Question

WorldCom’s financial statements were distorted, in part, by management’s fraudulent reclassification of operating expenses as additions to plant and equipment. The auditors stated that they only applied analytical procedures to the client data, but detected nothing unusual. Based only on the foregoing information, identify the deficiencies in the auditors’ approach, citing appropriate auditing standards.

Answer 1

Here is my Answer for the above question

As per SA 240 deals with the Auditors responsibilities towards frauds in the Financial statements,Auditors responsibilities Identify and assess the risk of material misstatements due to fraud,obtain adequate audit evidence for the risk identified and respond appropriately to the identified or suspected fraud.

The following are the Auditors Responsibilities

1.Obtain reasonable assurance

2. Maintain proffessional skepticism throughout the Audit

3.know the risk of non detection of management fraud is greater than employee fraud

4. Know the risk of non detection of fradulent material misstatement is higher than the misstatement due to error

if the Auditor performed proffessional skepticism ,may be he will identified management fraud in this case, Auditor statement about he followed only analytical procedures is not the correct prove of his integrity as Auditor..Auditor is not only responsible for  detecting frauds primarily it is the responsibility of management but Auditor has to follow all the procedures to identified any frauds...he just not say like this as Followed analytical procedures and not identified fraud.

With reference to the Satyam Computer case which came to light in 2008 is very good case to analyse,in this case even cash balances are not real and income is also inflated at high level,if the audit procedures along with proffessional judgement were properly followed during the Audit , the manipulated financials could have been identified before.from the case it is learned that is the importance to adehere to auditing standards and guidelines