ACC707 Auditing Assurance and Services-Communication of Key Audit

ASA701” Communicating key Audit Matter’s in independent Audit report” tells about the responsibility of the auditor towards the communication of key Audit matters in the Audit report. For providing more transparency of transactions and organisational activities key audit matters are conversed. Anticipated user of pecuniary statistics will definitely have more information on the position of the organisation they are investing in, by this they will understand the substances, which are most significant according to auditor’s proficient finding in the review of pecuniary reports. If the key audit matters are communication then it helps the user or stakeholders of financial statements of organisation to know the financial status of the organisation as well as activities of the organisation they are dealing with.

To provide better pellucidity to the stakeholders or the user of the commercial statement and the administration of the organisation this standard have been introduced.

Auditor’s full attention is required in doing audit in respect of Key audit matters.

The institution of ASA 701 communicating key audit matters in independent audit report replicates the guarantee to conventionality by means of recent augmentations to assessor reporting way developed by international auditing and assurance standards board.

This standard relates to common purpose monetary reports of listed bodies and conditions when the examiner then decides to interconnect important audit materials in his report of audit.

ASA 705 forbids the auditor from sharing important audit substances as soon as the auditor repudiates a judgement on the monetary report, except such reporting is necessitates by ruling or guideline.

1. How to determine significant audit matters.

Important audit matters are recognised through taking into account following factors:

• Regions of greater danger of material misstatements. Or any important risks recognised in harmony with ASA 315
• Auditor’s noteworthy finding, which communicates to parts of the monetary declarations, judgement of which important in connection with management. It also are in inclusion of secretarial approximations, which are recognised as guesstimate of improbability.
• Influence, on the important vents and transactions that happened during the period.
• The determination of the matters by the auditor as the most important in the audit of monetary report of the present dated and consequently are the important audit substances.

The auditor shall describe and communicate the important audit materials in the financial statements under a separate heading or subheading with the opening language in the report which says that the important audit matters are those matters which are most significant in the audit of financial report.

1. Necessity of ASA 701

Prerequisite for necessity of ASA701 Communicating key audit matters in independent audit report is established for improved clearness which will give the more comprehensive and clear statistics to the stakeholders or end user of the financial statements. As the result of this the end user will have the knowledge about the working of the organisation they are trusting in. the pre requisite of this standard is that this standard devise an ostensible community concern centre of attention which are of topmost prominence.

The auditor needs to interact with those individual who are charged with authority.

The matters which are needs to be conveyed should be key audit matters.

1. Downfall of Lehman Brothers:

Failure of Lehman brothers was the major fiscal downfall of 2008.This breakdown passes gigantic economical stagnation. This insolvency was the vivacious symptom which signposted agony in the market to the stakeholders, which was far more than the purpose of the crux.

Lehman which was amongst the largest and huge investment bank, volatile administration sequence of deed greater than before incomprehensibility.

Lehman’s downfall also made it the prevalent fatality of the US subprime hypothecation persuaded monetary catastrophe that flounced from end to end the world-wide monetary arcade in the year 2008.

This was not the common bankruptcy of any common organisation as Lehman was one of the largest investment bank at that time.

Lehman brothers failed because it has occupied excessively much risk in a thriving market.

The lesson from this downfall was that any organisation which is big and powerful can be sunk to the fragments on the stuns of leverage, liquescency and fatalities.

1. Whys and wherefores which headed towards demise of Lehman Brothers

The Question arises in the downfall of Lehman brothers that why such downfall happened? What were the reasons behind such collapse?

The answers to these questions will be elaborated in upcoming discussion:-

Subprime hypothecation emancipation was the foremost reason for the collapse of Lehman brothers. Thoroughgoing of the U.S banks alike to Lehman Brothers took the advantage of the boom in market forgoing 2007, overextended mammoth subprime loan money up front. Primarily the people who does have good credit notch these advances were extended to those customers, But this should unaccepted if the client does not have a good credit notch. Changeable interest was the chief attribute of the subprime mortgage. Afterwards, these instable interest charges was one of the main reason for problem for the pledgers because their aptitude to pay back the loan were antagonised.

The reason behindhand this was that the altered interest rate were greater than the interest which the borrowers were previously paying. Unluckily, values of homes started to plunge hugely, this situation was not in the knowledge of the investor, because guarantees which were given by the administrators about the fall in prices does not distress the corporation and its financiers were in their cognizance. But, the upper interest rates contribute growth to enormous non-payment in accumulation to stumpy values of homes, as a consequence organisation suffered huge losses. Due to this scenario the trust of investors and stakeholders were lost in the organisation (Azadinamin, 2017).

