing for auditors is when they speak out about a suspected wrongdoing in public. This can be done confidentially or openly depending on the situation and consequences (ASIC, 2018). The independence of the auditors is splited as follows according to APES 110 code of ethics. 

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Independence of mind: Mind should be in such a form which will not compromise professional judgment skepticism. This will enhance the audit performance in public interest. Appearance Independence: Auditor should not avoid facts in such a way that any unrelated and unbiased. Third party easily judge from audit work that auditor’s independence has been badly compromised and auditor is abusing the public interest. 4

The APES Code of ethics imposes that Fundamental ethical principles should be followed strictly by auditors, audit firms performing audit & review engagements or assurance engagements. The application of the fundamental principles is to ensure that auditor’s independence is intact. If at any stage the auditors think that appropriate safeguards are not available and these safeguards are not applied to mitigate the risk to an acceptable level the auditor should decline the audit engagement in the best interests of the people. Section 290.6 defines that independence comprises of independence of mind and independence of appaerence.Indepence of mind is the can result in a conclusion that the opinion of the auditor is unaffected by the influences which can result in compromise of the auditors integrity. While the independence of appearance is defined as the avoidance of such circumstances and facts through which a reasonable third party can conclude that auditor’s opinion and independence have been influenced and compromised. Section 290.7 defines the framework for the auditors and need auditors to identify threats to independence while carrying out assignments, then it need to evaluate the significance of the threats identified and then it ask auditors to apply safeguards necessary to mitigate the threats or reduce them to an acceptable level . Where auditor sees that no such safeguards are available which can mitigate the threats or bring them down to an acceptable level the member or the auditor should decline the audit engagement. Paragraphs 290.102 to 290.231 defines and explain those circumstances which can cause threats to auditors independence.Thes Para also describe the threats and the related safeguard that can be used to eliminate threats . Para 290.102 explains that having a financial interest in an entity can create the self-interest threat. The importance of the threat is explained by the role and person who is having the financial interest, whether the interest is direct or indirect in nature and the materiality of such interest. Para 290.104 explains further that if the member of the audit team or the immediate family member of the auditor is having direct or indirect financial interest in the client then there are no measures which can reduce the self-interest threat to an acceptable level .so the audit team member, his immediate family member cannot have the direct or indirect financial interest in the client. Question # 3 Auditor’s consideration after Enron failure After making asset of $63.4 billion and went into liquidation the news was shocking and hot topic for the US and Enron’s stakeholders. It was the biggest bankruptcy of any corporate business in the United States. Enron has lost their customers due to bad practices. The failure 5

was due to wrong practices, unethical behavior and deliberate wrong treatments of accounting standards in order to be looked very much profitable. They hide the original company’s financial position with the help of auditors. This mega failure forced the regulatory bodies to make the audit firms more accountable. Audit firms were directed to be independent while carrying audit (Ojo, june 2006). After the failure of Enron and strict regulations the quality of ethics in work environment has significantly improved. Lesson was learned by almost all types of stakeholder to avoid such frauds in future (Aldrick, Nov 2003). Different regulatory bodies and corporations were shaken and measures were taken to avoid the incident like Enron in future. Some of the lessons learned are following    

Auditors were abiding to perform work in a way where true and fair picture can be obtained as far as financial statements are concerned. Appropriate evidences should be obtained. Material misstatements should be identified and review of identified misstatement should be done by senior members. For further analysis. Client confidentiality should be kept where ever is required by law and regulations.

