BBAA3103

AUDIT 1

JANUARY 2019

NAME:

IC NO:
 Table of Contents

1.0 Description on Audit Evidences

1.1 Examples of Audit Evidences

1.0 Description on Audit Evidences
Audit Evidence commonly refers back to the facts collected for reviewing the monetary
transactions of a employer in addition to its inner control practices and other crucial elements
required for the certification of financial statements. The type and amount of the considered
auditing evidence varies significantly on the premise of the sort of business enterprise being
audited in addition to the required scope of the audit. The audit proof are crucial to be accrued by
an auditor throughout the process of his auditing work. The primary goal of any audit is to
discover the compliance of a organisation’s financial statements with the gaap applicable to the
jurisdiction of the entity. The publicly traded companies are generally required to give
completely audited monetary statements to shareholders at regular periods.

1.1 Examples of Audit Evidences

 Introduction to Audit Evidence

The underpinning of any audit is the evidence collected and evaluated by means of the
auditor.the auditor should have the abilities and know-how to gather and collect sufficient
suitable audit proof to satisfy the usual of the profession.obtaining enough suitable audit proof is
important for the auditor to attract affordable end on the genuine and fair view of the financial
statements.

 Nature of Evidence

Using evidence does now not uniquely belong to the audit professions.evidence has been
extensively used inside the criminal and scientific profession.one can be familiar with the
evidence that is sought by the lawyer in figuring out the innocence and guilt of the events
charged with crook offence in tv collection including regulation and order or the practice.

similarly in clinical experiment,scientists behavior experiments a good way to discover evidence

to draw a end approximately a theory.for example a forensic will take a look at and conduct
operations on murdered sufferer to discover evidence to establish the purpose and time of the
dying.
In the audit of monetary statements,auditors also collect evidence to assist them to arrive at end
whether or not financial assertion has been organized according to the necessities of the
regulation and stipulated standards.even though the character,kind and the manner wherein the
evidence is used range among attorneys,physician or auditors,however in all of these instances
the proof is used to assist the decision maker to draw a conclusion.

 Definition of Audit Evidence

in step with isa 500,audit evidence is defined as all of the information utilized by the auditor in
arriving at the conclusions on which the audit opinion is primarily based.audit evidence
includes facts together with accounting data and files underlying the monetary statements in
addition to corroborating data from different resources.

accounting information are accounting entries inclusive of magazine,popular ledger,subsidiary

ledgers and cash e book.despite the fact that an auditor can rely on the accouting records as a
source of evidence,it is not enough to assist her or him to base an opinion on the economic
statements.subsequently the auditor desires to are looking for other audit proof or corroborating
proof to aid his or her conclusion and opinion.other forms of audit proof includes facts from
internal or outside to the organisation such as minutes of board of
director,agreements,memorandum of associations,provider statements,bank
statements,confirmation from external parties,industries records and proof sought by means of
the auditor through observation,discussion with the clients employees and bodily examination.
  Audit Evidence Decision

one of the critical decisions that want to be made through the auditor is to decide the amount and
the proper kind of evidence to accumulate.this can allow the auditor to attract reasonable end as
to the real and honest view of the financial statements below attention.

The auditor’s decision on evidence accumulation can be divided into four types of decisions.

 Which audit procedure to use

 What sample size to select for a particular procedure?
 What items to select from the population?
 When to perform the procedures?
 Persuasiveness Of Audit Evidence

ISA 500 requires the auditor to accumulate enough appropriate audit evidence to help the
opinion issued.as explained in isa 500,appropriateness of audit evidence pertains to its relevance
to a specific announcement and to its reliability.

the two determinants of the persuasiveness of evidence are appropriateness and sufficiency as
explained next.

a)appropriateness

evidence is considered appropriate if it may be believable or dependable.if proof is taken into

consideration rather suitable,it's far a fantastic assist in persuading the auditor that the economic
statement displays a true and honest view.appropriateness of audit evidence deals most effective
with audit process decided on.appropriateness can't be stepped forward only through deciding on
a larger pattern length or one of a kind populace gadgets.

b)Characteristics of Appropriate Evidence

listed as follows

i)Relevance

ii)Independence of Provider

iii)Effectiveness of Client’s Controls

iv)Auditor’s Direct Knowledge

v)Qualification of Individuals Providing the Information

vi)Degree of Objectivity

vii)Timeliness

viii)Sufficiency

 Types of Audit Procedure

Inspection.