 There were Dualistic blunders that were indicated here is that organization’s let-down to do the accurate conjectures for yet to come periods and to implement methodology which is required in a result of that ,when market conditions rehabilitated. Another thing was the casualness of topmost officials. They were in knowledge of the future situations of the company due these measures but they keep quiet and continuing making profits for their own interest and not working properly in the interest of the company.

Excessively the borrowings which were done caused great leverages which was other result for impoverishment of Lehman Brothers.

Falsification of the revelation or exposure of repos dealings was another reason for the demise of Lehman brothers. Absence of competent and operational risk management policies also led to the collapse of Lehman Brother. Downfall of Lehman brother was caused by not in presence of competent management and strict counter actions and policies for effective risk.

Lehman brothers also jump into takeovers and bailed out transaction which was the big fail step, and one of the reasons for the demise of Lehman brother. At that time huge losses to the organisation were occurred which headed to the decision of selling out some of the subsidiaries of the firm. Share prices were halved of their values in 2008 due to the loss of stakeholder confidence in the organisation. This also led to the sale of asset as loss was huge which required to take this step as well company were forced to sell its shares in loss.

At last the establishment transfer from the protection of commercial money and merger and acquisitions into danger world of proprietary dealing which was also the reason of the breakdown of Lehman brother.

Let us discuss these reason point wise:

1. Lack of cash and liquidity
2. Losses were huge.
3. Transaction of repos.
4. Subprime advances.
5. Unsuccessful bailouts.
6. Lack of sincerity among the employees and topmost officials of the organisation (Fox, 2017)
7. Falsification of disclosures in financial statements.

End of Lehman Brother directed to tough periods in the accomplishment of various trades in U.S and globally. U.S has alone faced the fall in values of belongings due to Lehman Brothers failure and downfall. Due to Lehman brothers collapse debts of approximately $ 48 million were written off which payable to Federal Agricultural Corporation. Downfall of Lehman brothers also created a huge deficiency in jobs and there were greater no. of jobs lost. Stock prices have drastically falls which have impacted the earning of the investor hugely. This episode had hugely impacted the customers or clients as well as investors.

Lehman’s Impoverishment had precarious results for few key establishments and organizations who are associated to the business in big manner outside Europe and United States.

This collapse has bring the huge economic crisis all around the world.

 Issues that arises due to auditing in Lehman’s Case: 

• There were many issues related to auditing that surrounded or accompany the failure of Lehman Brother those were outer examiners flops in to recognise the existence of the scheduling of the repos dealings (Audit reprting, 2017)
• Statutory auditors was not successful in realising that there was a breach of generally accepted accounting principles. That is it fails to recognise all vital occasions that are plausible to a company’s monetary declarations should be discovered.
• Downfall of Lehman brothers was headed because of lack of clear and explicit standard.
• Transgressions done by the officials were not acknowledged by the examiners.

 The vital matter or reason of sham in financial statements can be effortlessly recognised by the auditors which were not done by them.

1. Issues that headed towards the introduction of ASA701Communicating key audit matters in independent audit report:

U.S economy as well worldwide crisis was the resultant situations due to the Lehman Brother bankruptcy. Whys and wherefores for the demise and issues related to auditing has been argued formerly, let us discuss the issues which leads towards the development of ASA701 that is communicating key audit matters in independent audit report.

For increasing the eminence of report, percentage increase of limpidity, and the intensification of answerability to the consumers of the monetary statements of the organisation they are financing or having a business in, caused the development of ASA701 communicating key audit matters in the independent audit report.

Global financial crisis was held in the year 2008, this leads to the bewildering situation for the corporations and their examiners and accountants. Fiscal status of markets in countries were worsening. There were huge cash crunch in the market. There were difficulties in nourishing liquescency and repossessing moneys from commercial associations, dividends and asset auction.

 To attain satisfactory audit proof was also became troublesome for the auditors. Through the enhancement in the professional scepticism auditors wanted to use counter approach to the risk.

There were some methods which the auditors can use counter the risk.

Letter of resignation is to be given to the customers devising greater jeopardies.

Percentage increase in the proneness to topic improved audit report

Enhancement of strength in performing audit.

Giving letter of resignation to the clients was not the step to be taken so easily. Therefore, dualistic tactics vicissitudes

In the proneness for the topic of going concern reform and to enhance the strength in performing audit were left.

 If the auditors become unsuccessful in pointing out the key audit matters before the companies faces the downfall then auditors will also be liable to penalties, which has created a huge pressure and burden on auditors.

 If there will be ample vagueness the company will remain the going concern for the near ASA 570 and communicating key audit matters in independent audit report ASA 701. These elements and factors which are discussed right through are the main causes for the development and introduction of this ASA 701 communication key audit matters in independent audit report.

 The development of this standard has not only improved the clear ness and limpidity in accounts also has increased culpability and it has also helped in providing more and detailed info regarding company, its financial situations and its operations.

