Semester 3 2013-14
ASSIGNMENT
This assignment is to be completed in groups of three and comprises twenty per-cent of the
marks for this course. There are 4 parts to discuss.
Assessment Criteria:
The Business School
BUACC3701: Auditing
Student work will generally be assessed in terms of the following criteria:
1. Effectiveness of communication - ie readability, legibility, grammar, spelling, neatness,
completeness and presentation will be a minimum threshold requirement for all written
work submitted for assessment. Work that is illegible or incomprehensible and does not
meet the minimum requirement will be awarded a fail grade.
2. Demonstrated understanding - This will be evidenced by the student's ability to be
dialectical in the discussion of contentious issues.
3. Evidence of research - This will be evidenced by the references made to the statutes,
auditing standards, books, journal articles and inclusion of a bibliography.
Note:
1. All written work must conform with the University of Ballarat General Guide for the
Presentation of Academic Work.
2. For all written work students must ensure that they submit their own original work. Any
act of plagiarism will be severely penalised.
Plagiarism is presenting someone else work as your own and is a serious offence with serious
consequences. As set out in the University Regulation 6.1.1, students who are caught
plagiarising will, for a first offence, be given a zero mark for that task. A second offence will
result in a failing grade for the course(s) involved and any subsequent offence will be referred
to the Student Discipline Committee. Student must be aware of the University Regulation 6.1.1
Student Plagiarism, available at http://www.ballarat.edu.au/legislation/6.1.1-plagiarism. The
link to the library website for more information is:
http://www.ballarat.edu.au/library/assignment-and-research-help/referencing
Students must:
? fully reference the source(s) of all material, even if you have re-expressed the ideas,
facts or descriptions;
? acknowledge all direct quotations; and
? not submit work that has been researched and written by another person.
Note – You will need to resource beyond the identified documents
PART A. (5 marks)
Auditor conservatism following audit failures
Stephan A. Fafatas
Williams School of Commerce, Economics and Politics,
Washington and Lee University, Lexington, Virginia, USA
Extract:
Findings – Empirical results indicate that auditor response to audit failure has
changed over time. Auditors implicated in audit failure events occurring in the postEnron
and Sarbanes-Oxley period enforce more conservative accounting choices in
the year following the event. Specifically, clients of the implicated firm’s office
report a significant decline in discretionary accounting accruals relative to clients of
other auditors in the same city location. However, a significant change in client
discretionary accounting accruals is not found following audit failures that occurred
prior to 2001, the year of the Enron bankruptcy.
Under GAAP a company’s reported net income includes both an operating cash
flow component and a component related to accounting accrual adjustments. The
amount and timing of these accrual adjustments are subject to management’s
discretion over accounting policies
Auditor Conservatism after Enron
Dorothy A. Feldmann , William J. Read
Extract:
Corporate scandals and the resulting passage of the Sarbanes-Oxley Act
(SOX) in 2002 significantly affected the auditing profession. The quality of
financial statement audits was called into questioned and the media and
regulators held audit firms responsible. Several studies found evidence of an
increase in the issuance of going-concern opinions after the passage of SOX
relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al.
2008). Auditors, it appears, behave more conservatively when the profession
is in the headlines.
Discuss how the auditing profession behaved after the Enron collapse and the
introduction of the Sarbanes-Oxley legislation.
PART B. . (5 marks)
Financial crisis and the silence of the auditors
Prem Sikka
Accounting, Organisations and Society (2009)
Abstract:
Against the backdrop of the current financial crisis, this paper seeks to stimulate debates about
contemporary auditing practices. It notes that many financial enterprises have sought state
support within a short period of receiving unqualified audit opinion. Auditors collected large
amounts in audit and non-audit fees. The events raise questions about the value of company
audits, auditor independence and quality of audit work, economic incentives for good audits
and the knowledge base of auditors.
Extract
Accountants, as auditors, have cemented their status and privileges on the
basis of claims that their expertise enables them to mediate uncertainty and
construct independent, objective, true, and fair accounts of corporate affairs.
This expertise, it is claimed, enables markets, investors, employees, citizens,
and the state to limit and manage risks. Such claims, however, are precarious
as measures of revenues, costs, assets, liabilities, and profits are contested
technically as well as politically and also because capitalist economies are
inherently prone to crises (O'Connor, 1987). The claims of expertise are
frequently punctured by unexpected corporate collapses, frauds, and failures.
Such events fuel the suspicions that auditors lack the requisite independence,
expertise and incentives to construct the promised 'true' and 'fair' account of
corporate affairs.
Accounting firms have been accused of delivering ‘dodgy auditing’ Discuss
PART C. (3.5 marks)
None of the Big Four accounting firms is a single firm; rather, they are accounting networks.
What is an accounting network and what benefits are there for the big accounting firms?
Discuss and explain
PART D. (6.5 marks)
Extracted from Australian Government – The Treasury
Auditors are currently exposed to unlimited liability for professional default.
Auditors, and other professional groups have traditionally dealt with their unlimited liability
exposure for professional default through professional indemnity insurance. Professional
indemnity insurance insures against loss arising from professional services offered by the
insured professional.
Australia is currently experiencing a 'hard insurance market', that is, a market characterised
by tougher risk selection by insurers. The recent submissions by the two professional
accounting bodies to the ACCC indicate that the position in relation to the availability and
cost of professional indemnity insurance has deteriorated in the current 'hard insurance
market':
The backdrop to the CLERP 9 consideration of the issues relating to the professional liability
of auditors is the important role that the independent audit function performs in relation to
Australia's corporate governance framework and the efficiency of the capital market.
The following policy options have been raised by the accounting profession for the purpose
of establishing an appropriate framework to address the profession's concerns in relation to
the present system of auditor liability:
? The incorporation of auditors.
? The law of joint and several liability in relation to actions for negligence causing property
damage or purely economic loss and its replacement by proportionate liability.
? The capping of professional liability within the framework of State and Territory
Professional Standards legislation.
Discuss each of the aforementioned three points (i.e. could or should these changes be
made)