Typically, an independent or external audit is carried out by a neutral third party, such as a professional accounting firm which specializes in audits to provide a fair view of a company’s financial statements. As the economy has just come out of a recession, there are quite a few companies attempted to manipulate their figures to their advantage to possibly drive investment by raising their share price or even give confidence in their company that they are not going to reach bankruptcy. It is external auditors responsibility to spot this to make sure there is no wrong doings present. However, the external auditors may be not independent of their clients for some reason. According to Accounting WEB, there are several factors threating an …show more content…
The total assets of the company were estimated to inflated by about $11 billion by the end of 2003. They overstated the cash flow and profit margins significantly to disguise its decreasing earnings to maintain the price of WorldCom’s stock by fraudulent accounting methods (web), which should be found by their auditor – Arthur Anderson (one of the former Big Five accounting firms and then bankrupted in 2001). According to the Economist (), WorldCom scandal resulted in many negative impacts on its auditors and American economy even the world. Andersen was not only sued and lost its reputation but also dented the confidence in American accounting. Additionally, WorldCom’s share price had fallen from a peak of over $60 to below $2 a share by several months. Before New York stock opened, Japan 's Nikkei, Germany 's Dax and France 's CAC 40 each fell by over …show more content…
However, in terms of an audit firm, it may not pay much attention to the audit procedures since they are always the same and the firm cooperates with its client for several decades. Subsequently, the firm or auditors may hold their client’s shares so that they would like to make an extra income by creating accounting to enhance the financial statements. Finally, when the firm provides other service like taxation and management consultancy to their clients, the auditors may rely too heavily on the other services income and are reluctant to risk losing a client because of unqualified audit opinion although these services, sometimes facilitate the performance of other work by knowing sufficiently about the operations of their
Auditors do not provide audit opinions for different levels of assurance. Therefore, auditors consider providing more or less assurance when modifying evidence for engagement risk to be unnecessary. However, auditors should be professionally responsible to accumulate additional evidence, assign more experienced personnel, and review the audit more thoroughly, particularly when a client poses a higher than normal degree of engagement risk. The auditor should also modify evidence for engagement risk when high legal exposure and other potential actions affecting the auditor
WorldCom and The Mississippi Scheme are both large financial scandals that have occurred. WorldCom was a telecommunication company that overstated their cash flow by reporting $7.6 billion in operating expenses as capital expenses. WorldCom is the largest accounting scandal in US history as of March 2002. The Mississippi Scheme was a business scheme that destroyed the economy of France during the 1700’s. The scheme involved the loss of paper money’s purchasing power as a result of asset inflation. Both WorldCom and The Mississippi Scheme were frauds involving manipulation to create higher stock prices and dubious practices within the organizations to keep the public unaware.
It has been noticed that during the accounting scandal of WorldCom, journal entries in the amount of $150 million and $771 million, respectively, were made by two General Accounting employees – Dan Renfroe and Angela Walter—without detailed support. Although, this was not out of the ordinary at WorldCom, this is not a correct accounting practice as it is against the basic principles of bookkeeping and accounting. This is because detailed support in the form of documentation is the key element in providing support to a journal entry and explains the reason or purpose why the journal entry was created in the first place. Such support is very important and relevant from the point of view of the persons reviewing the journal entry and those intending to approve the journal entry. Most importantly, it is extremely relevant and essential from the point of view of external auditors of the company or business. Thus, such support or related documentation enables the reviewer or approver to assess and acknowledge the completeness, reasonableness, accuracy, and appropriateness of the journal entry.