1. If ASA 701 communicating key audit matters were applicable on the Lehman brothers then the disclosures requirements were as follows:- 

• There should be clear accounting and internal controls was done to safeguard the properties and assets and there should be pellucidity. Lehman Brothers absences pellucidity in their internal controls act. Stakeholders who invest in the organisation need guarantee regarding their investments and the liquidity of the company.
• Deficiency in watching the amount of danger.
• Absence of knowledge regarding other party evasion danger, debt jeopardy intricate in the dealings.
• Absence of disclosure of important financial events which headed towards the break of commonly accepted bookkeeping ethics
• Misuse of the executive position by the Lehman’s official were not pointed out by the auditor.
• Realising the effectiveness of 105 repos transaction possibly be communicated to those charged with authority.
• The huge losses from which the company was suffering could revealed in the financial statements..
• Absence of exact estimate to be collected with kiosk tactic to the transformed market circumstances.
• Subprime mortgaged risk involvement must be known (Siskos, 2017)

Each and every vital audit matter should be separately disclosed in the financial statements so that user and other official will get the knowledge about those matters.

 There will increased improvement in the pellucidity and clearness of the financial statements and there will be detailed information available to the clients and there will improved and enhanced communication between auditor and official of the organisation who are sitting at the vital positions. The significance of the vital audit material in respect to the inspection of monetary declaration may be predictable by link amongst crucial review substance and further fundamentals of review description.

Ruin of Lehman Brothers was not put on the alert in the assessor’s information which resulted in unreserved report due to the failure of auditors to recognise schedule of repos transaction, transgression by the official of the organisations and the danger, threats and risk which were involved in Lehman’s Transactions. Post development of ASA701 communicating vital audit matters auditors are now more serious about the disclosure of all vital audit matters which provide more comprehensive info and data and also improves the pellucidity (Norbel, 2017)

1. Conclusion

Downfall of Lehman brothers have highlighted many issues which makes the company to head towards demise as has been discussed earlier these were 105 repos dealing, bad political actions, huge losses, huge cash and liquidity crunch, auditor’s fault in recognising the key audit matters and the revelations to be made about them. In the history of U.S economy this was the huge downfall yet as it has disturbed economy as a whole internally as well as all around the world. For providing better and detailed limpidity which will be useful to the stakeholders as well as investors, so that the there should be a trust building between company and its clients. ASA 701 was developed in the wake of global crisis and on the other hand from the advent of ASA 701 communication key audit matters in independent audit report makes the audit more focused towards their duties regarding disclosure and communication regarding vita transaction and important event which has increased the credibility of the organisation and also the communication between auditor and those charged with governance. To keep the assurance of financier in the company is very important and for this stringent level of approval and authorisation ought to be working.

References

Norbel , M(2017).Lehman brothers. [online] Available at: https://www.heritage.org/report/lehman-brothers-bankruptcy-and-the-financial-crisis-lessons-learnedhtml [Accessed 9^th April. 2017]

Siskos, D(2017).Lehman brothers case. [online] Available at: https://www.thinkingfinance.info/uploads/1/7/7/1/17713111/dimitrios_siskos.pdf [Accessed 9^th April. 2017]

Auditing ans Assurance standards board [online]ASA 701 Available at: https://www.legislation.gov.au/Details/F2006L01403 [Accessed 9^th April. 2017] 

Siskos, D(2017).Lehman brothers case. [online] Available at: https://www.thinkingfinance.info/uploads/1/7/7/1/17713111/dimitrios_siskos.pdf [Accessed 9^th April. 2017].

Lehman brother bankruptcy(2017).Lehman brothers. [online] Available at: https://www.pwc.com/jg/en/events/lessons-learned-for-the-survivors.pdf [Accessed 9^th April. 2017]

Fox, J(2017).Three lessons of the Lehman brothers collapse . [online] Available at: https://content.time.com/time/business/article/0,8599,1923197,00.html [Accessed 9^th April. 2017]

Audit Reporting(2017).ASA 701 [online] Available at: https://www.ifac.org/system/files/meetings/files/20140311-IAASBCAG-Agenda_Item_C1-Auditor_Reporting-Key_Audit_Matters-final.pdf [Accessed 9^th April. 2017]

Fox, J(2017).Three lessons of the Lehman brothers collapse . [online] Available at: https://content.time.com/time/business/article/0,8599,1923197,00.html [Accessed 9^th April. 2017] 

Azadinamin, A(2017).The bakruptcy of lehman and brothers. [online] Available at: https://www.researchgate.net/publication/230687440_The_Bankruptcy_of_Lehman_Brothers_Causes_of_Failure_Recommendations_Going_Forward [Accessed 9^th April. 2017].