Brothers Collapse In Financial Time Series -Myassignmenthelp.Com

Question: Discuss About The Brothers Collapse In Financial Time Series? Answer: Introduction Audit is an independent process of investigation of books of accounts by an individual who has required qualifications in order to determine whether the books of accounts are showing true and fair view or not. The person who conducts an audit is called an auditor. The main responsibility of an auditor is to ensure whether the financial statements are showing true and fair view or not (Griffiths, 2012). Many Companies have wrong conception that the main responsibility of an auditor is to detect fraud, but this is not the case. An auditor always has to prepare a plan which will guide him how to conduct the process of audit step by step. The three fundamental principles which any auditor must follow are integrity, objectivity and independence (Wright Capps, 2012). The principle of integrity states that the process of audit should be conducted in a way which displays the level of skills and competence on the part of the auditor. The principle of objectivity states that the audit process should be conducted in a professional manner while collecting material audit evidences on the basis of which an auditor forms a judgement. The principle of independence states that the auditor should not be related to the clients for which the audit is being conducted. Independence of an Auditor The independence of an auditor is a crucial factor which affects the overall audit process. In any audit, the auditor are specifically disqualified from conducting audit for any related person to the auditor. The independence of an auditor is important as the opinion of the audit needs to unbiased and uninfluenced (Tepalagul Lin, 2015). The auditors opinion on a financial report of a company is the basis on which investors decide whether or not to invest in the company. The auditor is responsible to the investors and it is their responsibility to report to the general public whether the financial statements are showing true and fair view or not. In other words, the role of an auditor is essential in establishing credibility of the financial report (Vona, 2012). While the process of audit has wide range of variables which affect the opinion on financial reports which is used by stakeholders, investors, government on the basis of which decisions about capital allocations are taken. Th e importance of an auditors independence is significantly depicted by the corporate failures which have taken place in recent times. As per the various standards which have been introduced in most of the countries on the independence of the auditor states that the auditor should be independent both in facts and in appearance. As per the provisions of section 290 of APES 110, an auditor must be independent from the client. Independence as per section 290 can be classified in two kind independence of mind and independence in appearance (Cpaaustralia.com.au., 2018). The concept of independence is crucial to the principles of integrity and objectivity for quality of the audit. As per section 120.1 of APES 110, the principle of objective states that an auditor should not compromise their judgement or become bias under undue influences of others. Another main principle of audit is that an auditor must be independent in making judgement on the financial statements of the client. The major threats to independence which arises out of which some instances are mentioned below: When an auditor holds an important position in the company where the auditor is conducting audit such as a post of director or holds certain self interest in the company. In such cases the auditors independence gets affected. When the auditor is closely related with the client whose audit is being performed. Another situation is that when the auditor advices the company on how to improve the accounting process of the company during the course of audit is considered to be unethical and a threat to the principle of independence. Therefore from the above instances it is clear that the auditors independence is threaten by factors such as self interest, familiarity and intimidation on the part of the management. In some cases the management also puts restriction on the independence of the auditor. For example when a management does not provides access to the auditor to a particular set of records during the course of audit than such shall be regarded as restriction on the audit by management. However such threats to independence can be overcome by implementing suitable safeguards to mitigate the threats to independence. The rotation of the audit team in case of an audit firm can to a wide extent overcome the threats to independence. Risks in Audit Risk based auditing is an independent and objective process of collecting audit evidences for the purpose of framing an opinion on the financial statements. It is primarily related to the inherent risks that an auditor faces while conducting an audit. It is a dynamic process which is continuously evolving and which is very effective (Hull, 2012). In any audit process there is major amount of risks involved whether these are inherent risks, business risks or compliance risk. Moreover risk based audit is more effective than the traditional approach as it continuously surveys those areas where there is a chance of risk or fraud or those areas where effective control has not been exercised. This helps in resolving the issues before any major damage is committed. It also ensures that internal control is always at its best at detecting errors and whether necessary measures are also taken or not. Business Risks can be defined as the risks that a business faces which can result in lower earnings than what was expected or a situation where there is no profit that is a loss. It is influenced by many factors such as change in technologies, change in taste and preference patterns, rise in input prices, governmental regulations (Alexy Reitzig, 2012). In other words business risk means that there might be uncertainty in profits or a situation may arise where there is a risk of loss. Business risks which arises due to some future events which may or may not happen, might affect the going concern of a business. These risks can arise due to both external factors as well as internal factors. Internal risks are risks which occur within the organisation and which can be controlled by the organisation (Knechel Salterio, 2016). For example errors committed by employees, fraudulent activities of employees, technological upgrade, better access to credit facilities. External risks are those risks which arise from outside the organisation and which cannot be controlled. Business risk can be classified into five main types Strategic risks: These are risks which are associated with the business environments of the industry concerned. Financial risks: These are associated with the financial requirements of an industry (Christoffersen, 2012). Operational risk: These are associated with the operational activities of industry. Compliance risks: These refers to the legal