Inspection is an audit manner based on the examination of records or documents, whether or not
internal or outside, that would be held in numerous bureaucracy, ie paper, digital or similar, or on
the bodily assessment of an asset

 Remark

Remark is as an alternative an audit system that consists of searching at a method or method

being achieved through others in order that evidence about the actual performance is obtained
but statement gives evidence that is constrained to the factor in time while it takes area and by
way of the fact that being determined may have an effect on how the system or system is
achieved on such occasion.

 External Confirmation

External Confirmation tactics may be an vital supply of applicable and dependable audit
evidence. This audit evidence that is obtained as an immediate written reaction to the auditor
from a third birthday party (the confirming party) in paper form, digital medium or other
medium.

 Recalculation

Recalculation technique that includes checking the mathematical accuracy of documents or

records and that can be used to verify the accuracy of the recording of transactions or of the
utility of accounting guidelines.
  Analytical Strategies

Analytical Strategies diverse ranges of an audit engagement: at the hazard-assessment stage, as

substantial audit methods to confirm monetary statements assertions and toward the end of the
audit to corroborate whether the monetary statements are regular with the auditor’s
understanding of the entity. Analytical techniques involve critiques of monetary data via
evaluation of practicable relationships amongst each financial and non-financial statistics.

 Inquiry

Inquiry form of audit manner that is used significantly at some point of the overall performance
of an audit similarly to different processes. It includes searching for each monetary and non-
economic data of knowledgeable individuals inside or outdoor the entity.

 Reperformance

Reperformance is a substitute entails the impartial execution by using the auditor of procedures
or controls that were inside the beginning finished as part of the entity’s internal manage.

 Evaluation of Audit Evidence

Evaluation of audit evidence have ability to assess audit evidence appropriately requires auditors
to have ok capabilities and expert judgment.the auditor must be able to decide the
appropriateness and sufficiency of each type of evidence collected.
2.0 Real Cases Associated with Audit Evidences
 ENRON SCANDAL( 2001)
The enron scandal surfaced in october 2001 while it became discovered that the united states's
seventh largest organization changed into involved in corporate corruption and accounting fraud.
the scandal surrounding the enron power agency covered political implications because of
enron's near hyperlinks with the white house, the deregulation of enron permitting the
organisation to perform in large part loose from us authorities scrutiny, misrepresentation in
earnings reviews, a fraudulent 'electricity crisis' and embezzlement undertaken by using enron
executives. the enron scandal subsequently caused the bankruptcy of the organization
collectively with and the dissolution of the auditing business enterprise arthur andersen. enron
shareholders lost $seventy four billion leading as much as its bankruptcy, and its personnel lost
their jobs and billions in pension benefits. enron ceo jeff skilling was sentenced to 24 years,
former ceo kenneth lay died before serving time.

 Waste Management Scandal (1998)

Between the years 1992-1998, Waste Management were found to have undergone one of the
most remarkable accounting fraud situations. The U.S SEC (2002) explains how the founder,
Buntrock, and five other senior members of the company manipulated the financial position of
the company in order to meet the predetermined targets they had been set at the beginning of the
financial year. The senior officers began to perpetrate the fraud using improper accounting
practices, not acceptable to the Generally Acceptable Accounting Principles (GAAP).
‘Defendants cooked the books, enriched themselves, preserved their jobs, and duped
unsuspecting shareholders’ (U.S SEC, 2002) in order to meet their own financial earnings
targets. The fraud case was intensified when the company’s long term auditors, Arthur Andersen,
along with three other partners, began to audit the year end statements. Upon inspection,
‘Andersen fully understood the extent of the accounting misrepresentations and repeatedly tried
to press Waste Management executives to change their practices or correct errors, with little
success’ (Eichenwald, 2002). Andersen attempted to use Proposed Adjusting Journal Entries
(PAJE’s), which Waste Management were expected to use to correct their errors, however,
management refused (U.S SEC, 2002). Instead, Andersen became further involved with the
fraudulent case when the two companies came to an agreement, which involved the write off of a
build-up of errors over a 10-year period. The fraud case unravelled in 1997 when Waste
Management appointed a new CEO, who initially began to review Waste Management’s
financial statements and ordered a restatement of the past 5 year’s financial statements ‘When
the company filed its restated financial statements in February 1998, the company acknowledged
that it had misstated its pre-tax earnings by approximately $1.7 billion. At the time, the
restatement was the largest in corporate history’ (U.S SEC, 2002). As a result of the fraud, Waste
Management ‘agreed to pay $26.8 million to settle a lawsuit brought by the Securities and
Exchange Commission against (the) four former top executives’ (Schneirder, 2005), while they
also lost massive amounts on their market value. As for Arthur Andersen, they were made to pay
shareholders $220 million as well as $7 million to the U.S SEC.