Due to This mega corporate failure public was concerned over the roles of auditors and at same time they were asking for more strict regulations on audit firm. After pressure from different groups Sarbanes Oxley act was established to regulate audits further and win the hearts and minds of public in order to restore the lost confidence of public in audit profession. Enron is the main origin of evolvement of auditing standards that are centering on ethics to perform quality audits directing mostly on independence and true and fair view of integrated reporting. Enron is history highest auditing home covering and manipulation using multiple malevolent and disgraceful activities. Entire audit community’s integrity was become suspicious (Beal). What Auditors have learned? If audit firm performs the same the incident will be repeating again and again in different parts of world and shareholders and other potential investors will lose the money and a day will come where audit will be mere a formality. In order to save the profession auditors made several new procedures and systems to be adopted to regain trust in profession. Standards were reviewed to mark them more reactive to the issues. Auditors have underway to advance disclosures of related party transaction and expand procedures to avoid and reduce manipulation through unalike audit and accounting treatments. Auditors from in different part of world has revised their audit techniques and members were guided through special training in order to make them familiar with new standards and check lists to carry audit free from material misstatements. Members were provided with decisions making authority to make decision with judgment under the circumstances where standards are not clear. Audit members were told to avoid wrong practices, careless behavior, and unethical approaches while carrying. Audit firms were clearly told to avoid carrying external audit and other assurance services at same time for same client because it will give rise to the self-review and familiarity 6

threats. However if threats cannot be avoided it must be reduced up to acceptable level (APES 110 Code of Ethics for Professional Accountants, 2010). Audit firms decided to rotate the staff from one client to another after definite time to reduce the familiarity threat as long standing with single client create threat of personal and mutual interest. Audit firm were made clear not to carry such services which create opportunities to save money for the client. Audit firms were guided to be remained integral and stand on right side of ethics throughout the audit. Auditor boards decided diverse sentences to avoid rude practice of audit skills. Audit firms decided to give strength to corporate governance and also learned from corporate failure of Enron that there should be strong whistle blower protections. Audit firms have realized that accountability, rotation of staff, ethical training and disclosure will bring transparency to the profession (Helen, Dec. 11, 2015). Question # 4 Audit quality can be improved through independence, integrity and has no Financial or other interest in client’s business, unlike the auditors of Enron which result in compromising independence. These rules are also specified in diverse standards and regulations (APES 110 Code of Ethics for Professional Accountants, 2010). Audit quality means that audit is performed as per all appropriate rules and auditing standards and to make sure that auditors involve the audit practice successfully. Audit quality comprises all information effortlessly retrieved by auditor to conduct audit and classify material misstatements to dodge Enron like situation about which Greg Med craft has assumed warning that inferior audits are coal in the canary for corporate letdowns as in Enron case. Audit must be accordance of international accounting standards to give fair and true picture of company’s financial position (ASIC, 2018). Performing high quality audit is very challenging task due to many limitations and inherent risks. This means that audit must be carried in a way to reduce the audit risks to make the right opinion. Actual case is the opposite as said by Greg med craft, former chairman of ASIC in interview. In the interview, he said that 23% audits are not free from material misstatements and audit firms are engaged with clients yet again and this could be the another Enron case. Auditor should ensure that financial Statements are free from material misstatements, major errors, big frauds and are spotted, amended and applied all standards in a timely manner. Auditor should test estimations, disclosures and demonstrations given by management using professional skepticism. Audit quality and concerns of former chairman Audit quality increases the sureness of shareholders and investors. Refining audit quality by big four will also increase the respect of occupation. Accounting profession was affected after Enron collapse, so audit quality is similarly vital to calm the audit sequence and related party interests. 7

One way to ensure audit quality, by taking on clients which have clean and clear records and considered to be fair in dealing. Client due diligence is extremely important before taking on new client. Professional skepticism It is very significant portion of quality audit that auditors have to critically evaluate all evidence obtained along critical and questioning mind. The information provided by management need scrutiny, it cannot be accepted blindly because that is internally generated which could be wrong in order to hide company original financial statements. The following procedures need to be adopted while carrying audit with high quality and reasonable assurance obtained.       

System of accountability and responses to different situation should be established. Deploy members with having relevant experience, qualification and skills and continuous supervision by senior partner should be carried out. Audit risks should eliminate or reduced to an acceptable level by timely responding to issues. Rotation of staff after certain time as per APES 110 code of ethics for professional accountants. Eliminating threats to ethics by applying suitable safeguards to reduce them at acceptable level. Audit should be free of any bias. An audit firm cannot be depending on single client as far as fee is concern.