risks that an industry faces , for example rules and regulation of the land. Other risks: These contains miscellaneous risks like natural disasters which are depended on natural forces. Risk of Material Misstatements are associated with financial accounts in which one or more data is misstated to a level of material significance. This is to be determined by the auditor whether a misstatement exists and whether it is material enough for him to consider it as a material misstatement. This aspect consists of risks of detection, inherent risks and risk related to internal controls. Detection risks are risks which can be reduced by the auditor. Inherent risks occur when there is an omission or error which has nothing to do with the companys internal control. Inherent risks take place when the transactions are of complex nature or a situation where better judgement is required on the part of the auditor. Control risks are those risks which are not detected by the companys internal control. When the material misstatement risk are high then it will also affect the overall audit process Literature Review The concept of audit independence states that the auditor should not be related in any way to the organization on which the audit is being conducted. The term of independence is very crucial to the whole auditing process as if an auditor is independent than the reliability of the audited financial statements increases (Wright Capps, 2012). An article shows that an auditors independence and the overall quality of audit is closely related. The article recognizes four major threats which can affect the independence of the auditor are client importance, non-audit services, auditor tenure and client affiliation with the firm. As per this article these affect the overall independence of the auditor is major determinant of the quality of the audit. Recent studies show that the auditor is able to perform much better in case he is independent. Besides this, Independence of an auditor is one of the fundamental principles of auditing (Tepalagul Lin, 2015). Auditing is also closely related wit h corporate governance. A recent study of china show that the government is trying to improve the corporate governance of the county and also the quality of external audit. Though the main responsibility of an audit is not to detect frauds and errors, but effective audit process helps management identify the weakness which are present in the organization whether such weaknesses exists in internal control or some process of the company (Gao Kling, 2012). The auditors responsibility is not to detect frauds, however if during the course of audit the auditor finds occurrence of fraud then he must inform the management of such and also suggest necessary steps which can be taken. Therefore it is clear that auditing process provides assistances to the overall corporate governance policy of the company. If proper audit is conducted then such reduces the chances of scams and the company can thus supervise its governance effectively. In this modern times, risk management has taken up lot of attentions of the people as the society have seen a lot of scandals which could have been managed or detected earlier. Similar is the case of Enron, which was a natural gas pipeline company. The company changed from gas supplying company to an energy trading company and later on was engaged in building powerplants and utilities from abroad. Theses were based on financial contracts based on prices of gas which the company used to reduce risks with such future gas prices. Now in behind doors the company hid losses which the company suffered and debts as well which were concealed through complex process. The company was also involved in electricity in California, where soon crisis started out which involved frequent blackouts and overpriced electricity. When the financial records of the company was audited the scandal was revealed and the company immediately went in bankruptcy (Ailon, 2012). Similar case study shows the scandal of Worldcom which is regarded as the biggest in the history. Worldcom was a US based company which provided telecommunication services in the country. While conducting an internal audit of the company, the financial records revealed that the company had improperly accounted for $3.8 billion in operating expenses over a period of five quarter. This was major blunder which attracted criminal proceedings against the CEO and CFO of the company and the company was filed for bankruptcy. The CEO was sentenced to imprisonment for 25 years as the economy has suffered a huge loss, stock market was deeply affected and more than 17000 employees of the company were now unemployed. The company also had a huge amount of personal loans in the name of the directors of the company (Cronje, 2014).The auditing of the Worldcom was done by Aurther Anderson an auditing firm which also audited Enron corps which was also closed due to mismanagement. Hence it is clear the role that audit plays in the efficient investigation of the financial statements with a view to form an opinion but also detect scandals which can affect the economy as a whole. The case study of Lehman Brothers show how risks and miscalculated moves can bring about a downfall in the company. The company had invested in the subprime mortgage market and acquired five mortgages. As the crisis started in 2007 the stock prices of Lehman fell sharply and the company had to cancel 2500 mortgages and shut down one of its units. The company the for some quarters earned losses and the prices of the stocks continued to fall along with the pressure of high leverage of the firm (Quax, Kandhai Sloot, 2013). This shows how too much risk and ineffective risk management can affect a business drastically. Conclusion Thus from the above analysis of facts and cases it is clear that the independence of auditor is a crucial factor for a proper audited financial reports which can then be used by stakeholders to take investment decisions. Moreover effective risk management strategy is also essential for the business which can counter situations which arise in Lehman Brothers. The report concludes with the fact that how audit can be used for effective investigation of the books of accounts as well as detection of any frauds which may be happening in a business. Reference Ailon, G. (2012). The discursive management of financial risk scandals: The case of Wall Street Journal commentaries on LTCM and Enron.Qualitative Sociology,35(3), 251-270. Alexy, O., Reitzig, M. (2012). Managing the business risks of open innovation.McKinsey Quarterly,1(1), 17-21. Christoffersen, P. F. (2012).Elements of financial risk management. Academic Press. Cpaaustralia.com.au. (2018).APES 110. [online] Available at: https://www.cpaaustralia.com.au/professional-resources/accounting-professional-and-ethical-standards/apes-110-code-of-ethics-for-professional-accountants [Accessed 8 Jan. 2018]. Cronje, C. (2014). Corporate accounting scandals: reconnaissance.Word and Action= Woord en Daad,53(423), 15-17. Gao, L., Kling, G. (2012). 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