Determination of Key Audit Matter(KAM)
ASA701” Communicating key Audit Matter’s in independent Audit report”, it deals with the concept of transparency and the level of audit surveillance that must be exercised in case of key audit matters in the audit report. The auditor is entrusted with the function of auditing the financial statements of any entity, and to comment whether they are showing a true or fair view or not. For this there must be transparency in the work of the auditor, it is possible that the auditor sometimes is not able to perform his work effectively, because he lacks the level of knowledge in determining the key areas that must be audited to help the auditor in commenting on the financial statements. This standard helps to determine those key areas of audit. It is also helpful for the end users as the key areas are properly audited. It helps the management in preparing the books of accounts in a better manner. (Gertler, M., Kiyotaki, N. and Queralto, A., 2012).
The key audit matter is the matters that play a significant part in auditing and must play a significant part in auditing.
The key audit matters can be determined by the following ways-
- Those risk areas in which the chances of misstatements are high
- The areas that requires specific assertions by the auditor in case of important matters like the application of accounting estimations, decisions regarding the management, areas that have uncertainty in them. In all these areas, specific assertions of the auditor are required.
The overall effect that decisions of the auditor causes on the accounting period and the accounting transactions that are significant in nature. .( Hofmann, C., 2011)
It is a very significant standard, as it helps in providing the much needed transparency to the people and the end users of the financial statements, and also to those that are charged with governance. It helps in providing a detailed analysis of the financial statements and also helps the entity and the users to increased reliance on the use of the same, because they are sure of their correctness and transparency is established when the auditor makes application of these standards. This standard helps in bringing important areas into notice and increase resilience of the auditor for the same. .(O Fernando, C.S., May, A.D. and Megginson, W.L., 2012)
The year 2008 witnessed the biggest collapse that occurred in that era ,and that was the downfall of the Lehman brothers. It made the world aware about the severity of the crisis that was going on in the world and how one can take stand for the same. It was an eye opener for the people. It forced the government to take immediate actions to fight the same. It validated the overall disturbance that was going in the market regarding the same, and how important it was to act against it. The main reason behind the downfall was the unpredictable course of government action of amplified obscurity. Cordos, G.S. and Fülöpa, M.T., 2015)
Need for ASA701
There were a large number of reasons that led to the downfall of the Lehman Brothers, the most important were the liberation of the subprime mortgage. In 2007 , a large number of other banks, started providing these subprime mortgages in advance. They were mainly forwarded with a reason to give the poor people a standing in the society that had poor credit standing. In case of the subprime mortgages one of the most important feature was the changing interest rates and how they were affecting the overall credit terms in the market. These differential rates later become a big problem, as the authorities’ had issue in how to repay back their loan, which rate to choose led to a lot of confusion. These rated were mostly higher than the rates than the rates at which such loan were mostly disbursed in the market among other people. So in a way the creditors weren’t gaining, because they had to pay back the loan at a higher rate. Because of this reason, the prices of house also began to fall, also there were a lot of loss to the investors , who were given the assurance that such rates won’t affect their credit and the credit worthiness of the company, but the creditors incurred a lot of loss because of the same. The prices of housed and other property also fell below an acceptable level in the country all these led to a high level of economic and financial crisis and eventually led to the downfall of the Lehman brothers. (Frank, N. and Hessen, H., 2009)
The two main faults that can be ascertained on part of the firm was to take important steps in dealing with the same, first it was not able to ascertain the future and what course of actions might take place and hence it could not take corrective actions in the beginning that would have been helpful in reducing this damage that was caused. If the firm was efficient enough it could have informed the investors and they could have taken necessary steps in respect of the same, and would have a better credit standing in the society. They must have been aware that the high prices of the houses would have negative effect on the investments done by the company, because of which the investors would be at a loss. The negligence on part of the management was also very high, they dint take important steps to maintain the profitability of the company, they failed to see how the on-going crisis could affect the company and its investors, they were busy making their own money and also their own profit, they dint care about the standing of the creditors. They were simply making use of their dominant position. In case of an economy it is very much known that when we borrow too much, it leads to high level of leverage and that eventually led to the downfall of the Lehman brothers and was also one of the main reason of its bankruptcy. Another factor that was responsible was the perversion of the disclosure or revelation of repos transactions. Also there was lack in the management policies with relation to operational and management component polices, all these also led to the downfall of the Lehman Brothers. One of the other reasons was the various amalgamation and merger transactions in which the company entered on its own end, and incurred huge losses in the same. If we go numerically , the company incurred a loss of around $3 billion i cases of its assets that were disposed of to counter the losses. The overall losses were around $4 billion, which coupled them to sell their shares. Because of all these reasons the investors lost confidence in the company and eventually incurred losses because of the same. All these led to the decline in the stock prices of the company. .( Siros, L.P., Beard, J. and Bear, P., 2016)
- Huge losses
- Subprime mortgages
- Failed bailouts
- Merger losses
- Repo Transactions
- Manipulation in the financial transactions
- The overall crunch in the liquidity
Collapse of Lehman Brothers
It led to A wide awakening among the general public and the government with regards to the present situation of financial crisis in the country, and how important it was for the government to act in favour of it, and take steps for the upliftment of the crumbling economy. It also affected a large number of other companies in and around UK and USA. It led to writing off large amount of agricultural debt that amounted to around $47 million. There was a loss of employment as large number of people lost their jobs because of fall of the industries. Many industries were affected and growth was hampered. There was fall in the prices of the stock exchange and also it has major effect on other big companies outside U.S and Europe. .( Presley, T.J. and Jones, B., 2014.)