Audit firms would organize their human resources from their employee structure to manage with any difficult audit issues too. Audit firms must have their active and competent internal quality control reviews to critic their staff obedience with purposes to perform high quality audit practice while carrying their audits. Internal quality control reviewers will have comprehensive power and sufficient knowledge to test any staff concerning their quality audit performance and if there is no internal expertise in the firm this segment of the business should be outsourced to another firm. Internal quality control department should be regularly developed and it must be quip with modern day knowledge and tactics (APES 110 Code of Ethics for Professional Accountants, 2010). Internal quality control must be reviewed periodically to study the practical suggestions of these reviews. There might be conditions where partners and other employee repel the findings of reviews and audit reviews because of risk of reputation loss or remuneration. Every audit tasks must be correctly documented and have right holdups. Audit firms are expected to dodge that audit which has close deadlines and contingent fee. Audit firms need to conduct regular seminars and trainings with intention to develop their employees (ASIC, 2005).

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Consequences of auditor’s obedience with audit quality rules will boost the public sureness in audit process and in financial reporting. High quality audits also become the vibrant basis to diminish expectation gaps among auditors and other stakeholders. Detailed cold review of audit papers helps in correcting errors and also helps in future to carry better audit Conclusion Greg med craft is highly in doubt that big 4 firms are not carrying audit as per international accounting standards in which reasonable assurance are given that financial statements are free from material misstatements which poses risks in Australia of Enron type failure because of carelessness by auditors in applying audit procedures. These facts are snowballing dangers for key stakeholder plus load on auditor also. So, if big errors do not recognize and corrected in timely manners then there are more chances of material misstatements which will have impression on confidence of stakeholders including customers, vendors, government and shareholders having diverse control and interest. Risks to stakeholders include dividends loss, loss of capital and taxes etc (ASIC, 2005). To dodge all substantial misstatements, as quantified in APES 110 code of ethics for professional accountants, auditors would have independence of mind and appearance while executing audit and also company must have robust internal controls to defend whistle blowing and all audit practices. Auditors ought to act in a manner that will not identical as Enron’s auditor and should display professional conduct and honesty to occupation. Cautionary from earlier ASIC chairman warning can also simply avoid by subsequent whole set of code of ethics. If these steps are carried with lucidity, we can avoid adverse situations and can improve audit quality.

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References ACCA News. (2018). Retrieved from https://www.accaglobal.com/us/en.html Aldrick, P. (Nov 2003). Retrieved from https://www.telegraph.co.uk/ APES 110 Code of Ethics for Professional Accountants. (2010, december). Retrieved from https://www.google.com.pk/search?q=2.+https%3A%2F%2Fwww.apesb.org.au%2Fuploads%2F standards%2Fapesb_standards%2Fstandard1.pdf&rlz=1C1CHBF_enPK792PK793&oq=2.+https %3A%2F%2Fwww.apesb.org.au%2Fuploads%2Fstandards%2Fapesb_standards%2Fstandard1.p df&aqs=chrome.. ASIC. (2005). Retrieved from https://asic.gov.au/ ASIC. (2018, december 6). Retrieved from https://asic.gov.au/regulatory-resources/financialreporting-and-audit/auditors/whistleblowers-company-auditors-obligations/ Beal, V. (n.d.). Retrieved from https://www.webopedia.com CBC News. (2006, May 25). Retrieved from https://www.cbc.ca/news/business/the-rise-and-fallof-enron-a-brief-history-1.591559 Helen. (Dec. 11, 2015). Retrieved from https://pcaobus.org/News/ Japanese newspaper Nikkei. (2002, March 5). Retrieved from https://www.scu.edu/ethics/focusareas/business-ethics/resources/lessons-from-the-enron-scandal/ Ojo, M. (june 2006). muenchen.de/1147/1/MPRA_paper_1147.pdf

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PWC. (2017). Understanding Fiancial sttaemnets audit. Silas Malone. (2016). Retrieved from https://slideplayer.com/slide/9230668/ Wikipedia. (2005). Retrieved from https://en.wikipedia.org/wiki/Enron_scandal

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