 TYCO Scandal

Tyco Incorporated was founded in 1960 by Arthur J. Rosenberg, situated in Waltham,

Massachusetts. In 1982, to strengthen the company, Tyco were divided into three business
segments which are fire protection, electronics and packaging. In 1992, Leo Dennis Kozlowski
became the CEO after climbed up from executive, company’s president, and CFO position.
Kozlowski used an aggressive approach to gain acquisitions and mergers during his period as a
CEO. In choosing the Tyco Inc. board of directors, Kozlowski only picked his own crony and
composed the firm’s corporate governance system. In 1999, after a stock split, rumours began to
spread about Tyco’s accounting habits. It was said that Tyco was producing irregular financial
accounts, but it was denied by Tyco’s leaders. Throughout the years of Kozlowski’s leadership,
Tyco merged and bought out several companies, making their profits grow beyond $30 billion.
The Tyco’s scandal was taken place in 2002 when the board of directors launched an
investigation about their members’ incorrect behaviour. Kozlowski and his few “friends” were
resigned and have been dragged to the court. Kozlowski and Swartz, the Chief Finance Officer
(CFO) of Tyco Inc were alleged for stealing $170 million from the company and fraudulently
selling an additional $430 million in stock options. Kozlowski and few Tyco’s board of directors
also been accused in embezzling of Tyco fund for their private used and were cited for conflict
of interest issues. This scandal has caused the shares value decreased drastically and made the
workers breathless. After the resignation of Kozlowski, Tyco was led by Edward Breen and the
firm have been saved.

Lehman once employed 28,000 people across the world, including 5,000 in London. At their
peak, its shares traded at $85, but they are now roughly 10¢. Lehman's remains were shared out
between Barclays, which bought its US broking arm, and Japanese giant Nomura, which bought
its European and Asian assets. These firms, plus number-one investment bank Goldman Sachs,
have profited most from picking over the bones of Lehman's businesses.

In short, Lehman Brothers -- a company with a 158-year history, including 14 years as an NYSE-
listed giant -- failed simply because it took on too much risk in a booming market. In the end, its
move from the safety of corporate finance and M&A (mergers and acquisitions) income into the
risky world of proprietary trading proved to be its downfall.

The lesson here is that any firm, no matter how big and powerful, can be dashed to pieces on the
rocks of leverage, liquidity and losses!

 HealthSouth Scandal

The first of HealthSouth's accounting problems surfaced in late 2002 after CEO Richard M.
Scrushy sold $75 million in stock several days before the company posted a large loss.
HealthSouth was accused by the U.S. Securities and Exchange Commission (SEC) of an
accounting scandal where the company's earnings were falsely inflated by $1.4 billion. In 1996,
Scrushy allegedly instructed the company's senior officers and accountants to falsify company
earnings reports in order to meet investor expectations and control the price of the company's
stock. The fraud continued for seven years. In certain fiscal years, the company's income was
overstated by as much as 4700%. The $1.4 billion represents more than 10% of the company's
total assets. At one point, the company's corporate taxes—based on its fraudulent earnings—
were higher than its actual earnings.In 1998, HealthSouth was accused of violation of the
Securities Exchange Act by failing to disclose negative trends and misrepresenting company's
financial information.[4]In 1998, HealthSouth was accused of violation of the Securities
Exchange Act by failing to disclose negative trends and misrepresenting company's financial
information

In 1998, HealthSouth was accused of violation of the Securities Exchange Act by failing to
disclose negative trends and misrepresenting company's financial information.

in 1998, healthsouth turned into accused of violation of the securities exchange act by way of
failing to disclose bad trends and misrepresenting organisation's monetary facts.[4]

in march 2003, healthsouth's ceo richard m. scrushy turned into charged with the accounting
fraud[5] and the sec introduced it become investigating whether scrushy's inventory promote
changed into associated with healthsouth posting a massive loss. healthsouth employed an
outside law firm to study scrushy's inventory sale, with the company concluding that the sale and
profit loss had been not related, although this did not take the business enterprise off the sec's
radar. at the nighttime of march 18, 2003 fbi agents carried out search warrants at the agency's
headquarters after the agency's leader monetary officer william owens agreed to wear a twine in
a failed attempt to get scrushy to speak approximately the fraud.

in june 2005, scrushy became acquitted on all 36 of the accounting fraud counts towards him,
most significantly one count number in violation of the sarbanes-oxley act. however, 4 years
later, he was sued for fraud by using healthsouth buyers and ordered to pay off his enterprise
$2.8 billion.