There were several issues related to the audit of the firm that led to its fall.
- The external auditor was not capable enough to ascertain the occurrence of the repo rates and how that can affect the economy in the times to come. (Wiggins, R.Z., Bennett, R.L. and Metric, A., 2014.)
- The auditor failed to decipher how the company has broken the generally accepted principles and had not taken any precaution for the same. The company failed to comply with so many provisions on part of the accounting of its financial statements.
- The company followed a very vague approach and there was no substandard norms and principles that were followed by the company. These vague provisions were used to judge a lot of critical transactions of the company and that affected the overall transactions of the company.
- The auditor also failed to discover the misconduct on part of the important executives of the company
The audit was not conducted properly, no proper guidelines were followed, if the same would have been down , then the audit must have been conducted in a better manner and many mistakes could have been avoided. (Sánchez-Medina, A.J., Basques-Santana, F. and Alonso, J.B
When the company suffered a downfall, it not only affected the company but also the other companies were affected worldwide, the overall world economy came crashing down because of the same. The reasons that led to the fall has been discussed beforehand, to curb the same and to bring in changes in the overall process of auditing, the ASA701 was introduced. It was meant to communicate key audit matters by the independent auditor to those charged with governance. There was no proper communication between the various parties and also the auditor and the company, this led to a lot of material misstatement and risks and also the sue of ambiguous auditing affected the overall growth of the company to a large extent. (Frank, N. and Hessen, H., 2009)
The main requirements was to communicate the key audit matters effectively to those charged with governance.
- The users of the financial statements show more interest in those matters that are properly highlighted by the auditor as key matters
- It nessiciates adherence on part of the auditor to the key matters.
- Increased communication with those charged with governance will bring to the note of management of the entity for proper disclosure in the financial statements.
- It also covers that the auditor must have proper detail about the entity and the government and pre field audit must be done. It must see that the financial statements are properly equipped with the relevant accounting standards and policies and some are followed by the company. This was stated by the • SSA 320 materiality in planning and performing the audit that clarified that it was important for the auditor to adopt the users of the financial statements.
There must be proper control in the kind of work done by the management and proper transparency must be ascertained by the auditor. There were so many loopholes in the management practices of the Lehman brothers and care must be taken to see that all those are properly corrected. The key audit matters must be described and each matter must be represented by the auditor separately.
l) Recommendations and Conclusion
From the overall analysis we can say that the auditor must audit the books of accounts and the financials attempts to the best of their ability so that the users are benefited and the investo0rs are able to take important decision based on the same. The auditor must be given a chance to establish their opinion to the best of their ability after applying all the relevant standards accordingly. That is the main recommendation that can be given in the above case.
References:
Financial spill overs to emerging markets during the global financial crisis (No. 9-104). International Monetary Fund
Central bank collateral and the Lehman collapse. Capital Markets Law Journal, 6(4), pp.456-469.
The value of investment banking relationships: evidence from the collapse of Lehman Brothers. The Journal of Finance, 67(1), pp.235-270.
Financial crises, bank risk exposure and government financial policy. Journal of Monetary Economics,59, pp.S17-S34.
Independent Auditors Report: Australian Trends From 1996 to 2010. Journal of Modern Accounting and Auditing, 9(3), p.356.
Do Auditors Reflect the True Image of the Company Contrary to the Clients’ Interests? An Artificial Intelligence Approach. Journal of Business Ethics, pp.1-17
The Informational Value of Key Audit Matters in the Auditor’s Report: Evidence from an Eye-tracking Study.
Understanding audit reporting changes: introduction of Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128.
The Lehman Brothers Bankruptcy D: The Role of Ernst & Young.
Lehman Brothers: The Case Against Self-Regulation. Journal of Leadership, Accountability and Ethics, 11(2), p.11.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