Audited party attributes interrelated to the ability of the audited party to achieve expected goals. Implications of audited party attributes on tax audit effectiveness consist of the ability of audited party to effectively and efficiently meet the sub-goals of organization, attitude of audited party towards tax auditing and the cooperation level provided to the auditor. The auditors are required to fully and unlimitedly access to all activities, records and properties and cooperate with the audited party in order to attain an effective tax auditing work. Hence, the attributes of audited party have a positive effect towards the effectiveness of tax
...ent expense the year it incurred. Due to the reporting error, in 2001 $3.055 billion was misclassified and 4791 million in the first quarter of 2002 (Law Maryland). In order to avoid getting caught, WorldCom was trying to be slick by leaving some line costs as current expense so that the error in classifying would not be easily detectible. This error in classifying expenses cause WorldCom to increase net income and assets. This fraud was found by the companies internal audit, Cynthia cooper, on May 2002. This detection was not good news to Arthur Anderson as they were the outside auditors of WorldCom. Anderson had already been affected by Enron scandal and neglecting to do to their job correctly. But with WorldCom they claimed that the chief financial officer Scott Sullivan did not tell them about the line costs being capitalized and they were unaware of this fact.
People have relied upon the auditing procedures for many years, but the formal practice of auditing has a short period of being into existence. The
An external auditor is from an independent firm which is hired by shareholder vote. The external auditors provide full evaluation, using specific formats for their audit, to investors, creditors and to participants who are somewhat connected to the specific business. Auditor has evaluated company’s financial situation and if the whole dates would be accurate it gives more benefit for owner of the company. The reason is that financial statement is more reliable when it checking by the external auditors and when it is absolutely
The fraud came in to limelight when they could not explain improper records of $3.8 billion in their capital expenditure. Further investigation exposed that the company used to adjust the value of assets in their accounts which gave false impression to investors that company is improving quarter by quarter. They admitted to violate and adjust an earnings of $11 billion. Total fraud was reported to be $79.5 billion. WorldCom has filed for Chapter 11 bankruptcy in 2002.
The purpose of internal auditing and the professionals who provide internal auditing services according to the definition created by the Institute of Internal Auditors is to provide “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” Several guidelines and processes have been created to aid an internal auditor in providing the objective, value adding services they’re supposed to. The International Professional Practice Framework is the compass that provides internal auditors
Lyke, B and Jickling, M. (2002). WorldCom: The Accounting Scandal. CRS Report for Congress, p2.
In summary, we can understand internal auditor is an important for company to ensure the control is good, governance had proper manage, and risk management control is effective. Internal auditor must be independence and objectivity on the work done because if the internal auditor can’t maintain it may arise of impairment and lead company loss money. Internal is an eyes and ears of the and represent audit committee to appraisal, evaluate and identify company management effective and efficient.
The importance of internal audit has certainly raised up along with the transforming business environment. Nowadays internal audit standards and theories have been actively discussed, yet there are still many debates on the ambiguity of internal audit professions’ foothold and their duties. Moreover, the internal audit scandals have never been out of sight: FIFA (2015), Toshiba (2015), Libor (2012), Olympus (2012). Practitioners and scholars study the audit methods, the effectiveness, the factors, etc. that impact the internal audit, but it is only useful once the outputs of internal auditors are realised to outcome.
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
However, some of their client did not give cooperation and collaboration to give the information necessary. So, this will lead to the delay and audit process cannot be proceed smoothly. Auditors need to have sufficient evidence to ensure that to prove that financial statement which are prepare are true and in fair view free from any fraud and misstatements. As for example, during my practical day at Aljafree & Co, I also face with a lot of problems with client related to obtain information like a difficulty to call the client, and I request any information to make as audit evidence, but they just ignore
The major characters of the tradition audit are all information what is needed by auditors are on the paper and the manual calculators and without high communication technology. Auditors usually were limited by the place in the paper time. When a several people are working on the same auditing project for a client with offices in cities across the country, even worldwide, it takes a lots all time those auditors get the information which they need from the client, even there is risk paper information disappear for many reasons. on the another hand, mail paper information increase the auditing cost. The mistake caused by the manual calculators inevitably, no matter how fixed auditors concentrate on recalculate is, after all auditors are human. The global business become major in the modern business world, some example, several auditors who are in different locations are working a same auditing project, or auditors are in different city even country with the client, when there is issue among these auditors or between auditors and client, they only can communicate with each other by phone or be together and have meeting. Phone call can not make sure information been watched in the same time when the voice is talking about the issue, but having a meeting takes time and money make all people together, it increases auditing cost.